Housing bubbles are universally destructive • Hacker News Board

Re: Housing bubbles are universally destructive

#31

Post by bobthepanda » Tue, Oct 02, 2018, 7:50 AM UTC

mistermann wrote: post #20

AnthonyMouse wrote: post #7

Earlier quoted context omitted.

> It is true that housing prices in urban areas have risen astronomically in many regions of the world, and while we may well see a correction, I wonder if these these areas have simply become way more valuable than they used to be. They are, in the short-term. The problem is that high housing costs have a slow, long-term corrosive effect on a city. Companies have to pay higher wages for workers to achieve the same s…

> It's almost impossible to avoid this once the values are already ridiculous, but what the article suggests can mitigate it somewhat: Sustained moderate inflation combined with a large increase in the housing supply, so that real values come down even though nominal values are stable. I'm having trouble understanding what inflation means in this context. From the article: > There is a way out, but it’s not a pleasan…

The money has come, both directly and indirectly, from global capital markets. Countries like China, Russia, Germany, and Japan save a lot of money, and would like to put it somewhere where it'll be a productive investment earning interest. If Canadian property looks attractive for that purpose, some of that money will head in that direction.

Re: Housing bubbles are universally destructive

#32

Post by bobthepanda » Tue, Oct 02, 2018, 7:53 AM UTC

llamaman wrote: post #30

mistermann wrote: post #20

Earlier quoted context omitted.

> It's almost impossible to avoid this once the values are already ridiculous, but what the article suggests can mitigate it somewhat: Sustained moderate inflation combined with a large increase in the housing supply, so that real values come down even though nominal values are stable. I'm having trouble understanding what inflation means in this context. From the article: > There is a way out, but it’s not a pleasan…

I believe the author is referring to high inflation as measured by things that reserve banks look at (in Australia this would be the consumer price index etc); while house prices either stay stagnant or rise slower than said rate of inflation. Thus, the nominal price of housing is maintained, while the real value tanks. How this might happened is something I do not have the economics to know - as you mentioned, an in…

Housing markets are only overheated if supply is not keeping up. There are scenarios where an overheated market leads to oversupply of housing; but there is a few years' lag between investing in construction and the units coming online due to the time it takes to finance and construct housing.

Re: Housing bubbles are universally destructive

#33

Post by dafrie » Tue, Oct 02, 2018, 7:56 AM UTC

lewis500 wrote: post #9

This whole piece makes me ask what a bubble really means. The author admits to having been wrong about housing prices since 2000. But that’s okay because bubbles can, apparently, last decades. If a bubble can last a very long, but totally indeterminant amount of time, does it have any reality?

I can not really give you an intuitive explanation, but economists usually refer to bubbles (or disequilibrium), when actual asset prices deviate from the prices estimated based on the identified long term equilibrium properties of often co-integrated variables.

To identify such models, VAR and SVAR (Structural Vector Autoregressive) analysis are often used, where up to 15-20 time series fed into. Such approaches of course come with their sets of necessary assumptions, but wich are in the case of VAR in levels quite reasonable...

Basically the assumption behind such kind of analysis is, that in the long run, there is some kind of equilibrium path were forces of nature/system are pushing towards to, but to identify disequilibria, you need to look at the whole system and not only 1 or two (as a ratio) variables.

An interesting application about identifying "bubbles" in housing prices with VAR you can find here [1].

[1] https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsd...

Re: Housing bubbles are universally destructive

#34

Post by isostatic » Tue, Oct 02, 2018, 7:59 AM UTC

AnthonyMouse wrote: post #11

timcederman wrote: post #8

Earlier quoted context omitted.

I think for most folks actually living in these high cost areas, capital appreciation is not the primary motivation. Also I disagree that they are universally destructive - how else do you explain the long term success of high price cities such as London, New York City, Hong Kong, etc.

> I think for most folks actually living in these high cost areas, capital appreciation is not the primary motivation. Sure, they want a house so they can live in it. But who wants to pay a million dollars, which you either have to pay interest on (if borrowed) or can't collect interest on (if not), when it's only going to be worth the same amount of money in 30 years? At 5% interest, the lack of equivalent appreciat…

> But who wants to pay a million dollars, which you either have to pay interest on (if borrowed) or can't collect interest on (if not), when it's only going to be worth the same amount of money in 30 years?

People who want to live somewhere?

House prices tend to be what people can afford to live. People tend to budget x% of their household income on housing. With lower interest rates, it means houses are more expensive. With two full time workers it means houses are more expensive. With higher wages it means houses are more expensive.

Since 1990 house prices (in real terms) in the US have increased about 15%, but disposable household income has increased nearer 80%. Even in SF from 1990 to 2016 house prices only increased about 80% in real terms, and I suspect that average household income has increased far more

Re: Housing bubbles are universally destructive

#35

Post by Emma_Goldman » Tue, Oct 02, 2018, 8:00 AM UTC

msvan wrote: post #2

It is true that housing prices in urban areas have risen astronomically in many regions of the world, and while we may well see a correction, I wonder if these these areas have simply become way more valuable than they used to be. People thought that the internet would make location irrelevant, but it seems that the opposite has happened. I can think of many armchair theories as to why, but it's not a simple question…

I think it would be very wrong to think of increasing house prices as a direct reflection of intrinsic value.

In the UK the economic model of the past forty years has been based on a conscious policy of asset price inflation. Thatcher stripped away most of the social housing in this country and put it into the market. Few have been built since. The recentering of the economy in financial services has led to a massive expansion of easy credit, that reaches its fulcrum in the housing market. Together this has meant: (a) a dwindling housing stock; (b) progressively larger sums of credit chasing the same number of properties.

