14 ms·

There is more to high house prices than constrained supply

234 points by jedwhite 8y ago

baybal2 8y ago
>Low interest rates and innovations in the mortgage market may also be to blame Low interest rates and innovations in the mortgage market are to blame You are simply letting a person to buy more of any big, expensive asset. And the thing does gets out of control fast when there is a even minimal expectation of appreciation, and inflation fears. And that on top of the fact that real estate is the only "investment" possible for an ordinary person without employing an officeload of securities attorneys in many countries. Chinese housing market is the prime example (2B vacant square metres, with even more in the pipeline)
- christophilus 8y ago
  Yeah. We’re seeing a similar effect in the price of education.
- mooreds 8y ago
  All real estate is local. Certainly the innovations mentioned are part of the issue for most markets, but for some markets there are other impprtant factors: * The flood of expat money (Vancouver) * Supply constraints due to geography and/or Nimbyism coupled with net in migration (Bay area) * Builder hesitation plus in migration (Front range of Colorado) Hard to paint one picture. However, making mortgages easier to get has a broad effect on demand, which will definitely shift the curve.
  - sgroppino 8y ago
    But there are other factors like tax. In the UK for example you generally won't need to pay capital gains tax when selling your main home...
    - fjsolwmv 8y ago
      Ita the same in the US, except for windfall gains over $250K/person (x2 for married couples), a vanishingly small fraction of inventory.
    - jimnotgym 8y ago
      ... and even as your second home capital gains is taxed at a lower rate than income. Plus it can be deferred until you die! If your estate is big enough to be worth it you can form a trust and defer it forever. That unpaid tax flows straight back into the housing market.
  - A2017U1 8y ago
    > All real estate is local. > The flood of expat money (foreign investment) these two statements are contradictory
    - PakG1 8y ago
      The supply is local, the demand not necessarily so. Hence Vancouver's recent tax on foreign buyers.
      - commaone 8y ago
        I'd venture to say this should get more attention than it does. Real estate was local. Glass-steagal (sp?) changed who is valuing the property and from where. Putting pressure on home values based on skewed national or international perspectives that are completely non-local.
    - ThrowMeDown01 8y ago
      No, why? The expat money went into local markets (very unequally but that's another point). Vancouver, London, etc. But even in small towns real estate investors are not necessarily local. My mother just moved into an apartment owned by a lawyer living a few hundred kilometers away. It depends on what you understand when OP says "all real estate is local", I assume that it's the thing itself and its customers. It can be seen as inexact because yes, the investors often are not and that is that second statement, but we all know what OP meant, so no need to start nitpicking over nothing. I see no merit in arguing over words whose meaning everybody understands just for the sake of it.
      - TheOtherHobbes 8y ago
        At the high end, the money didn't go anywhere, except possibly offshore. A lot of London real estate was being built explicitly as an investment, and the offshore investors - who are now being cleaned out - handed over their money to developer/speculator companies, who were also offshore and/or foreign owned. So no - this real estate is not local. It happens to have a physical location, but when you understand how the money associated with it does it best to avoid spreading out into the surroundings, it might as well be built on an uninhabited atoll in the Pacific. At the low end in London the money went to landlords who bought large portfolios with the financial assistance of buy-to-let loans and tax breaks. The tax breaks are being removed, and interest rates are drifting upwards. This is killing casual landlords, but isn't a problem for the sharks and the rabbit hutch 10-gig-economy-workers-in-a-room slumlords.
  - pjmorris 8y ago
    Real estate supply is local; real estate demand, via capital, is not.
- austincheney 8y ago
  Lower interest rates opened housing inventory to more people who were and ready to purchase it at already ridiculously low prices since the market crash of 2008. This is part of what got me into my house. > You are simply letting a person to buy more of any big True, but that is grossly incomplete. It suggests that single individuals (or agencies) are gobbling up a plurality of real estate. It is also true that many people are each purchasing single houses. Also constrained inventory appears to be a reality only on the US coasts. In my geography they continue to build thousands more houses every year. Inventory is hardly limited and yet prices and demand are both continually increasing year over year.
  - robocat 8y ago
    I think you are talking about a minority of buyers. Structurally what is happening for the majority? "In 1991, 67% of British 25- to 34-year-olds owned property; today only 37% do." is the problem. Not how some of those individuals within the 37% came to own their home.
Iamhisalt 8y ago
I blame investors and speculation.
yholio 8y ago
The price of houses is driven by market rents compounded with access to financing. If lenders are willing to finance an investment with 3% yield, then house prices will jump to 33x their annual rent value - it goes without saying that's only possible in low interest markets. The rent itself however is controlled by supply and demand - there needs to be a real person there earning a paycheck and he must have no other options before going for a high rent house. Therefore, the options for keeping rents down are either keeping people out of the city through administrative means, or, realistically, building higher and denser. Good public transport infrastructure is an essential component because it opens for development distant areas that otherwise would not be desirable to people working in the city. On the other hand, as the city grows, economies of scale bring in more businesses, create more high paying jobs and opportunities, therefore attracting more people - up to the point where rents and commute times increase again and restore equilibrium. A Malthusian catastrophe of sorts, that requires radical new transport solutions and workplace transformations, as opposed to building regulation and financial innovation.
- esotericn 8y ago
  What influences the willingness of a lender? Availability of money in the general lending environment, sure, but surely there's a risk component there. The low interest rates can only persist as long as a lender has a reasonable expectation that they'll be paid back (e.g. that rents remain high enough to sustain the mortgage over the term). The real world factors like 'how desirable a place is'/'are good jobs there' and so forth seem to be further back in the causation chain to me. This is probably why we see the sort of "non-linear growth" that we do. An environment with stable, increasing rents due to increased demand _directly_ increases the price of housing linearly, and then on top of that it's a less risky market as a result so you end up with lower interest rates which drive it even further. A mortgage at 3% is basically a risk-free rate. Lenders are saying "you can't lose by buying here so go wild".
