If it's all about supply and demand.....

dopester

IveSeenTheLight wrote: »

Will there be enough of these sellers to influence the market?

I don't understand. Transaction levels were pretty low during 2008 but we all saw the main UK house price indexes recording some heavy falls, month on month. Similarly the market moved upwards in 2009, with QE, low interest rates, low transaction numbers, and low supply due to Government policies to prevent more repossessions.

It only takes one seller and one buyer to transact to make an impact on market prices. If all houses on this street, all very similar, the owners had in mind were worth £350K, but one owner sold to a buyer for £220K, that will have an impact on the market for the other houses on the street and the area - feeding back to the main indexes.

It would feedback harder, especially if few other houses sold in the area.. the only ones selling being those who are desperate to sell, accepting whatever money is on the table, rather than those holding out for old-world value. Then again there might be enough buyers to ensure that an owner in distress doesn't have to drop right down to £220K, as there are enough will to buy well above that, but below £350K.

This is how markets work, ISTL. Although I agree with the fact there has to be a need for those who do sell, to sell lower, thus pushing values down for owners, even for those waiting for the price they think they deserve.

Asset prices rise not because of "buying" per se, because indeed for every buyer, there is a seller. They rise because those transacting agree that their prices should be higher. All that everyone else - including those who own some of that asset and those who do not - need do is nothing.

Conversely, for prices of assets to fall, it takes only one seller and one buyer who agree that the former value of an asset was too high. If no other bids are competing with that buyer's, then the value of the asset falls, and it falls for everyone who owns it. If a million other people own it, then their net worth goes down even though they did nothing. Two investors made it happen by transacting, and the rest of the investors made it happen by choosing not to disagree with their price. Financial values can disappear through a decrease in prices for any type of investment asset, including bonds, stocks and land.

Although I'm uncertain about how strong the forces are on those who want/need/have to sell, due to ultra low interest rates and current policy to keep values supported and owners in position, will be for any effect of seeing the market fall.

The Conservatives don't seem to have any desire to allow the market to operate naturally - so I suspect they'll maintain policies of market rigging to support values, hoping enough FTBs (stamp duty bung £250K) and others will pay well over what otherwise would be the true value for homes.

The current market is so FUBAR, so utterly rigged, so totally bent to try and maintain values for existing owners no matter how stupid they've been in taking out mega debt for 1 or more properties, that it's nothing short of outright market abuse against those who don't own but are looking to buy in an open free market. At what otherwise would be a much lower price, without all the supports in place. Maybe values it'll continue that way and values won't fall in the 12 months after a General Election, whoever wins. Despite public sector cuts, strikes, gilt/bond strikes, and whatever else to come. The indexes should also start to include what properties sold at auction go for imo.

Rochdale_Pioneers

I now have a house that is overpriced vs a local housing market being skewed by developers offering ever sillier deals to shift their stock (like a 25% equity scheme where you only get a mortgage for 75% and the remaining 25% is an interest-free loan for 20 years). Surprisingly enough to sell any house worth any price you now have to drop to below the money you'd need to buy 75% of a new one.

So screw it. I have a job in Rotherham, a home in Stockton and a 190 mile commute. If I have to wait until the developers have either flogged them or gone pop, I can wait.

Generali

lostinrates wrote: »

I wish we could have a glossary and reference sticky for things like this actually. How/who do I ask for that ?

PM one of the 'board guides' (not moderators, we definitely don't have moderators, presumably in an attempt to limit liability for racist or libellous posts) I guess.

lostinrates wrote: »

I wih someone would expain all things things people rightly feel need to be explained..

Here I am!

Ok, supply and demand in the housing market.

Firstly, for the doubters, there is only supply and demand setting prices in the housing market as the Government doesn't intervene to set prices (except for dwindling numbers on a secure tenancy agreement).

Demand is the number of properties people are willing and able to buy at any given price. It isn't the number that have some vague wish to buy. Demand for massive properties that sell for multi-millions is low, despite what people will have you believe, as few can afford them. Their price is high as supply is also low.

The demand curve which is a graph that maps price on the verticle axis against quantity on the horizontal will slope downwards, ie high price = low qty demanded, low price = high qty demanded.

Supply, conversely, is the number of properties that people are willing and able to sell at any given price. It isn't the total number of houses in existance or the number of new houses being built.

The supply curve on the same pair of axies will slope upwards, ie low price = low supply and high price = high supply.