That is not to mention the fact the since the late 1960s London has been the main global waystation for offshore tax havens, much of which is attached to property sales in the capital. There are 100,000 properties in the UK which are held as investments, unoccupied.

Re: Housing bubbles are universally destructive

#36

Post by TheOtherHobbes » Tue, Oct 02, 2018, 8:14 AM UTC

Emma_Goldman wrote: post #35

msvan wrote: post #2

It is true that housing prices in urban areas have risen astronomically in many regions of the world, and while we may well see a correction, I wonder if these these areas have simply become way more valuable than they used to be. People thought that the internet would make location irrelevant, but it seems that the opposite has happened. I can think of many armchair theories as to why, but it's not a simple question…

I think it would be very wrong to think of increasing house prices as a direct reflection of intrinsic value. In the UK the economic model of the past forty years has been based on a conscious policy of asset price inflation. Thatcher stripped away most of the social housing in this country and put it into the market. Few have been built since. The recentering of the economy in financial services has led to a massive…

There are actually two economies - one where everything is an investment to be sweated for returns, and one where everything is priced according to real world utility.

In a financialised system everything is priced according to the values of the first economy, which are completely divorced from conventional economic utility.

This makes everything unaffordable to those who don't have access to that economy. It also lowers the quality of goods and services within the second economy, because providing quality and value conflicts with fast high returns.

Re: Housing bubbles are universally destructive

#37

Post by TheOtherHobbes » Tue, Oct 02, 2018, 8:15 AM UTC

isostatic wrote: post #34

AnthonyMouse wrote: post #11

Earlier quoted context omitted.

> I think for most folks actually living in these high cost areas, capital appreciation is not the primary motivation. Sure, they want a house so they can live in it. But who wants to pay a million dollars, which you either have to pay interest on (if borrowed) or can't collect interest on (if not), when it's only going to be worth the same amount of money in 30 years? At 5% interest, the lack of equivalent appreciat…

> But who wants to pay a million dollars, which you either have to pay interest on (if borrowed) or can't collect interest on (if not), when it's only going to be worth the same amount of money in 30 years? People who want to live somewhere? House prices tend to be what people can afford to live. People tend to budget x% of their household income on housing. With lower interest rates, it means houses are more expensi…

How is that disposable income distributed?

Re: Housing bubbles are universally destructive

#38

Post by isostatic » Tue, Oct 02, 2018, 8:27 AM UTC

TheOtherHobbes wrote: post #37

isostatic wrote: post #34

Earlier quoted context omitted.

> But who wants to pay a million dollars, which you either have to pay interest on (if borrowed) or can't collect interest on (if not), when it's only going to be worth the same amount of money in 30 years? People who want to live somewhere? House prices tend to be what people can afford to live. People tend to budget x% of their household income on housing. With lower interest rates, it means houses are more expensi…

How is that disposable income distributed?

That's the median income. At the top 10% incomes have increased dramatically more.

Re: Housing bubbles are universally destructive

#39

Post by shkkmo » Tue, Oct 02, 2018, 8:35 AM UTC

mistermann wrote: post #20

AnthonyMouse wrote: post #7

Earlier quoted context omitted.

> It is true that housing prices in urban areas have risen astronomically in many regions of the world, and while we may well see a correction, I wonder if these these areas have simply become way more valuable than they used to be. They are, in the short-term. The problem is that high housing costs have a slow, long-term corrosive effect on a city. Companies have to pay higher wages for workers to achieve the same s…

> It's almost impossible to avoid this once the values are already ridiculous, but what the article suggests can mitigate it somewhat: Sustained moderate inflation combined with a large increase in the housing supply, so that real values come down even though nominal values are stable. I'm having trouble understanding what inflation means in this context. From the article: > There is a way out, but it’s not a pleasan…

> And if we're speaking about monetary inflation,well, where did all the money come from in the first place to make housing so expensive? Yes I know, when one house sells in a neighborhood or city everything is revalued, but when you've been at it for 10++ years and have had significant turnover of the entire inventory, this excuse begins to run thin after a while. If GDP growth is more or less flat, and there isn't negative growth in other areas like consumer spending, where is all the money coming from to execute the transactions?

I've struggled with a similar question. Where does the money come from? The US GDP has increased ~500x (unadjusted for inflation) in the last 100 years, this means each dollar has to be transacted 500x more frequently on average than it did 100 years ago (assuming a fixed supply). How does this work?

Re: Housing bubbles are universally destructive

#40

Post by nly » Tue, Oct 02, 2018, 8:42 AM UTC

isostatic wrote: post #34

AnthonyMouse wrote: post #11

Earlier quoted context omitted.

> I think for most folks actually living in these high cost areas, capital appreciation is not the primary motivation. Sure, they want a house so they can live in it. But who wants to pay a million dollars, which you either have to pay interest on (if borrowed) or can't collect interest on (if not), when it's only going to be worth the same amount of money in 30 years? At 5% interest, the lack of equivalent appreciat…

> But who wants to pay a million dollars, which you either have to pay interest on (if borrowed) or can't collect interest on (if not), when it's only going to be worth the same amount of money in 30 years? People who want to live somewhere? House prices tend to be what people can afford to live. People tend to budget x% of their household income on housing. With lower interest rates, it means houses are more expensi…

Are you comparing inflation adjusted house prices against unadjusted income?

The % of take home pay people are putting, on average, in to housing here in the UK (ok, different economy) has gone from something like 20-25% in the 1950s to something like 40-50% now.

I myself live in London and put 47% of my take home pay in to rent. That's without property related tax. I'm in the top 5% of earners in the land and can only afford a modest ~45sqm apartment. If my rent goes up next year and my income stays the same, I will have to consider a longer commute.