  - bradleyjg 8y ago
    The lender on a very percentage of loans made in the United States since 2008 is directly or indirectly the federal government. The federal government is not constrained by the reasonable expectation of being paid back or market discipline.
phkahler 8y ago
Home prices vary inversely with interest rates. Here's how that works: 1) person tells bank they'd like a mortgage to buy a house. 2) banker asks for info on income, expenses, etc. 3) banker estimates persons maximum monthly payment. 4) banker figures out max loan amount based on #3 5) buyer is encouraged by everyone to spend the full amount from #4 Everyone - the seller, their agent, your agent, the bank, and maybe some others - want you to spend every penny you can. Everyone benefits from higher prices except the buyer. Even if you're immune to it, there is enough pressure that the market as a whole tends toward the highest prices people can afford. Now lets see how interest rates play in this. At step 4 above, the amount you can borrow for a given monthly payment is mathematically increased by lower interest rates. For a given amount of debt your payment should be lower if rates are lower - that's true - but they'll make up for it by pushing a larger loan. Ultimately your payment is determined in step 3 and has nothing to do with interest rates or home prices. You will "pay" the same for your house (total payments) regardless of interest rates. The only thing the interest rate determines is who gets the money - the seller or the bank. In a services and consumption based economy this is the primary way interest rates drive things. Sure, businesses will do their part too, but they're a smaller part of it.
- travisoneill1 8y ago
  Even if the majority of people choose the max they can afford, it doesn't follow that individuals can't freely choose cheaper houses for themselves.
  - nly 8y ago
    Individual action doesn't matter. If you're only willing to spend 30% of your take home pay on rent, whereas your sociodemographic twin is willing to pay 50%, they'll outbid you. Incidentally I currently spend 47% of my take-home on rent in London. At 32, buying a property is still out of my reach. There are statistics on this in this related BBC article https://www.bbc.co.uk/news/business-42179119 https://www.bbc.co.uk/news/business-42179119
    - malvosenior 8y ago
davidhbolton 8y ago
I take issue with the statement that since 2005 rents in London have only gone up by less than 4%. This is personal data but In 1998 I was paying £650 a month for fully furnished. In the same building but on the top floor unfurnished is £925. I bought in 2000 and sold in 2015 for three times what I paid. The main people buying where I lived in East London, were from West London where rents were so high it was effectively cheaper long term to buy in East London. Number 47 on this page. https://www.rightmove.co.uk/house-prices/E10-6QB.html https://www.rightmove.co.uk/house-prices/E10-6QB.html My son-in-law and his wife had moved back in with us a year or two earlier because rents in East London had gone up. In 2015 a typical 2 bed flat in East London was £1,400 per month, West London around £2,500. There's a simple reason why house prices and rentals in London have gone up. Demand due to mass migration. Back in 2015 London's population was at an all time high, numbers not since seen 1939 apparently. https://www.trustforlondon.org.uk/data/londons-population-over-time/ https://www.trustforlondon.org.uk/data/londons-population-ov... Many properties were bought-to-rent though that got hit by changes in law.
- crdoconnor 8y ago
  London also has a supply constrained by wealthy buyers of second and third homes for investment purposes. There are a lot of central residential areas without many people actually living in them and a lot of prime land taken up by spacious luxury residences. If council tax were unfrozen and allowed to go up this effect would be mitigated and rents might actually go down.
- esotericn 8y ago
  > In 2015 a typical 2 bed flat in East London was £1,400 per month, West London around £2,500. I think you're defining East and West in weird ways in order for this to make sense. Maybe it's because Hyde Park shifts the real "centre" of London off to the left (e.g. Charing Cross is 'sort of' the middle but isn't really.) If you compare like for like it's much closer. e.g. go 3 miles east and 3 miles west from a 'centre' and compare prices. There's not a 70% difference unless you end up in an outlier (e.g. South Ken). Last year a 2 bed in Hammersmith was ~1500. I think that would compare fairly well with the other side which would be near Canary Wharf somewhere.
- 8y ago
fovc 8y ago
In case anyone else is wondering, 161% since 1996 is 4.4% per year compounded. I think annual figures are more relatable and wish publishers would just state those
- PunchTornado 8y ago
  4.4 per year is huge. wish my salary went up like this between 2008 - 2014
xwkd 8y ago
Take a look at the lumber market. The cost of building materials has been shooting up for the past 10 years. I believe houses are getting more expensive because returns on new builds come with much higher risk. It’s cheaper to recycle the existing real estate market.
- sjg007 8y ago
  Materials, labor and everything cost more today. 2008 wiped out a good portion of home builders / construction workers. Also basically nothing got built for 5 years until house prices recovered. Also factor in a high COL area and you can't really buy for cheap either the the land or the build.
  - rb808 8y ago
    > 2008 wiped out a good portion of home builders / construction workers. In the US/Ireland/Spain maybe, in most countries house prices didn't fall - they rose with the low interest rates.
rb808 8y ago
Absolutely. On top of the interest rates (and QE) we have: 1. Cities becoming much wealthier, and lower crime, resulting new generations moving there 2. New immigration wave to Western Countries. (UK esp had population relatively slow growing pop in the 50s, 60s, 70s) 3. A big demographic bulge of baby boomers getting ready for retirement saving as much as possible, looking for investments 4. Lots of money coming out of China looking for investments 5. Two huge stock market crashes leaving most people wary of stocks and seeing property as a safer investment 6. A combination of all factors pushing property even higher into bubble conditions.
- rustcharm 8y ago
  But isn't that still _supply_?
- tonyedgecombe 8y ago
  Probably more important than any of that we have gone from a population with three generations alive to one with four generations.
sunsu 8y ago
Asset inflation.
gfodor 8y ago
Don't forget about the direction of rates. If interest rates are trending upwards, that can increase the urge to buy out of fear of being unable to afford housing later.
will_brown 8y ago
