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There is more to high house prices than constrained supply

economist.com

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

#101

Post by TangoTrotFox »

I think the argument here is directly analogous to why university prices started going loony. When it became impossible for even private education loans to be dismissed in bankruptcy suddenly education loans became seen as very near 0 risk. And everybody's told from the time they're in diapers that they need to go to university, with cost given little to no consideration. And it's also seen as priceless investment that will pay for itself and then some in the future. Suddenly people value something immensely and have access to an effectively unlimited line of debt. This incentives universities to arbitrarily increase their costs. University costs only started to stabilize as university enrollment started to decline.

But there's a big argument against this that I don't see the answer to. Everything that's mentioned in this article is true for buying a house, but not for renting. Rental prices have also gone through the roof - and the only reason they're able to go through the roof is because people are able and willing to pay the costs asked. But people renting are getting absolutely no return whatsoever on this exchange, and rent is also generally not paid from debt. So how would this explain the willingness of people to pay ever higher prices for rent?

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

#102

Post by avip »

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.

Not an "analysis", but here's the last (?) HN discussion on Vancouver's housing market https://news.ycombinator.com/item?id=14608918

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

#103

Post by rsync »

panarky wrote: post #95
rsync wrote: post #91

Earlier quoted context omitted.

"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…

"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"

Yes, that is my point - the correct response to deflation is a very painful experience (and has been, as you note).

Since the deflationary collapse can be delayed be QE3, QE4, QE5, etc., that pain could last a very long time.

I don't know how to properly prepare for / hedge against the scenario I outlined.

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

#104

Post by Apes »

brownbat wrote: post #60
phkahler wrote: post #13

Home prices vary inversely with interest rates. Here's how that works: 1) person tells bank they'd like a mortgage to buy a house. 2) banker asks for info on income, expenses, etc. 3) banker estimates persons maximum monthly payment. 4) banker figures out max loan amount based on #3 5) buyer is encouraged by everyone to spend the full amount from #4 Everyone - the seller, their agent, your agent, the bank, and maybe…

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…

I don't believe your analysis. The relationship has such a high correlation, you can just look at the the graph and probably eyeball estimate the regression within 10% error.

Banks and relators have such a massive conflict of interest in pretending that the inflated prices on housing are normal. Rising interest rates are causing housing sales volumes to plummet to record lows, and after over a year of pretending nothing was wrong, prices are finally starting to come down.

But the people invested in the housing market want to pretend it's anything other than the interest rate, like a child caught with their hand in the cookie jar and making up nonsensical explanations on why it happened.

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

#105

Post by thaumaturgy »

yholio wrote: post #9

The price of houses is driven by market rents compounded with access to financing. If lenders are willing to finance an investment with 3% yield, then house prices will jump to 33x their annual rent value - it goes without saying that's only possible in low interest markets. The rent itself however is controlled by supply and demand - there needs to be a real person there earning a paycheck and he must have no other…

> The rent itself however is controlled by supply and demand

No, it's not. Folks have got to stop using simplistic remedial high school economics classes to explain complex social problems. They just aren't that simple.

During the 2008 financial implosion, a single investment company called Blackstone Group went on a buying spree around the US. As of this time last year, they owned, through a subsidiary company, fully 1.5% of the entire Sacramento-area rental house market [1]. Blackstone in turn is flush with cash from foreign investors [2].

Foreign cash investment in real estate is a major cause of high rental prices. But the data on this and investment companies like Blackstone Group is spotty and difficult to follow [3], on purpose.

These groups don't set prices according to "the market". They are more than happy to let some percentage of their properties remain empty rather than decreasing rental prices, because they can claim the lost rents -- at the prices they set -- as taxable deductions. It's a net win for them: keep the price high for all their other properties, get a writeoff on their empty properties.

Building more housing is not going to fix this part of the housing problem. There is more than enough foreign capital available to continue to keep housing prices artificially inflated no matter how many new homes are built. These are long-term investments and small fluctuations in available housing are not going to shake them loose.

Much more comprehensive investigation is needed in the actual causes of high housing costs, including the effects of foreign investment and investment firms, and then reform is needed to address those causes.

[1]: https://www.kcra.com/article/this-is-the-largest-owner-of-re...

[2]: https://www.bloomberg.com/news/articles/2018-10-22/how-black...

[3]: https://calmatters.org/articles/data-dig-are-foreign-investo...

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

#106

Post by noitsnot »

phkahler wrote: post #13

Home prices vary inversely with interest rates. Here's how that works: 1) person tells bank they'd like a mortgage to buy a house. 2) banker asks for info on income, expenses, etc. 3) banker estimates persons maximum monthly payment. 4) banker figures out max loan amount based on #3 5) buyer is encouraged by everyone to spend the full amount from #4 Everyone - the seller, their agent, your agent, the bank, and maybe…

I question it because this is how our worked for me. Maybe other people want something they can barely afford most of the time?

1. I go to banker for mortgage. 2. Banker asks how much I would like to spend and gets financials. 3. Approved 4. I go to real estate agent and say this is what I was approved for.

Never was there any pushback. I was far below my max limit.

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

#107

Post by brailsafe »

mabbo wrote: post #20
phkahler wrote: post #13

Home prices vary inversely with interest rates. Here's how that works: 1) person tells bank they'd like a mortgage to buy a house. 2) banker asks for info on income, expenses, etc. 3) banker estimates persons maximum monthly payment. 4) banker figures out max loan amount based on #3 5) buyer is encouraged by everyone to spend the full amount from #4 Everyone - the seller, their agent, your agent, the bank, and maybe…

> Ultimately your payment is determined in step 3 and has nothing to do with interest rates. This presumes a single purchase. You've got to go 'macro economic' to see where this breaks down. When prices start rising because of increased max loan amounts, you get things like bidding wars. Toronto has been terrible for those in the last 5 years. Both the bank and the seller win when people start paying (and borrowing)…

I'm guessing you're in Toronto or Downtown Vancouver, mind breaking down approximately where/what your condo is out of curiosity? I'll never hope to own something here, but I'm always curious how far out these insane prices are getting and what you would get for 1m.

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

#109

Post by [deleted] »

MrTonyD wrote: post #77
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.

I read an article where they did a supply/demand analysis of tuitions, and found that tuitions might simply be responding to demand. Obviously, there are a lot of factors to consider. But they looked at broader economics for demand (jobs, unemployment) and existing college sizes (instructor and class volume) and found that pricing were correlated with supply/demand changes, with loans playing only a minor role in edu…

[deleted]

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

#110

Post by gweinberg »

The author is writing as if housing construction just happens irrespective of demand. People will build new housing if they are confident it will earn a profit. It stands to reason that if new construction is allowed, housing prices can't stay much higher then construction costs for long.
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