Can anyone explain....

DervProf

HAMISH_MCTAVISH wrote: »

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.

What if the cost of widgets, by the people that sold them, were based on what the last few widgets were sold for by your competitors ? What if there was mass media speculation that widgets were going to rise in price, would all the widget suppliers think "I know, I`ll drop the price of my widgets" ?

Oh, and what if the sales of widgets were mostly arranged by an independant salesperson who charged commsion on every widget sold ?

DervProf

HAMISH_MCTAVISH wrote: »

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.

So, if a seller wanted a bigger/better widget, or just fancied a different one, and there were plenty to choose from (because other widget owners also have the same idea), would they all drop their asking price ? They would be more likely to if they new that other widget buyers had limited access to funds, than if funds were easily available.

Graham_Devon

Graham_Devon wrote: »

Oh sorry, I thought that was all there was.

Now we have an inbetweener.

I do like the inbetweeners though.

What about things like stamp duty? Supply? Demand? Inbetweener? Nothing? Sh*tted all over your parade?

Hello?????

Thrugelmir

HAMISH_MCTAVISH wrote: »

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.

For basic products , providing the quality of the product is right then more often or not price is the deciding issue. In stagnant markets where there are plenty of other sellers and times are tough its dog eat dog.

Shupufski

I concede the point that supply is limited in respect of the best houses in the best areas but there are plenty of homes for everyone if we disregard the differences between them.

Historically, the very best areas have always been expensive and out of reach of the masses due to the fact that there have always been sufficient numbers of people willing and able to pay a premium.

If you increase the credit available by loosening the lending criteria (and make credit available to more people) you immediately fuel the aspirations of a larger proportion of society. The availability of credit means that the money available for house purchase is reflected in the price of all property. Thus, the relative positioning of property doesn’t change but the price of it all goes up.

Now, I agree that appetite for property did increase (due to many of the reasons put forward by Cleaver) so we can perhaps conclude that the increase in prices was due to increase in appetite multiplied by increased credit.

So if price is a function of Appetite X Credit then it stands to reason that if credit is restricted prices will fall. However, this is not reflected in prices immediately (as it would be in commodities) because the frequency of transactions is low (relative to other purchases needed to survive, like food) and the increased cost of Credit has not been applied to all participants in the market.

This can be seen most clearly by the high deposits required by lenders. The deposit demanded reflects the increased cost of credit because the interest rate does not. The interest rate is artificially low due to exceptional intervention by the BOE. However, since the deposit is essentially a cost placed mainly on new entrants into the market we now have the low transaction volumes now being seen.

In my view, the current situation is reflection not of any intrinsic value of property or demonstration of some absolute level of demand but rather simple barriers to entry.

There is no doubt that if you want more new entrants to the market then you need to lower barriers to entry. This is achieved by lowering the cost of entry via cheaper credit or lower house prices.

IveSeenTheLight

DervProf wrote: »

I have to say that the above scenario shows that prices, and demand are determined by lending availability.

Lending availability simply affects the demand side of the function.

It can be a contributer to the effect on prices, but it depends on what happens on the other side of the equation i.e. supply

Cleaver

Shupufski wrote: »

I concede the point that supply is limited in respect of the best houses in the best areas but there are plenty of homes for everyone if we disregard the differences between them.

With all due respect, we need to stop here because people don't disregard the differences between them. Indeed, that's what a market is. It's the reason we don't just have one manufacturer making one car - people want choice, value, deals, special models etc. etc.

Shupufski wrote: »

If you increase the credit available by loosening the lending criteria (and make credit available to more people) you immediately fuel the aspirations of a larger proportion of society. The availability of credit means that the money available for house purchase is reflected in the price of all property. Thus, the relative positioning of property doesn’t change but the price of it all goes up.

Completely agree. There's an overall demand for property and an increase in credit allows additional people to purchase that property, hence prices go up as there are more people able to buy the same small stock of houses.

Shupufski wrote: »

Now, I agree that appetite for property did increase (due to many of the reasons put forward by Cleaver) so we can perhaps conclude that the increase in prices was due to increase in appetite multiplied by increased credit.

As I've said before, I don't think any one factor was to 'blame' for the doubling in property prices. I think it was the 20 or so factors that I listed on the previous page all combined. So I disagree.

Shupufski wrote: »

So if price is a function of Appetite X Credit then it stands to reason that if credit is restricted prices will fall. However, this is not reflected in prices immediately (as it would be in commodities) because the frequency of transactions is low (relative to other purchases needed to survive, like food) and the increased cost of Credit has not been applied to all participants in the market.

Obviously if you withhold credit for long enough, prices fall. But at the moment credit is very much withdrawn and prices are falling a bit, as sellers seem to just be happy to sit in their houses and wait it all out. This would result in stagnation over the medium term.

Shupufski wrote: »

In my view, the current situation is reflection not of any intrinsic value of property or demonstration of some absolute level of demand but rather simple barriers to entry.

I kind of agree, but in essence, houses prices are what they are. Whatever the government do, or banks do, or we do... wrap it all up and you have house prices. We can all debate the 'real' value of houses prices, or what a house price 'should be', or the 'intrinsic' value. We see it all the time on here: "we all know that that house is only worth £70k.". At the end of the day, that means nothing. A house is worth what the buyer purchases it for from the seller. End of.

Shupufski wrote: »

There is no doubt that if you want more new entrants to the market then you need to lower barriers to entry. This is achieved by lowering the cost of entry via cheaper credit or lower house prices.

Agree 100%. The lowering of house prices or easier access to credit would allow FTBers access to the housing market. Hamish thinks credit is the answer, 'bears' think lower house prices are the answer. I personally think a mixture of both is the answer.

I have a bit of a skewed view though, as I live in Manchester. There are thousands of FTBer houses here well within reach of FTBers on average Manchester wages. So prices don't really have to fall here. The answer here is more 90% mortgage products.