Housing prices are artificially high because of debt and finance. If loans/debt/financing/mortgages were made illegal, then these artificial high housing prices based on the credit line one can obtain rather than what one can actually afford, prices would come down to fair market value. I know people will claim credit is based on what one can afford but that is mental gymnastics (foreclosures, student loan defaults, car repos, and credit card defaults could all suggest otherwise)and wouldn’t matter if credit were made illegal. The same is true of student loans. Tuition costs couldn’t continue to exponentially (artificially) increase based on the guarantee of government loans to students to cover these costs, take away a the loans and the prices will meet the new demand.
- ineedasername 8y ago
  Eh, the full picture is more complicated for college tuition prices. While loan availability may drive up tuition somewhat, there has been a drastic decrease in state funding to higher education over the last few decades. In New Jersey, one of the worst offenders, the state funds less per student than 20 years ago, and that is before inflation. This has driven an increase in bonds used to support things like capital expenses and even basic infrastructure maintenance, and the interest on those bonds has driven up operating expenses. Another factor is a sort of raise to the bottom arms race among colleges to attract students with shiny new facilities, causing even more debt.
- ip26 8y ago
  Hmm, forgetting land entirely, actual replacement cost is a lot higher than most people can afford directly (literally, the cost of materials and labor, a very competitive market) so I think instead of arriving at the true price of the house the market would instead be dominated by those who hold capital (as with industry), and we'd basically all be renters.
  - will_brown 8y ago
    The credit based system is already dominated by people with capital. And I admit that same general bias would likely appear in homeownership statistics in a non credit based system. But the systemic problems of indebtedness and lack of access to credit (either bad credit or no credit) would disappear. Your greater point may be right, that leveling of the playing field will be all for not because the still existing wealth divide. To your point to the costs. I think the home costs are already generally the cheaper part in most real estate purchases (ie the land is worth more than the home). And those costs (like everything in society) are artificially inflated because the pricing is set in a credit based system where price is based on future ability to pay/not what one can pay out of pocket today.
mcguire 8y ago
Sigh. I've been saying this since the early 2000s when I saw even lower end new construction getting Corian or granite countertops as standard. Easily available money causes prices to rise.
mancerayder 8y ago
What about construction costs? In the US costs have gone up due to: - Tariffs which affect steel and timber - higher wage costs due to low unemployment (perhaps the most benevolent of the list) - a construction boom in certain areas (Brooklyn comes to mind) leading to a scarcity of construction professionals being available I'm sure 'new construction' costs being high affects the prices of second-hand properties, which scale up. Even more so if they're renovations.
topkai22 8y ago
There is a point that is often glossed over in these analysis- the rental stock and the ownership stock are often fundamentally different. Last time my family moved we weren’t opposed to renting, but there was something like 1/10 the number of available SFH rental units in the area we were looking compared to available SFH rental units. In the US at least I think there is a case to be made that this is due to the UNDER financialization of housing- if you own a home at want/need to move it is difficult for most families to do anything but sell their current home in order to qualify for a mortgage. This suppresses the rental stock even when it is financially reasonable to rent out a house versus selling. (Yes, there are companies buying SFH housing to let out, but they seem small compared to the overall market right now)
- burfog 8y ago
  It may seem financially reasonable to rent out a house, but normal people don't want the risk and hassle. Renting out houses is an occupation, with special skills. You have to navigate the legal situation to avoid being sued, while still doing your best to refuse people who seem like they could be trouble. You can expect damage and non-payment of rent. You can expect the state to make it extremely difficult for you to get rid of destructive people who aren't paying. You can get sued over a lack of repairs, but meanwhile the renters are causing the damage and failing to tell you about it. Renters will ignore water leaks that don't seem to impact them, letting your home rot from the water. Renters will smoke and keep pets, despite any rules to the contrary, and they will fail to control destructive kids. Renters will illegally authorize workers to drill holes to run cables through the walls. I've known people who tried renting out a house. They ended up with drug dealers, prostitutes, new doorways and other openings being cut, a bloody murder scene, floors and walls rotted out, destroyed cabinets, etc. Most new homes are in home owner associations that prohibit renting houses out.
simonh 8y ago
I think the discussion so far, while interesting, is tangential to the point the article is trying to make. The point is that supply of housing isn’t the only thing affecting house prices. If you view houses as financial assets with varying value, it’s the supply of financial assets that matters, not just the supply of houses. Or am I missing the point?
TheRealPomax 8y ago
Effectively: as long as people need to borrow money to buy a house, housing prices will be high because instead of buying a house, that house has to make someone money. And that someone isn't even you.
TangoTrotFox 8y ago
I think the argument here is directly analogous to why university prices started going loony. When it became impossible for even private education loans to be dismissed in bankruptcy suddenly education loans became seen as very near 0 risk. And everybody's told from the time they're in diapers that they need to go to university, with cost given little to no consideration. And it's also seen as priceless investment that will pay for itself and then some in the future. Suddenly people value something immensely and have access to an effectively unlimited line of debt. This incentives universities to arbitrarily increase their costs. University costs only started to stabilize as university enrollment started to decline. But there's a big argument against this that I don't see the answer to. Everything that's mentioned in this article is true for buying a house, but not for renting. Rental prices have also gone through the roof - and the only reason they're able to go through the roof is because people are able and willing to pay the costs asked. But people renting are getting absolutely no return whatsoever on this exchange, and rent is also generally not paid from debt. So how would this explain the willingness of people to pay ever higher prices for rent?
