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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

#21

Post by pjc50 »

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…

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...

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

#22

Post by crdoconnor »

davidhbolton wrote: post #18

I take issue with the statement that since 2005 rents in London have only gone up by less than 4%. This is personal data but In 1998 I was paying £650 a month for fully furnished. In the same building but on the top floor unfurnished is £925. I bought in 2000 and sold in 2015 for three times what I paid. The main people buying where I lived in East London, were from West London where rents were so high it was effecti…

London also has a supply constrained by wealthy buyers of second and third homes for investment purposes. There are a lot of central residential areas without many people actually living in them and a lot of prime land taken up by spacious luxury residences.

If council tax were unfrozen and allowed to go up this effect would be mitigated and rents might actually go down.

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

#23

Post by nly »

travisoneill1 wrote: post #19
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…

Even if the majority of people choose the max they can afford, it doesn't follow that individuals can't freely choose cheaper houses for themselves.

Individual action doesn't matter. If you're only willing to spend 30% of your take home pay on rent, whereas your sociodemographic twin is willing to pay 50%, they'll outbid you.

Incidentally I currently spend 47% of my take-home on rent in London. At 32, buying a property is still out of my reach.

There are statistics on this in this related BBC article https://www.bbc.co.uk/news/business-42179119

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

#25

Post by Spooky23 »

esotericn wrote: post #15
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…

What influences the willingness of a lender? Availability of money in the general lending environment, sure, but surely there's a risk component there. The low interest rates can only persist as long as a lender has a reasonable expectation that they'll be paid back (e.g. that rents remain high enough to sustain the mortgage over the term). The real world factors like 'how desirable a place is'/'are good jobs there'…

A: Closing the deal.

The only exposure your bank has in terms of losing money is losing the costs associated with starting up the loan when you apply — there is a strong incentive to approve. The government owns the risk on performance.

This was a policy choice, because banks making subjective decisions usually looked a lot like redlining. Nobody would write a loan on a luxury condo in a rehabbed factory in the inner city because it’s a measurably higher risk. Bad schools, high crime, pollution, and risk of the condo board doing dumb things makes that a risk for the bank.

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

#26

Post by xwkd »

Take a look at the lumber market. The cost of building materials has been shooting up for the past 10 years. I believe houses are getting more expensive because returns on new builds come with much higher risk.

It’s cheaper to recycle the existing real estate market.

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

#27

Post by rb808 »

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 of China looking for investments 5. Two huge stock market crashes leaving most people wary of stocks and seeing property as a safer investment 6. A combination of all factors pushing property even higher into bubble conditions.

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

#28

Post by rustcharm »

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…

But isn't that still _supply_?

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

#29

Post by rustcharm »

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…

This is why Government backed mortgages and mortgage interest deductions don't really save any homebuyers money, and just end up costing the taxpaying public.
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