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Debate House Prices
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Can anyone explain....
Comments
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Well said Cleaver.
It isn't just "supply and demand", there is more to it than that. The availability and cost of credit will have a bearing on property prices.
Actually, I think Hamish and I probably agree on this thread. It is all just supply and demand, but there's a shed load of interesting factors that effect supply and demand. That's my opinion anyway.0 -
There's a fairly simple proof that the cost of housing is principally driven by the shortfall between household creation and housing provision, which is that rents are increasing as competition for rented housing increases. Rents are not driven by mortgage lending.
If that isn't enough proof, we've now had a massive contraction in mortgage lending and very strictly enforced lending criteria. Yet even under these circumstances prices have bounced back within around 10% of their peak values. That doesn't indicate that oversupply of finance was a major factor.
Anyway it's kind of ridiculous to claim that excessive lending was the only cause of the boom when the loan to salary multiple never exceeded 3.5x earnings. Over 25 years that is a small proportion of income. The key enabler was low interest rates which led to high affordability in historic terms, not relaxed lending standards - there's no evidence at all that lending was reckless: the most the FSA have said is that certain combinations of practices - uncertified loans using offset mortgages or interest only for example - carry more risk than certified repayment loans. The housing market was a little overcooked, but not excessively so.0 -
If that isn't enough proof, we've now had a massive contraction in mortgage lending and very strictly enforced lending criteria. Yet even under these circumstances prices have bounced back within around 10% of their peak values. That doesn't indicate that oversupply of finance was a major factor.
OK, its a bit late, I`m a bit tired, but let me just throw this in......
Prices are within 10% of their peak, but are fairly static.
What would happen to prices if lending was suddenly back on tap ?
Demand would increase, would it not ?
Prices would increase, would they not ?
Hamish would say "told you, prices are determined by supply and demand".
I have to say that the above scenario shows that prices, and demand are determined by lending availability.30 Year Challenge : To be 30 years older. Equity : Don't know, don't care much. Savings : That's asking for ridicule.0 -
Actually, I think Hamish and I probably agree on this thread. It is all just supply and demand, but there's a shed load of interesting factors that effect supply and demand. That's my opinion anyway.
I doubt many will dispute the demand for housing. To look forward though you need to understand what occurred in the recent past to create the price boom that we've witnessed. As the game has changed. With property the most widely held of any asset class. The future has a high degree of unpredictability. As no longer is credit availability the only issue, but the fall in disposable incomes as well. If its going to take until 2013 for income levels to return to those seen in 2008 as was forecast this week. Then the property price bubble may well and truly burst. Property is a marketplace over which time itself will create change.0 -
HAMISH_MCTAVISH wrote: »But you can't significantly increase selling prices in an open market in the absence of a genuine situation where supply is less than demand.
Why not ?
I make widgets (I`ve used this analogy before, I think). I have lots of widgets to sell. People want my widgets (stop sniggering at the back), and pay £10 each for them. Widgets are £10 each. Right. I now decide I want £20 for my widgets. I`ve got lots in stock, but I still ask £20 for them. People still want them, but I get a few less takers. Widgets are now £20 each, double what they were before. There is less demand, plenty of supply, but the price has doubled. All I now have to do is tell people that there is, or will be a shortage of widgets, and it might well be possible to ask £25 for them. If I get too greedy, and people say they can no longer afford them, I simply say "here, you can pay in installments, just 25 years of monthly payments, and the widget is yours". Now add a little "a widget will be worth more in future years", and demand may well further increase, as will the asking price.
BTW. I don't really have any widgets for sale, so please don't ask to buy one. If I do get some, I`ll let you know. Demand will be high, so don't miss out.30 Year Challenge : To be 30 years older. Equity : Don't know, don't care much. Savings : That's asking for ridicule.0 -
OK, its a bit late, I`m a bit tired, but let me just throw this in......
Prices are within 10% of their peak, but are fairly static.
What would happen to prices if lending was suddenly back on tap ?
Demand would increase, would it not ?
Prices would increase, would they not ?
Hamish would say "told you, prices are determined by supply and demand".
I have to say that the above scenario shows that prices, and demand are determined by lending availability.
No-one would dispute that that finance availability enables purchases and therefore increases demand. But the fact is that without lending being available, prices have settled back to within about 10% of their peak. That would indicate that prices about 10% less than peak are sustainable without "loose" lending. And the proof is that they're being sustained.
The more important point is about rentals anyway. The "bulls" predicted last year that if housing purchases were restricted because of mortgage rationing, rents would rise due to the demand for housing (and I remember a fair few gleeful bear threads on "rents tumbling"). Rents are not driven by mortgage lending, but they are rising.
The REAL scandal of the housing shortage is rising rents. We're creating a two tier society of property owners and those forced to rent pretty much forever. Those renting are skewed towards the less well off, and they have no protection against rising rents and a considerable timebomb is building around paying for rental in retirement. The solution is probably a form of leasehold, but we do need more homes to stabilise prices.0 -
Hey julieq, I might have a widget, would you be interested in it ?
Sorry, it had to be done.
Sometimes I am appalling.
To be serious for a moment, I expected my analogy to be torn apart. Maybe it'll get that treatment tomorrow when they're back online.
Goodnight.30 Year Challenge : To be 30 years older. Equity : Don't know, don't care much. Savings : That's asking for ridicule.0 -
can someone explain the concept of Effective Demand to DesperateProf please?
it may help him understand the fundamentals behind demand and supply...0 -
I now decide I want £20 for my widgets. I`ve got lots in stock, but I still ask £20 for them. People still want them, but I get a few less takers. Widgets are now £20 each, double what they were before. There is less demand, plenty of supply, but the price has doubled. All I now have to do is tell people that there is, or will be a shortage of widgets, and it might well be possible to ask £25 for them. If I get too greedy, and people say they can no longer afford them, I simply say "here, you can pay in installments, just 25 years of monthly payments, and the widget is yours". Now add a little "a widget will be worth more in future years", and demand may well further increase, as will the asking price.
.
And that's a very good description...... Of how a monopolistic market works.
But not an open market...
If you were the only provider of widgets, you could do what you like with prices, and people would have to pay.
But as you're actually in competition with 1000 other widget suppliers, what happens in real life is that when you double your price, they all go and buy from your competitors.
Now if you raise your price by just a few percent, you may be able to maintain your business simply because some people like your widgets, you are closer to them geographically so it's more convenient to shop with you, they get better service, etc.“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”0 -
What would happen to prices if lending was suddenly back on tap ?
Demand would increase, would it not ?
Yes, lending would enable conversion of need to effective demand.Prices would increase, would they not ?
That entirely depends on supply. If the supply shortage remains, then yes.Hamish would say "told you, prices are determined by supply and demand".
And I'd be right.I have to say that the above scenario shows that prices, and demand are determined by lending availability.
No, they're determined SOLELY by the balance between supply and demand.
Because if you increased lending, but also doubled the supply, then prices would fall regardless.“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”0
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