5 ms·

I think a strong housing market may be the result of lack of productive capital, but I think it has more to do with supply and demand. Most average people pay f

I think a strong housing market may be the result of lack of productive capital, but I think it has more to do with supply and demand. Most average people pay for a house using a mortgage payment, so when buying a house, they'll be looking for a house that has an affordable mortgage payment. Let's say Joe wants to spend / can afford a $1000/month mortgage payment. If interest rates are 5% and the maximum mortgage period is 30 years, Joe can afford to buy a house worth $190,000. However, if interest rates go down to 2% and Joe can now take a 40 year mortgage, Joe can now buy a house worth about $330,000. Great for Joe! The only problem is that housing supply is relatively inelastic, so the supply of housing didn't magically increase overnight. When Joe buys a house, he's essentially bidding against a bunch of other people for that house. If those other people's mortgage payments were affected the same way, then the actual effect is that what was once a house worth $190,000 is now worth $330,000. This sounds like a problem out of an Econ 101 exercise. Either politicians are stupid, or more likely, they know that "homeowner policy" like this can make them and their other rich buddies even richer.

Gustomaximus 9y ago
Homes are important to people and they tend to buy as good as they can afford. When employment is stable and interest rates are low people will spend more because they can and feel safe doing so. Early movers purchase a higher grade of home than they could have previously. Eventually this shifts the market as a whole as income distribution remains stable. Then people buy the same house they would have previously at a higher price. Now nothing has changed and people are more in debt as the cycle returns to normal, if it ever does. Plus the whole investor (foreign and domestic) vs owner occupier discussions we are seeing plenty of...
- samsonradu 9y ago
  Isn't it inherently bad to buy "as good as you can afford"? Employment is rarely stable throughout a 30-year period. Shouldn't people be much more careful when maxing out their mortgage relative to 'the good times'?
  - mistermann 9y ago
    Stretching as far as you can and then some has been the optimum strategy in Canada for a very long time now.
  - bluGill 9y ago
    That depends. Location location location. The right answer changes based on what side of the city you live in. As such nobody can give a definitive answer. In all but the smallest cities you have options for a different job. They might not be as good, but there is an option. If you lose your job you can find a different job close enough to your current house that you don't have to move. Remember this is NOT an rational economic problem. There are good reasons to live near by the same neighbors that you know well for years. There are good reasons to live near your family. When you own a house you can make modifications to support your hobbies which in turn make your house a better place for your to live than anyone else. These all mean there are good reasons to accept a job that pays less than you could earn elsewhere and thus stay in the same house. With inflation you can probably afford the house on a lesser paying job after a few years.
    - aeorgnoieang 9y ago
      > Remember this is NOT an rational economic problem. There are good reasons to live near by the same neighbors that you know well for years. Why is a living near the same people you know and love irrational or somehow an inappropriate object of economic reasoning? You could even estimate prices for such things! Just because they're not typically represented as currency amounts doesn't mean they're not 'rationally economic' or that making tradeoffs that involve these things couldn't be better done with good economics.
      - bluGill 9y ago
        Generally rational economics assumes someone who is rationally trying to optimizes for other factors. You are correct that it is fully rational behavior for people. However that is not the definition used in economics. (sort of like physics tends to assume no friction where possible)
ppeetteerr 9y ago
I agree with everything except for the "make them and their other rich buddies even richer." Let's not bundle all politicians into this. :)
- nvarsj 9y ago
  It's sort of telling how many prominent politicians in the UK make much of their income off of housing. Boris Johnson, George Osbourne, and David Cameron all come to mind - all who were in prime places to improve the situation, but it was against their best interests.
  - maxxxxx 9y ago
    Same in US Congress. Most of them are millionaires who benefit from housing prices.
  - MisterPC 9y ago
    I don’t think you can really blame 3 conservative politicians for the home price boom in most western countries over the past 20 years! They weren’t even in power for a major part of the boom in the UK (Labour were in power from 1997-2010). The most recent part of the increase has come from the slashing of interest rates to rock bottom following the global financial crisis and quantative easing, neither of which is the responsibility of the government.
    - nvarsj 9y ago
      Yes it’s not their fault - just saying it’s not in their interest to improve things, and they didn’t. But you think government has no influence over house prices? How about help to buy schemes and similar? London bubble is pretty extreme even compared to most other places, and the median price has doubled in the last decade under the tories.
- collyw 9y ago
  I think it has been shown that the majority of politicians in the UK (or their partners) own extra properties.
notyourday 9y ago
If this is the case and Joe wants to bet that the housing prices will continue to rise, Joe gets an interest only ARM with a 7 year balloon.
- gjjrfcbugxbhf 9y ago
  Joe is probably risk averse and more concerned with having a place to live in the future than taking on risk.
  - notyourday 9y ago
    In that case Joe is clueless and should stay in the same house he bought.
littlestymaar 9y ago
> Either politicians are stupid, or more likely, they know that "homeowner policy" like this can make them and their other rich buddies even richer. It's not a malice vs idiocy situation, actually there is a third explaination : economy needs a growing money supply to work properly (and the money creation need to compensate the economic growth AND the reduction of money velocity[1]). But since the late seventies, money creation is only possible through the banking system via credit. That's why central banks reduces interest rates to stimulate economy, because you need to create money to enable economic growth. To get out of the rising housing prices trap, we need another money creation mechanism, but many people are affraid of the old ones (state-controlled monetary creation) and a lot of people (bankers, homeowners) have a lot to lose if we changed the system. [1]: this is the failure of the monetarist view from the seventies, which predicted a constant money velocity, in fact we've had a declining one for the last four decades.
- hackerguy99 9y ago
  How else can money be created except through credit?
  - littlestymaar 9y ago
    Direct reserve emission by the central bank. In practice, the central bank can just give some reserve to the governement account.
    - badestrand 9y ago
      ..or they can give it directly to people. There is an initiative for Europe that wants exactly that, Quantitive Easing for People. I love the idea and am sure it would do more for the economy than just pushing banks to lend more money.
      - littlestymaar 9y ago
        That could be a good idea, even though we don't really know the impact it will have on inflation. Imho, the impact would be close to zero in nowadays economy where the lack of demand is much more of a problem than an hypothetical shortage of goods. In the long run though, the demand would catch up and the supply could be the limit, like it was after the first oil crisis. Personnally, I'd rather give the money to the governement like we did in the keynesian golden age, because it fuels the development of infrastructures, housing and social security. And at our point in history, it could be used to transition to a sustainable society. But that's because I don't trust the market on this, I'm kind of a socialist. > am sure it would do more for the economy than just pushing banks to lend more money. This is such a failure (esp. in the EU) I don't see how I could disagree with you on this.
akgerber 9y ago
http://cityobservatory.org/the-origins-of-the-housing-crisis/ http://cityobservatory.org/the-origins-of-the-housing-crisis... A major reason why housing supply is so inelastic today is that zoning has become much more restrictive in the last two generations.
- dredmorbius 9y ago
  And what's driving zoning?
s0rce 9y ago
Also, at least in the US, there are enormous tax advantages to speculating/investing in your house instead of in other mediums (equities/bonds/etc). Capital gains tax on gains is basically 0 on your primary home and you can deduct the mortgage (already low) interest (compare to a margin position).

