There is more to high house prices than constrained supply • Hacker News Board

Re: There is more to high house prices than constrained supply

#91

Post by rsync » Sat, Nov 24, 2018, 6:05 PM UTC

tonyedgecombe wrote: post #74

lordnacho wrote: post #40

Earlier quoted context omitted.

The thing to think about is convexity. If everyone is maxing out their budget when rates are 2%, it causes a huge problem for their personal budget when rates go up to 4%. If the rate was originally 10% like a few decades ago, each rate increment would matter a lot less.

Yes, we could be in for a lot of pain if inflation and interest rates rise over the coming years.

"Yes, we could be in for a lot of pain if inflation and interest rates rise over the coming years."

This is true, but I think unlikely ...

All macro trends - especially demographics and birthrates - point to large deflationary headwinds. The little bit of inflation that we experience currently is the result of massive manipulations like quantitative easing and related policies. Just look at the price of oil ... even the peak 2018 price is quite low when compared against the last ten years.[1]

Nobody can know how this will pan out, but I think a reasonable guess is that as QE is allowed to unwind we experience recessionary forces that we are no longer willing to accept or able to withstand - given the increased fragility and interconnectedness of our economies. And so we will see QE3 and QE4 and so on, with related ZIRP[2], until we finally see a deflationary collapse.

That could play out over decades. I don't know how you could shrewdly prepare for such a sequence of events, since the correct way to prepare for deflation is to have liquid, cash assets and those assets would be almost completely idle during the ZIRP period (like the one we are living in).

I suspect the only way we would see real inflation is if political actors made political decisions to massively overshoot the QE (and related) policies. Even then, we would not see high interest rates unless some later actor decided to "correct" that inflation.

[1] https://www.macrotrends.net/1369/crude-oil-price-history-cha...

[2] https://en.wikipedia.org/wiki/Zero_interest-rate_policy

Re: There is more to high house prices than constrained supply

#92

Post by tonyedgecombe » Sat, Nov 24, 2018, 6:07 PM UTC

rb808 wrote: post #27

Absolutely. On top of the interest rates (and QE) we have: 1. Cities becoming much wealthier, and lower crime, resulting new generations moving there 2. New immigration wave to Western Countries. (UK esp had population relatively slow growing pop in the 50s, 60s, 70s) 3. A big demographic bulge of baby boomers getting ready for retirement saving as much as possible, looking for investments 4. Lots of money coming out…

Probably more important than any of that we have gone from a population with three generations alive to one with four generations.

Re: There is more to high house prices than constrained supply

#93

Post by boombust » Sat, Nov 24, 2018, 6:08 PM UTC

johnpmayer wrote: post #84

__blockcipher__ wrote: post #67

Earlier quoted context omitted.

IMO homes should not be considered productivr capital. Farms are, as one example. A home sits there and looks pretty (maybe), slowly losing real value. Of course, w/ an increasing population amd limited supply it accrues nominal value (and “real” value in the investment sense). Yet compared to owning shares in an actual productive company, it’s a very poor value proposition.

A home produces rents. If you live in the home that you own, you can think of it equivalently as a productive asset that provides you one unit of free rent (modulo some quality of life factor based on how nice the property is to live in) every month.

If you look at it through the lens of opportunity cost, sure. But homes don't actually yield anything, they are not productive in that sense. So from the economy's standpoint, there seems little reason to classify it as such along with financial assets that produce yields.

Re: There is more to high house prices than constrained supply

#94

Post by ttul » Sat, Nov 24, 2018, 6:13 PM UTC

clofresh wrote: post #78

pjc50 wrote: post #21

Earlier quoted context omitted.

Not everyone is mortgaged - quite a lot of the price rises are driven by foreign capital flight. A few places have figured this out and decided to tax it: https://www.bloomberg.com/news/articles/2018-02-20/british-c...

I've noticed this annecdotally when trying to buy a home on separate occasions in the New York and LA metro areas. I'm not sure it's foreign capital, but the majority of winning bids were all cash offers above the asking price. I'd love to see a retrospective analysis on Vancouver's protective measures to see if they did actually help, or if buyers found loopholes, or it wasn't Chinese buyers to begin with.

Of course it’s impossible to say with complete certainty, but... Vancouver’s housing market has stalled since the foreign buyer tax and vacancy taxes started to bite. Inventories are high and stubbornly stuck there rather than falling as they do toward the end of the year. Prices on high end homes are down a great deal - 20-30% for homes priced higher than $3M.

I would say that at this early stage it looks like the new taxes are working precisely as intended.

Re: There is more to high house prices than constrained supply

#95

Post by panarky » Sat, Nov 24, 2018, 6:23 PM UTC

rsync wrote: post #91

tonyedgecombe wrote: post #74

Earlier quoted context omitted.

Yes, we could be in for a lot of pain if inflation and interest rates rise over the coming years.

