It's simply supply and demand - or is it?

Graham_Devon

Roger Bootle gives his reasoning's as to why affordability measures are flawed and why it's not all about supply and demand (in a free market sense).

I've posted this article as it directly takes on one of the reasons put forward on here so often for increasing house prices....

Whenever I opine on this subject people write in to tell me that I do not understand: this is simply a matter of supply and demand. As an economist, of course, I have never thought of this. It is true that in a small island with limits on the availability of land for building and a growing population, property prices are bound to be relatively high and to rise over time.

But that does not justify the current real level of prices or the current rate of increase......

He goes on to look at how the shortage of housing isn't the issue many are making it out to be.

Firstly, he cites that over the last 15 years more houses have been built that households formed.

Secondly, rising prices are not only a UK phenomenon, which you'd expect if it was all about a small island with a supply problem.

Third, the ratio of rents to house prices is low and hardly moving. Again, if a shortage of houses was solely to blame, you'd expect rents to be bid up alongside house prices. It's not happening.

Fourth, help to buy.

He's just a journalist. I don't agree with everything he says. But he's someone else saying the same things as a growing number of people.

It's not supply that's the biggest issue here, it's policy.

http://www.telegraph.co.uk/finance/comment/rogerbootle/10901558/Roger-Bootle-At-some-point-there-will-be-a-reckoning-on-house-prices.html

ruggedtoast

This is right on message for the forum hpc.co.uk Graham, but I think we all know there arent enough houses in places where people want to live.

CLAPTON

Graham_Devon wrote: »

Roger Bootle gives his reasoning's as to why affordability measures are flawed and why it's not all about supply and demand (in a free market sense).

I've posted this article as it directly takes on one of the reasons put forward on here so often for increasing house prices....

He goes on to look at how the shortage of housing isn't the issue many are making it out to be.

Firstly, he cites that over the last 15 years more houses have been built that households formed.

Secondly, rising prices are not only a UK phenomenon, which you'd expect if it was all about a small island with a supply problem.

Third, the ratio of rents to house prices is low and hardly moving. Again, if a shortage of houses was solely to blame, you'd expect rents to be bid up alongside house prices. It's not happening.

Fourth, help to buy.

He's just a journalist. I don't agree with everything he says. But he's someone else saying the same things as a growing number of people.

It's not supply that's the biggest issue here, it's policy.

http://www.telegraph.co.uk/finance/comment/rogerbootle/10901558/Roger-Bootle-At-some-point-there-will-be-a-reckoning-on-house-prices.html

poorly reasoned article but

interesting that he concludes

This is not to say that someone planning to buy a home to live in should desist. There are all sorts of pecuniary and non-
pecuniary advantages to owning your own home and there is more to life than money. But anyone who thinks that residential housing currently presents an attractive medium-term investment needs to have their head examined – and their finances.

michaels

Not sure how 'household formation' is counted but I suspect by definition it can not exceed the number of new houses?

Rinoa

Hmmm. Roger Bootle eh? He's the go-to economist journos contact if they want a wacky angle on something.

He's been spectacularly right with some predictions and spectacularly wrong on others. About the same ratio as spinning a coin.

Low interest rates and accessible finance make house buying easier and prices are rising. But the same could be said for cars where 0% deposits are freely available. So why isn't the price of cars spiraling? Because the manufactures simply make more cars.

Graham_Devon

michaels wrote: »

Not sure how 'household formation' is counted but I suspect by definition it can not exceed the number of new houses?

Though it's being stated that more new houses have been built than households formed.

I guess that leads us down a road of second homes etc.

Conrad

'But anyone who thinks that residential housing currently presents an attractive medium-term investment needs to have their head examined – and their finances'.



Bootle has been saying this as long as I can recall, way back to something like 2004.


If I stick £30k in an ISA, there's no gearing effect to benefit from unlike property whereby my £30k gets me £100k of exposure. In 20 years time the rental will be considerably more relative to the mortgage.


As to your main home constituting an investment, it makes perfect sense. Not only do you enjoy the utility of the asset in a very fundamental sense, you get to cash in in free of tax when you one day downsize. Plus you can extend and so on to increase value.

N1AK

Graham_Devon wrote: »

Firstly, he cites that over the last 15 years more houses have been built that households formed.

Which on its own should pretty much stop this being considered a serious article worthy of merit. He doesn't source the information or explain it. It would be true if 5 houses had been built in the last 15 years but one of them was a holiday home

His point on rents becoming more affordable is less vacuous but again
there are many flaws with simply noticing that and doing no further digging.

There are very clear figures to show that the UK is chronically short on houses. That could well be but one part of a bigger picture, but anyone trying to dismiss that fundamental premise is attempting to deceive and entirely wrong.

HAMISH_MCTAVISH

Rinoa wrote: »

Low interest rates and accessible finance make house buying easier and prices are rising. But the same could be said for cars where 0% deposits are freely available. So why isn't the price of cars spiraling? Because the manufactures simply make more cars.

Nail. Head.

[/thread]

N1AK

Conrad wrote: »

As to your main home constituting an investment, it makes perfect sense. Not only do you enjoy the utility of the asset in a very fundamental sense, you get to cash in in free of tax when you one day downsize. Plus you can extend and so on to increase value.

We bought in 2011 when I still thought we were likely to see further downwards corrections (and was entirely wrong!). With interest rates this low we swapped £525 a month in rent for £120 a month in interest on mortgage payments. I figured that our house was unlikely to lose more than £5k a year in value, and we'd have the freedom to use as we pleased anyway.

With interest rates as low as they have been it frankly astounds me that anyone hasn't seen buying to occupy as an attractive investment for the last 2+ years.

Graham_Devon

N1AK wrote: »

There are very clear figures to show that the UK is chronically short on houses. That could well be but one part of a bigger picture, but anyone trying to dismiss that fundamental premise is attempting to deceive and entirely wrong.

To be fair here, he hasn't dismissed it at all.

What he is saying in the article is yes, there's a shortage of supply, BUT that shortage alone cannot explain the size of the increases in property prices.

It is true that in a small island with limits on the availability of land for building and a growing population, property prices are bound to be relatively high and to rise over time.

But that does not justify the current real level of prices or the current rate of increase.