Things that will inluence demand directly are:

- The substitution effect. That is people can buy a place or rent. If house prices increase but rents stay the same, more people will rent for example, either by choice or by force. In the above example, the demand curve is shifted downwards or to the left, depending on how you look at it, ie less is demanded at any given price.
- The income effect. If incomes rise, people can afford to spend more on housing, ie rising incomes = demand curve shifts to the right or upwards, more people can aford to buy houses at any given price.
-Financing. Most houses are bought on credit, generally using a mortgage (which comes from the old French for 'death pledge' as the debt died with the borrower). The price and availability of mortgages will have a big impact on the 'able' part of "willing and able to buy". There is an argument which goes that most of the rise in house prices wasn't a bubble at all but a repricing due to a fall in long term nominal interest rates reducing mortgage payments and thus the effective price of housing. I have some sympathy with this argument although I don't think it's the entire story.
-Wealth effect. As people get wealthier (the total value of assets minus total debt rises) they feel able to spend more on consumption and on investment. Rising house prices led to BTL and increased consumption through MEWing. Of course BTL as a result of increasing wealth may have led to increased house prices and thus increasing purchases of BTL property. That is the bubble argument I guess which I also have some sympathy with.

There are other things as well but TBH this post is about as long as you can get away with on a forum already and I haven't even touched on supply really. Demand is the bit people are most interested in and get most badly wrong anyway.

The 'willing and able' bit is the thing to remember. Willing and able to buy, willing and able to sell.

dopester

Rochdale_Pioneers wrote: »

So screw it. I have a job in Rotherham, a home in Stockton and a 190 mile commute. If I have to wait until the developers have either flogged them or gone pop, I can wait.

That is heavy going. I thought you lived in Rochdale? I've just looked at the distance between Stockton and Rotherham on Google maps and it's about what you say.. 90 odd miles there, 90 odd miles back. Hope you're not doing that 5 days a week.. It would be expensive with fuel / time.

I'm not all bad. Hope you can find some other solution to your house sale.

chucky

how about this?

the current rises of the last year are the correction of the over-correction that went too far in 2008

Generali

chucky wrote: »

how about this?

the current rises of the last year are the correction of the over-correction that went too far in 2008

That makes sense if you believe in the financing argument - house prices shouldn't have fallen as interest rates fell despite a fall in incomes. Interest rates being slashed will more than compensate overall for falling incomes.

nembot

ukcarper wrote: »

I know Hamish takes it to the extreme but can you explain why a 3 bed semi in one town is 33% cheaper than one 5 miles away.

Couldn't to tell the truth, apart from and I say this in the nicest way, some people are easily lead by good salesmen and women. When you have the goverment shouting from the treetops that everything is "A OK" and "We are a BOOMING nation" everyone wants a slice. The truth is, the economy was being subsidised by the goverment and EU to such an extent, the lenders got greedy and people took greater risks. The government did nothing was done to stop the "feel good feeling" and to be honest, if you were they - would you?

Technically the economy without the incentives should of slowed down around 2000/2001, it's only natural to expect the current powers that be, use this as ammunition in their quest for extended reign. With strong growth, everyone was happy... good times an all that.

But, the statement that prices go up forever wasn't entirely true, or guaranteed in the short term. When the nation becomes obessed though, these caveats are often overlooked and the massive investment, which was not going to last forever, stayed conveniently in the background adding to the illusion that the good times will last forever.

Admittedly, in the long term prices do rise almost inline with inflation. But what I see in my eyes, is an artifically inflated market that's gone on so long people have become complacent, maybe even foolish to assume that the current prices are realistic and the market will function, against all logic and external factors.

As a father, it's important my children can own a place of their own. I know it's only a culture thing, as many of my friends from the continent tell me how different it is over there. You can almost rent a property indefinitely, unlike the UK were it's touch and go for many tenants.

But I think the majority here are locals, should we say and we are ingrained from birth that owning a place if your own, is the right thing. This is now unattainable for so many and I lay blame entirely at the governments door, for lack of regulation.

I know some people would like and i'd even said "need" in the past, which is a little unfair as I don't wish hardship on anyone and can't argue that rising prices are a bad thing. But you know, not silly prices because... they're just a bit silly.

So yeah, I really don't know whether prices are too high or why it would be different from town to town. I think they are, but that doesn't mean I'm right.