"Yes, we could be in for a lot of pain if inflation and interest rates rise over the coming years." This is true, but I think unlikely ... All macro trends - especially demographics and birthrates - point to large deflationary headwinds. The little bit of inflation that we experience currently is the result of massive manipulations like quantitative easing and related policies. Just look at the price of oil ... even…

> the correct way to prepare for deflation is to have liquid, cash assets

I agree that we're more likely to struggle with deflation and stagnation, and holding cash is the textbook response.

But in the last 10 years of ZIRP, cash underperformed every major asset class -- stocks, bonds, real estate, fine art, private businesses, precious metals, cryptocurrencies, even rare books [1].

Cash was the worst place to be.

We can blame it on QE, but policymakers will do infinite QE before they'll allow asset prices to fall very far.

So I'm not sure the textbook response is valid in the world we actually inhabit.

[1] https://www.theguardian.com/books/2015/nov/10/index-reveals-...

Re: There is more to high house prices than constrained supply

#96

Post by jeromegv » Sat, Nov 24, 2018, 6:29 PM UTC

wtvanhest wrote: post #80

brownbat wrote: post #60

Earlier quoted context omitted.

I expected this was true for the same reasoning when buying a home, but when I sampled the historical numbers, there was no strong relationship. Bankrate came to similar conclusions: https://www.bankrate.com/finance/mortgages/rising-rates-lowe... I think your reasoning is valid, so best I can figure it's because home prices and interest rates are both directly correlated with economic activity. So if the economy is h…

Lowering interest rates increase prices. Rising interest rates reduce volume until inflation catches up. People are unwilling to sell homes when they lose value because there is so much leverage

Up until they have no choice but to sell, and in that case, have to sell at any cost.

Re: There is more to high house prices than constrained supply

#97

Post by burfog » Sat, Nov 24, 2018, 6:31 PM UTC

topkai22 wrote: post #61

There is a point that is often glossed over in these analysis- the rental stock and the ownership stock are often fundamentally different. Last time my family moved we weren’t opposed to renting, but there was something like 1/10 the number of available SFH rental units in the area we were looking compared to available SFH rental units. In the US at least I think there is a case to be made that this is due to the UND…

It may seem financially reasonable to rent out a house, but normal people don't want the risk and hassle.

Renting out houses is an occupation, with special skills. You have to navigate the legal situation to avoid being sued, while still doing your best to refuse people who seem like they could be trouble. You can expect damage and non-payment of rent. You can expect the state to make it extremely difficult for you to get rid of destructive people who aren't paying. You can get sued over a lack of repairs, but meanwhile the renters are causing the damage and failing to tell you about it. Renters will ignore water leaks that don't seem to impact them, letting your home rot from the water. Renters will smoke and keep pets, despite any rules to the contrary, and they will fail to control destructive kids. Renters will illegally authorize workers to drill holes to run cables through the walls.

I've known people who tried renting out a house. They ended up with drug dealers, prostitutes, new doorways and other openings being cut, a bloody murder scene, floors and walls rotted out, destroyed cabinets, etc.

Most new homes are in home owner associations that prohibit renting houses out.

Re: There is more to high house prices than constrained supply

#98

Post by paulddraper » Sat, Nov 24, 2018, 6:32 PM UTC

Retric wrote: post #68

mattm wrote: post #51

Earlier quoted context omitted.

It's crazy how this isn't more common knowledge that the Economist needs to write an article about it. We're also seeing the same thing recently with tuition prices. There is more money available for student loans so schools just jack up the tuition to meet the supply of money available.

That’s not just a question of loans. Schools can always discount prices down to what people can pay. So, they charge families making twice as much more money each year.

It's insane what schools can get away with for price discrimination.

Remember the uproar over Orbitz (and others) price discrimination based on Mac/iOS usage? [1]

Schools have been doing the same thing in broad daylight for years and years with far greater consequence, basing their price on your parent's income levels.*

And near zero public blowback. It's confusing.

* This is all done through school scholarships, but there's practical difference between that and a more direct price adjustment.

[1] https://www.wsj.com/articles/SB10001424052702304458604577488...

Re: There is more to high house prices than constrained supply

#99

Post by malvosenior » Sat, Nov 24, 2018, 6:35 PM UTC

mamon wrote: post #70

malvosenior wrote: post #63

Earlier quoted context omitted.

I don’t think they’ll outbid you, they’ll buy a more expensive house.

And you think you'll be able to find a cheaper house? No, sorry: sellers will raise their asking price to match (or exceed) the market average. So, your choice really is between paying the same price as everybody else or not buy a house at all.

Every house does not cost the same amount. Yes, the average price might go up, but in my experience people will buy the biggest house they can afford instead of over bidding on a smaller house (in most markets).

Re: There is more to high house prices than constrained supply

#100

Post by malvosenior » Sat, Nov 24, 2018, 6:36 PM UTC

tonyedgecombe wrote: post #73

malvosenior wrote: post #63

Earlier quoted context omitted.

I don’t think they’ll outbid you, they’ll buy a more expensive house.

They will when supply is constrained.

I think this is a minority of real estate markets (mainly SF and Vancouver). Even in NY there's enough of a spread that someone making 250k a year will have the option of buying a house under their max buying potential.