elchief 8y ago
AirBnB makes owning a home more valuable (basically double rental income) And several trillion dollars of hot money left China and ended up in the Pacific ring real estate market
gweinberg 8y ago
The author is writing as if housing construction just happens irrespective of demand. People will build new housing if they are confident it will earn a profit. It stands to reason that if new construction is allowed, housing prices can't stay much higher then construction costs for long.
fallingfrog 8y ago
I have to say I just don’t understand why anyone would willingly pay the kinds of prices for housing that I see people paying. It seems like the consensus is that you should pay 2.5 times your household income on a house; I see people around me paying 5 times or more. That’s bonkers. We paid 1.25 times our household income and we’d never have considered more. I’d rather live in a double wide than put that much of my income into a sunk cost like that. No way. Everyone is just behaving in a totally irrational way and I don’t get it.
- bognition 8y ago
  > Everyone is just behaving in a totally irrational way and I don’t get it. A lot of people don’t have the luxury of paying only 1.25X their salary. Take Boston for example. You’d need to live more than an hour out of the city or in a city with terrible schools to find a house that cheap. Lots of people are optimizing for more than just price. Things like quality of education and commute also factor in. So please realize housing is incredibly complex before judging everyone else as irrational for not making the same life choices as you.
- chillacy 8y ago
  A comment about not getting something ends with everyone else is irrational? If you don’t understand something the problem is often with your model of reality being incomplete, not other people.
- snarfybarfy 8y ago
  Which consensus are you talking about? US? Northern Idaho? Thailand? Saudia Arabia? SV?? Where I live the long term average is 6-7x household incomes.
microcolonel 8y ago
Yeah, but constraining supply is dead certain to increase prices, and increasing it is almost as certain to decrease them.
vanbytheriver 8y ago
/r/vandwellers
vanbytheriver 8y ago
I purchased a van that I am going to rebuild into an RV and live in San Fransico at a fraction of what I would throwaway on rent and interest to the bank. Some googlers got the same idea and slept in the google parking lot! It does not make sense to purchase expensive properties with the record low interest rates. As soon as they rise again, your property will lose in 10s of thousands of dollars in value and you will be tempted to walk away from it.
- mmirate 8y ago
  Sounds most interesting. Are there any other people who have done similar things and publicly written-up their e.g. bill-of-materials, for comparison with non-SF apartment-rent costs?
- conanbatt 8y ago
  I think its a fine way to save money, but that is basically choosing to be homeless and live like a pauper. When you have 200k+ salaries and you find it appealing to live like a minimum-wage worker with no family, it should raise a red flag.
  - wpdev_63 8y ago
    Many people live alot more comfortably within a van than they do in their stationary home. They can go to the beaches during the summer weekends and go out to colorado during the ski season and bring their home with them. This is one of the many couples that are doing it these days:https://faroutride.com https://faroutride.com If you get 90% of your home comfort in a finished conversion van and you save 50% if your wealth, it's a no brainer. You'll also be avoiding the inevitable housing crash. Why on god's green earth would an employer care about where you live?
    - conanbatt 8y ago
      You'd be living in an illusion to believe living in a van is a higher quality of life than having a proper place. Its a ridiculous comparison, no matter how hipster some modern choices can become. Would you raise a child in a van? Down by the river?
ouid 8y ago
Well there's also the MITC, but no, the market determines the price.
jondubois 8y ago
Corporate growth is a major culpit. Corporate growth means that corporations open up more HQs and offices and create more jobs in major urban centers. By taking market share away from small regional businesses, corporations are destroying jobs in regional towns and creating jobs in big cities instead. People are increastly forced to move to big cities to find jobs. As more people move to big cities, demand for real estate in those cities goes up. Big cities struggle to increase the supply of real estate due to limited space. By moving to big cities, value-creating workers are increasingly forced to compete against wealthy owners of capital for the limited supply of real estate. Wealthy owners of capital don't need to work for their money, so they're willing to spend a lot more to buy houses that they don't even need; this drives up house prices for everyone else.
lifeisstillgood 8y ago
South East England has an interesting problem - for a decade or more Dirty Money from Russia, China and elsewhere has poured into London, as bankers and lawyers turned a blind eye. As the "big" properties in London went into the multi millions the original owners moved out one rung, and those owners moved out one and so on. The commuter belt is apparently shored up by billions of dirty money But now it's drying up. Maybe tougher enforcement, more likely competition from NY / Nevada and Brexit uncertainty but it seems to have tanked the market.
true_tuna 8y ago
But there’s also extremely constrained supply. Look at Mountain View CA from 2000 to 2010. The city blocked new housing religiously for a decade while welcoming tens of thousands of new jobs. Now traffic is insane, housing prices are insane. Tell me simple supply and demand is not at play here. If we add jobs we gotta add housing. It’s baffling that we’d try to do anything different. And yet every city in the Bay Area is happy to welcome new jobs and blocks new housing at every turn. There’s a muddy field right next to google campus. Been vacant for at least a decade. Zoned for hotel. Nobody wants or needs a hotel there. High density housing yes. Hotel no. I’m not interested in any conversation about the housing crisis that ignores this simple idea. Add a job? Permit a housing unit. Do that for a decade and then we can talk about the other factors.
- masonic 8y ago
  The city blocked new housing religiously for a decade Specific examples? (I'm a MV resident for 26 years and have seen no such examples.) There have been significant blocks against new retail (e.g. the "gorilla" campaign that killed the Home Depot at El Camino and the Americana), but not housing. There's little bare land except on the Bay side of 101.
acd 8y ago
Banks create money out of thin air, fractional reserve banking. When the banks go bust the Central banks save the debts. People speculate in house prices, people loan more for their new home than their old one, new debts are created. It goes on until there is a bust in the market, either financial shock, or price discovery that the loans are not sustainable.