Gustomaximus 9y ago

Homes are important to people and they tend to buy as good as they can afford. When employment is stable and interest rates are low people will spend more because they can and feel safe doing so. Early movers purchase a higher grade of home than they could have previously. Eventually this shifts the market as a whole as income distribution remains stable. Then people buy the same house they would have previously at a higher price. Now nothing has changed and people are more in debt as the cycle returns to normal, if it ever does. Plus the whole investor (foreign and domestic) vs owner occupier discussions we are seeing plenty of...

samsonradu 9y ago
Isn't it inherently bad to buy "as good as you can afford"? Employment is rarely stable throughout a 30-year period. Shouldn't people be much more careful when maxing out their mortgage relative to 'the good times'?
- mistermann 9y ago
  Stretching as far as you can and then some has been the optimum strategy in Canada for a very long time now.
- bluGill 9y ago
  That depends. Location location location. The right answer changes based on what side of the city you live in. As such nobody can give a definitive answer. In all but the smallest cities you have options for a different job. They might not be as good, but there is an option. If you lose your job you can find a different job close enough to your current house that you don't have to move. Remember this is NOT an rational economic problem. There are good reasons to live near by the same neighbors that you know well for years. There are good reasons to live near your family. When you own a house you can make modifications to support your hobbies which in turn make your house a better place for your to live than anyone else. These all mean there are good reasons to accept a job that pays less than you could earn elsewhere and thus stay in the same house. With inflation you can probably afford the house on a lesser paying job after a few years.
  - aeorgnoieang 9y ago
    > Remember this is NOT an rational economic problem. There are good reasons to live near by the same neighbors that you know well for years. Why is a living near the same people you know and love irrational or somehow an inappropriate object of economic reasoning? You could even estimate prices for such things! Just because they're not typically represented as currency amounts doesn't mean they're not 'rationally economic' or that making tradeoffs that involve these things couldn't be better done with good economics.
    - bluGill 9y ago
      Generally rational economics assumes someone who is rationally trying to optimizes for other factors. You are correct that it is fully rational behavior for people. However that is not the definition used in economics. (sort of like physics tends to assume no friction where possible)