Bit of a waffle eh, whoops


No tin hats plz

Rochdale_Pioneers

dopester wrote: »

That is heavy going. I thought you lived in Rochdale? I've just looked at the distance between Stockton and Rotherham on Google maps and it's about what you say.. 90 odd miles there, 90 odd miles back. Hope you're not doing that 5 days a week.. It would be expensive with fuel / time.

I'm not all bad. Hope you can find some other solution to your house sale.

lol - from Rochdale, but haven't lived there for 15 years. Yes, its 93 miles each way door to door which takes about 85 minutes. It would be hell in fuel but I get a company car and a fuel card so its OK. The way I look at it is that my current arrangements are temporary. The new job was too good an opportunity to turn down (great company, great prospects, monumental pay rise) so I can cope with the commute in the short term (this year? Next year?) and feel the benefits for the next 30.

I'm pretty sure its what Tebbit used to refer to as get on your bike and find work. 11 years ago I was a year out of uni with a useless degree and working shifts in a call centre for minimum wage. Now I have a nice house a nice car and sit (so I'm told) in the top 10% of salaries. A long commute for a little while is worth it for the results.

HAMISH_MCTAVISH

Generali wrote: »

I haven't even touched on supply really. Demand is the bit people are most interested in and get most badly wrong anyway.

The 'willing and able' bit is the thing to remember. Willing and able to buy, willing and able to sell.

Great post Generali, and for that matter we've had a lot of good posts so far in this thread. I even thanked Nembot.

As Generali hasn't really gone there, I'll dust off the old economics book, (and keep google open) and take on a highly abreviated version of the supply side.

As previously mentioned, the supply curve represents the amount of goods (in this case housing) that suppliers (vendors) are willing and able to sell at any given price.

As prices increase, theoretically, the supply of houses that people are willing or able to sell should also increase, whereas at a lower price the supply should decrease, as less people are willing or able to sell.

We have seen the results of this principle happening over the last few years..... As prices fell, the number of houses available for sale also fell, as an increasing number of people felt unable or unwilling to sell at the new lower price. (due to negative equity, for example)

As prices have risen again over the last year, they have now reached a high enough level that an increasing number of people are able and willing to sell again, and stock levels are increasing.

The ability of supply to quantitatively respond to various factors, including price, is known as the elasticity of supply, and it is assumed that there is some amount of elasticity in the supply of almost all goods, even those of limited quantities, most often due to price elasticity. The easiest way to think of this is the old saying that "everything has a price".... If you offer enough money for something, even a rare something, eventually someone will sell.

However some markets can be inelastic in supply. As a hypothetical example, consider land. Suppose that no matter how much someone would be willing to pay for an additional piece, more land cannot be created. Also, even if no one wanted all the land, it still would exist. In such a case, land would have a vertical supply curve, with zero elasticity.

Now in reality, there are many other factors impacting supply and demand of housing, but the most important is probably the supply and demand of money.

The money market is also a supply and demand system, with interest rates being the price of money. The demand for money intersects with the money supply to determine the interest rate. Central banks influence this process through the setting of base rates in attempts to control liquidity, and thus supply, but ultimately the market decides the rate it will lend at via supply and demand.

And as this post is also getting too long, I'll leave it there. (and hopefully Generali can correct any schoolboy errors, I'm sure I'll have made a few, later on);)

Generali

The only correction I'd make Hamish is that supply of land can react to price.

Supply is the number of people willing and able to sell at any given price. As land prices, in the South East particularly, have risen, people have sold off a chunk of their garden for houses or flats to be built on. Clearly by doing this they are depriving themselves of a nice amenity but they feel the price is such that it is worthwhile.

The thrust of the rest is correct when talking about movements along the supply curve IMO. One thing you overlook is that the supply curve can also shift. The main thing restricting the supply of housing in the UK is planning permission. This keeps the price of land which has either been developed or can be developed very high. The price of this land is what keeps prices high as the maximum long term price for a house must = price of building land plus cost of rebuilding (short term there can also be a premium for the house already being there, this can be seen currently in the price of houses in many mining towns in Aus as there is tons of land and many builders but a short-term bottleneck).

The key as to why house prices are perennially high in the UK is in the supply side IMO. Scrap the Green Belt and you'll solve the problem as the Green Belt is where people want to live - places that are commutable to the big cities and towns.

By letting more houses be built, you shift the supply curve upwards/to the right and this enables more houses to be sold at any given price. The economic loss to the UK's economy caused by restrictive planning policies is horrendous but then that's deadweight loss and for another discussion.