234 points by jedwhite 8y ago

>Low interest rates and innovations in the mortgage market may also be to blame Low interest rates and innovations in the mortgage market are to blame You are simply letting a person to buy more of any big, expensive asset. And the thing does gets out of control fast when there is a even minimal expectation of appreciation, and inflation fears. And that on top of the fact that real estate is the only "investment" possible for an ordinary person without employing an officeload of securities attorneys in many countries. Chinese housing market is the prime example (2B vacant square metres, with even more in the pipeline)

christophilus 8y ago
Yeah. We’re seeing a similar effect in the price of education.
mooreds 8y ago
All real estate is local. Certainly the innovations mentioned are part of the issue for most markets, but for some markets there are other impprtant factors: * The flood of expat money (Vancouver) * Supply constraints due to geography and/or Nimbyism coupled with net in migration (Bay area) * Builder hesitation plus in migration (Front range of Colorado) Hard to paint one picture. However, making mortgages easier to get has a broad effect on demand, which will definitely shift the curve.
- sgroppino 8y ago
  But there are other factors like tax. In the UK for example you generally won't need to pay capital gains tax when selling your main home...
  - fjsolwmv 8y ago
    Ita the same in the US, except for windfall gains over $250K/person (x2 for married couples), a vanishingly small fraction of inventory.
  - jimnotgym 8y ago
    ... and even as your second home capital gains is taxed at a lower rate than income. Plus it can be deferred until you die! If your estate is big enough to be worth it you can form a trust and defer it forever. That unpaid tax flows straight back into the housing market.
- A2017U1 8y ago
  > All real estate is local. > The flood of expat money (foreign investment) these two statements are contradictory
  - PakG1 8y ago
    The supply is local, the demand not necessarily so. Hence Vancouver's recent tax on foreign buyers.
    - commaone 8y ago
      I'd venture to say this should get more attention than it does. Real estate was local. Glass-steagal (sp?) changed who is valuing the property and from where. Putting pressure on home values based on skewed national or international perspectives that are completely non-local.
  - ThrowMeDown01 8y ago
    No, why? The expat money went into local markets (very unequally but that's another point). Vancouver, London, etc. But even in small towns real estate investors are not necessarily local. My mother just moved into an apartment owned by a lawyer living a few hundred kilometers away. It depends on what you understand when OP says "all real estate is local", I assume that it's the thing itself and its customers. It can be seen as inexact because yes, the investors often are not and that is that second statement, but we all know what OP meant, so no need to start nitpicking over nothing. I see no merit in arguing over words whose meaning everybody understands just for the sake of it.
    - TheOtherHobbes 8y ago
      At the high end, the money didn't go anywhere, except possibly offshore. A lot of London real estate was being built explicitly as an investment, and the offshore investors - who are now being cleaned out - handed over their money to developer/speculator companies, who were also offshore and/or foreign owned. So no - this real estate is not local. It happens to have a physical location, but when you understand how the money associated with it does it best to avoid spreading out into the surroundings, it might as well be built on an uninhabited atoll in the Pacific. At the low end in London the money went to landlords who bought large portfolios with the financial assistance of buy-to-let loans and tax breaks. The tax breaks are being removed, and interest rates are drifting upwards. This is killing casual landlords, but isn't a problem for the sharks and the rabbit hutch 10-gig-economy-workers-in-a-room slumlords.
- pjmorris 8y ago
  Real estate supply is local; real estate demand, via capital, is not.
austincheney 8y ago
Lower interest rates opened housing inventory to more people who were and ready to purchase it at already ridiculously low prices since the market crash of 2008. This is part of what got me into my house. > You are simply letting a person to buy more of any big True, but that is grossly incomplete. It suggests that single individuals (or agencies) are gobbling up a plurality of real estate. It is also true that many people are each purchasing single houses. Also constrained inventory appears to be a reality only on the US coasts. In my geography they continue to build thousands more houses every year. Inventory is hardly limited and yet prices and demand are both continually increasing year over year.
- robocat 8y ago
  I think you are talking about a minority of buyers. Structurally what is happening for the majority? "In 1991, 67% of British 25- to 34-year-olds owned property; today only 37% do." is the problem. Not how some of those individuals within the 37% came to own their home.