ppeetteerr 9y ago

I agree with everything except for the "make them and their other rich buddies even richer." Let's not bundle all politicians into this. :)

nvarsj 9y ago
It's sort of telling how many prominent politicians in the UK make much of their income off of housing. Boris Johnson, George Osbourne, and David Cameron all come to mind - all who were in prime places to improve the situation, but it was against their best interests.
- maxxxxx 9y ago
  Same in US Congress. Most of them are millionaires who benefit from housing prices.
- MisterPC 9y ago
  I don’t think you can really blame 3 conservative politicians for the home price boom in most western countries over the past 20 years! They weren’t even in power for a major part of the boom in the UK (Labour were in power from 1997-2010). The most recent part of the increase has come from the slashing of interest rates to rock bottom following the global financial crisis and quantative easing, neither of which is the responsibility of the government.
  - nvarsj 9y ago
    Yes it’s not their fault - just saying it’s not in their interest to improve things, and they didn’t. But you think government has no influence over house prices? How about help to buy schemes and similar? London bubble is pretty extreme even compared to most other places, and the median price has doubled in the last decade under the tories.
collyw 9y ago
I think it has been shown that the majority of politicians in the UK (or their partners) own extra properties.

notyourday 9y ago

If this is the case and Joe wants to bet that the housing prices will continue to rise, Joe gets an interest only ARM with a 7 year balloon.

gjjrfcbugxbhf 9y ago
Joe is probably risk averse and more concerned with having a place to live in the future than taking on risk.
- notyourday 9y ago
  In that case Joe is clueless and should stay in the same house he bought.

littlestymaar 9y ago

> Either politicians are stupid, or more likely, they know that "homeowner policy" like this can make them and their other rich buddies even richer. It's not a malice vs idiocy situation, actually there is a third explaination : economy needs a growing money supply to work properly (and the money creation need to compensate the economic growth AND the reduction of money velocity[1]). But since the late seventies, money creation is only possible through the banking system via credit. That's why central banks reduces interest rates to stimulate economy, because you need to create money to enable economic growth. To get out of the rising housing prices trap, we need another money creation mechanism, but many people are affraid of the old ones (state-controlled monetary creation) and a lot of people (bankers, homeowners) have a lot to lose if we changed the system. [1]: this is the failure of the monetarist view from the seventies, which predicted a constant money velocity, in fact we've had a declining one for the last four decades.

hackerguy99 9y ago
How else can money be created except through credit?
- littlestymaar 9y ago
  Direct reserve emission by the central bank. In practice, the central bank can just give some reserve to the governement account.
  - badestrand 9y ago
    ..or they can give it directly to people. There is an initiative for Europe that wants exactly that, Quantitive Easing for People. I love the idea and am sure it would do more for the economy than just pushing banks to lend more money.
    - littlestymaar 9y ago
      That could be a good idea, even though we don't really know the impact it will have on inflation. Imho, the impact would be close to zero in nowadays economy where the lack of demand is much more of a problem than an hypothetical shortage of goods. In the long run though, the demand would catch up and the supply could be the limit, like it was after the first oil crisis. Personnally, I'd rather give the money to the governement like we did in the keynesian golden age, because it fuels the development of infrastructures, housing and social security. And at our point in history, it could be used to transition to a sustainable society. But that's because I don't trust the market on this, I'm kind of a socialist. > am sure it would do more for the economy than just pushing banks to lend more money. This is such a failure (esp. in the EU) I don't see how I could disagree with you on this.

akgerber 9y ago

http://cityobservatory.org/the-origins-of-the-housing-crisis/ http://cityobservatory.org/the-origins-of-the-housing-crisis... A major reason why housing supply is so inelastic today is that zoning has become much more restrictive in the last two generations.

dredmorbius 9y ago
And what's driving zoning?

s0rce 9y ago

Also, at least in the US, there are enormous tax advantages to speculating/investing in your house instead of in other mediums (equities/bonds/etc). Capital gains tax on gains is basically 0 on your primary home and you can deduct the mortgage (already low) interest (compare to a margin position).