Iamhisalt 8y ago

I blame investors and speculation.

yholio 8y ago

The price of houses is driven by market rents compounded with access to financing. If lenders are willing to finance an investment with 3% yield, then house prices will jump to 33x their annual rent value - it goes without saying that's only possible in low interest markets. The rent itself however is controlled by supply and demand - there needs to be a real person there earning a paycheck and he must have no other options before going for a high rent house. Therefore, the options for keeping rents down are either keeping people out of the city through administrative means, or, realistically, building higher and denser. Good public transport infrastructure is an essential component because it opens for development distant areas that otherwise would not be desirable to people working in the city. On the other hand, as the city grows, economies of scale bring in more businesses, create more high paying jobs and opportunities, therefore attracting more people - up to the point where rents and commute times increase again and restore equilibrium. A Malthusian catastrophe of sorts, that requires radical new transport solutions and workplace transformations, as opposed to building regulation and financial innovation.

esotericn 8y ago
What influences the willingness of a lender? Availability of money in the general lending environment, sure, but surely there's a risk component there. The low interest rates can only persist as long as a lender has a reasonable expectation that they'll be paid back (e.g. that rents remain high enough to sustain the mortgage over the term). The real world factors like 'how desirable a place is'/'are good jobs there' and so forth seem to be further back in the causation chain to me. This is probably why we see the sort of "non-linear growth" that we do. An environment with stable, increasing rents due to increased demand _directly_ increases the price of housing linearly, and then on top of that it's a less risky market as a result so you end up with lower interest rates which drive it even further. A mortgage at 3% is basically a risk-free rate. Lenders are saying "you can't lose by buying here so go wild".
- bradleyjg 8y ago
  The lender on a very percentage of loans made in the United States since 2008 is directly or indirectly the federal government. The federal government is not constrained by the reasonable expectation of being paid back or market discipline.

phkahler 8y ago

Home prices vary inversely with interest rates. Here's how that works: 1) person tells bank they'd like a mortgage to buy a house. 2) banker asks for info on income, expenses, etc. 3) banker estimates persons maximum monthly payment. 4) banker figures out max loan amount based on #3 5) buyer is encouraged by everyone to spend the full amount from #4 Everyone - the seller, their agent, your agent, the bank, and maybe some others - want you to spend every penny you can. Everyone benefits from higher prices except the buyer. Even if you're immune to it, there is enough pressure that the market as a whole tends toward the highest prices people can afford. Now lets see how interest rates play in this. At step 4 above, the amount you can borrow for a given monthly payment is mathematically increased by lower interest rates. For a given amount of debt your payment should be lower if rates are lower - that's true - but they'll make up for it by pushing a larger loan. Ultimately your payment is determined in step 3 and has nothing to do with interest rates or home prices. You will "pay" the same for your house (total payments) regardless of interest rates. The only thing the interest rate determines is who gets the money - the seller or the bank. In a services and consumption based economy this is the primary way interest rates drive things. Sure, businesses will do their part too, but they're a smaller part of it.

travisoneill1 8y ago
Even if the majority of people choose the max they can afford, it doesn't follow that individuals can't freely choose cheaper houses for themselves.
- nly 8y ago
  Individual action doesn't matter. If you're only willing to spend 30% of your take home pay on rent, whereas your sociodemographic twin is willing to pay 50%, they'll outbid you. Incidentally I currently spend 47% of my take-home on rent in London. At 32, buying a property is still out of my reach. There are statistics on this in this related BBC article https://www.bbc.co.uk/news/business-42179119 https://www.bbc.co.uk/news/business-42179119
  - malvosenior 8y ago

davidhbolton 8y ago

I take issue with the statement that since 2005 rents in London have only gone up by less than 4%. This is personal data but In 1998 I was paying £650 a month for fully furnished. In the same building but on the top floor unfurnished is £925. I bought in 2000 and sold in 2015 for three times what I paid. The main people buying where I lived in East London, were from West London where rents were so high it was effectively cheaper long term to buy in East London. Number 47 on this page. https://www.rightmove.co.uk/house-prices/E10-6QB.html https://www.rightmove.co.uk/house-prices/E10-6QB.html My son-in-law and his wife had moved back in with us a year or two earlier because rents in East London had gone up. In 2015 a typical 2 bed flat in East London was £1,400 per month, West London around £2,500. There's a simple reason why house prices and rentals in London have gone up. Demand due to mass migration. Back in 2015 London's population was at an all time high, numbers not since seen 1939 apparently. https://www.trustforlondon.org.uk/data/londons-population-over-time/ https://www.trustforlondon.org.uk/data/londons-population-ov... Many properties were bought-to-rent though that got hit by changes in law.

crdoconnor 8y ago
London also has a supply constrained by wealthy buyers of second and third homes for investment purposes. There are a lot of central residential areas without many people actually living in them and a lot of prime land taken up by spacious luxury residences. If council tax were unfrozen and allowed to go up this effect would be mitigated and rents might actually go down.
esotericn 8y ago
> In 2015 a typical 2 bed flat in East London was £1,400 per month, West London around £2,500. I think you're defining East and West in weird ways in order for this to make sense. Maybe it's because Hyde Park shifts the real "centre" of London off to the left (e.g. Charing Cross is 'sort of' the middle but isn't really.) If you compare like for like it's much closer. e.g. go 3 miles east and 3 miles west from a 'centre' and compare prices. There's not a 70% difference unless you end up in an outlier (e.g. South Ken). Last year a 2 bed in Hammersmith was ~1500. I think that would compare fairly well with the other side which would be near Canary Wharf somewhere.
8y ago

fovc 8y ago

In case anyone else is wondering, 161% since 1996 is 4.4% per year compounded. I think annual figures are more relatable and wish publishers would just state those

PunchTornado 8y ago
4.4 per year is huge. wish my salary went up like this between 2008 - 2014

xwkd 8y ago

Take a look at the lumber market. The cost of building materials has been shooting up for the past 10 years. I believe houses are getting more expensive because returns on new builds come with much higher risk. It’s cheaper to recycle the existing real estate market.

sjg007 8y ago
Materials, labor and everything cost more today. 2008 wiped out a good portion of home builders / construction workers. Also basically nothing got built for 5 years until house prices recovered. Also factor in a high COL area and you can't really buy for cheap either the the land or the build.
- rb808 8y ago
  > 2008 wiped out a good portion of home builders / construction workers. In the US/Ireland/Spain maybe, in most countries house prices didn't fall - they rose with the low interest rates.

rb808 8y ago

Absolutely. On top of the interest rates (and QE) we have: 1. Cities becoming much wealthier, and lower crime, resulting new generations moving there 2. New immigration wave to Western Countries. (UK esp had population relatively slow growing pop in the 50s, 60s, 70s) 3. A big demographic bulge of baby boomers getting ready for retirement saving as much as possible, looking for investments 4. Lots of money coming out of China looking for investments 5. Two huge stock market crashes leaving most people wary of stocks and seeing property as a safer investment 6. A combination of all factors pushing property even higher into bubble conditions.

rustcharm 8y ago
But isn't that still _supply_?
tonyedgecombe 8y ago
Probably more important than any of that we have gone from a population with three generations alive to one with four generations.

sunsu 8y ago

Asset inflation.

gfodor 8y ago

Don't forget about the direction of rates. If interest rates are trending upwards, that can increase the urge to buy out of fear of being unable to afford housing later.

will_brown 8y ago

Housing prices are artificially high because of debt and finance. If loans/debt/financing/mortgages were made illegal, then these artificial high housing prices based on the credit line one can obtain rather than what one can actually afford, prices would come down to fair market value. I know people will claim credit is based on what one can afford but that is mental gymnastics (foreclosures, student loan defaults, car repos, and credit card defaults could all suggest otherwise)and wouldn’t matter if credit were made illegal. The same is true of student loans. Tuition costs couldn’t continue to exponentially (artificially) increase based on the guarantee of government loans to students to cover these costs, take away a the loans and the prices will meet the new demand.

ineedasername 8y ago
Eh, the full picture is more complicated for college tuition prices. While loan availability may drive up tuition somewhat, there has been a drastic decrease in state funding to higher education over the last few decades. In New Jersey, one of the worst offenders, the state funds less per student than 20 years ago, and that is before inflation. This has driven an increase in bonds used to support things like capital expenses and even basic infrastructure maintenance, and the interest on those bonds has driven up operating expenses. Another factor is a sort of raise to the bottom arms race among colleges to attract students with shiny new facilities, causing even more debt.
ip26 8y ago
Hmm, forgetting land entirely, actual replacement cost is a lot higher than most people can afford directly (literally, the cost of materials and labor, a very competitive market) so I think instead of arriving at the true price of the house the market would instead be dominated by those who hold capital (as with industry), and we'd basically all be renters.
- will_brown 8y ago
  The credit based system is already dominated by people with capital. And I admit that same general bias would likely appear in homeownership statistics in a non credit based system. But the systemic problems of indebtedness and lack of access to credit (either bad credit or no credit) would disappear. Your greater point may be right, that leveling of the playing field will be all for not because the still existing wealth divide. To your point to the costs. I think the home costs are already generally the cheaper part in most real estate purchases (ie the land is worth more than the home). And those costs (like everything in society) are artificially inflated because the pricing is set in a credit based system where price is based on future ability to pay/not what one can pay out of pocket today.

mcguire 8y ago

Sigh. I've been saying this since the early 2000s when I saw even lower end new construction getting Corian or granite countertops as standard. Easily available money causes prices to rise.

mancerayder 8y ago

What about construction costs? In the US costs have gone up due to: - Tariffs which affect steel and timber - higher wage costs due to low unemployment (perhaps the most benevolent of the list) - a construction boom in certain areas (Brooklyn comes to mind) leading to a scarcity of construction professionals being available I'm sure 'new construction' costs being high affects the prices of second-hand properties, which scale up. Even more so if they're renovations.

topkai22 8y ago

There is a point that is often glossed over in these analysis- the rental stock and the ownership stock are often fundamentally different. Last time my family moved we weren’t opposed to renting, but there was something like 1/10 the number of available SFH rental units in the area we were looking compared to available SFH rental units. In the US at least I think there is a case to be made that this is due to the UNDER financialization of housing- if you own a home at want/need to move it is difficult for most families to do anything but sell their current home in order to qualify for a mortgage. This suppresses the rental stock even when it is financially reasonable to rent out a house versus selling. (Yes, there are companies buying SFH housing to let out, but they seem small compared to the overall market right now)

burfog 8y ago
It may seem financially reasonable to rent out a house, but normal people don't want the risk and hassle. Renting out houses is an occupation, with special skills. You have to navigate the legal situation to avoid being sued, while still doing your best to refuse people who seem like they could be trouble. You can expect damage and non-payment of rent. You can expect the state to make it extremely difficult for you to get rid of destructive people who aren't paying. You can get sued over a lack of repairs, but meanwhile the renters are causing the damage and failing to tell you about it. Renters will ignore water leaks that don't seem to impact them, letting your home rot from the water. Renters will smoke and keep pets, despite any rules to the contrary, and they will fail to control destructive kids. Renters will illegally authorize workers to drill holes to run cables through the walls. I've known people who tried renting out a house. They ended up with drug dealers, prostitutes, new doorways and other openings being cut, a bloody murder scene, floors and walls rotted out, destroyed cabinets, etc. Most new homes are in home owner associations that prohibit renting houses out.

simonh 8y ago

I think the discussion so far, while interesting, is tangential to the point the article is trying to make. The point is that supply of housing isn’t the only thing affecting house prices. If you view houses as financial assets with varying value, it’s the supply of financial assets that matters, not just the supply of houses. Or am I missing the point?

TheRealPomax 8y ago

Effectively: as long as people need to borrow money to buy a house, housing prices will be high because instead of buying a house, that house has to make someone money. And that someone isn't even you.

TangoTrotFox 8y ago

I think the argument here is directly analogous to why university prices started going loony. When it became impossible for even private education loans to be dismissed in bankruptcy suddenly education loans became seen as very near 0 risk. And everybody's told from the time they're in diapers that they need to go to university, with cost given little to no consideration. And it's also seen as priceless investment that will pay for itself and then some in the future. Suddenly people value something immensely and have access to an effectively unlimited line of debt. This incentives universities to arbitrarily increase their costs. University costs only started to stabilize as university enrollment started to decline. But there's a big argument against this that I don't see the answer to. Everything that's mentioned in this article is true for buying a house, but not for renting. Rental prices have also gone through the roof - and the only reason they're able to go through the roof is because people are able and willing to pay the costs asked. But people renting are getting absolutely no return whatsoever on this exchange, and rent is also generally not paid from debt. So how would this explain the willingness of people to pay ever higher prices for rent?

elchief 8y ago

AirBnB makes owning a home more valuable (basically double rental income) And several trillion dollars of hot money left China and ended up in the Pacific ring real estate market

gweinberg 8y ago

The author is writing as if housing construction just happens irrespective of demand. People will build new housing if they are confident it will earn a profit. It stands to reason that if new construction is allowed, housing prices can't stay much higher then construction costs for long.

fallingfrog 8y ago

I have to say I just don’t understand why anyone would willingly pay the kinds of prices for housing that I see people paying. It seems like the consensus is that you should pay 2.5 times your household income on a house; I see people around me paying 5 times or more. That’s bonkers. We paid 1.25 times our household income and we’d never have considered more. I’d rather live in a double wide than put that much of my income into a sunk cost like that. No way. Everyone is just behaving in a totally irrational way and I don’t get it.

bognition 8y ago
> Everyone is just behaving in a totally irrational way and I don’t get it. A lot of people don’t have the luxury of paying only 1.25X their salary. Take Boston for example. You’d need to live more than an hour out of the city or in a city with terrible schools to find a house that cheap. Lots of people are optimizing for more than just price. Things like quality of education and commute also factor in. So please realize housing is incredibly complex before judging everyone else as irrational for not making the same life choices as you.
chillacy 8y ago
A comment about not getting something ends with everyone else is irrational? If you don’t understand something the problem is often with your model of reality being incomplete, not other people.
snarfybarfy 8y ago
Which consensus are you talking about? US? Northern Idaho? Thailand? Saudia Arabia? SV?? Where I live the long term average is 6-7x household incomes.

microcolonel 8y ago

Yeah, but constraining supply is dead certain to increase prices, and increasing it is almost as certain to decrease them.

vanbytheriver 8y ago

/r/vandwellers

vanbytheriver 8y ago

I purchased a van that I am going to rebuild into an RV and live in San Fransico at a fraction of what I would throwaway on rent and interest to the bank. Some googlers got the same idea and slept in the google parking lot! It does not make sense to purchase expensive properties with the record low interest rates. As soon as they rise again, your property will lose in 10s of thousands of dollars in value and you will be tempted to walk away from it.

mmirate 8y ago
Sounds most interesting. Are there any other people who have done similar things and publicly written-up their e.g. bill-of-materials, for comparison with non-SF apartment-rent costs?
conanbatt 8y ago
I think its a fine way to save money, but that is basically choosing to be homeless and live like a pauper. When you have 200k+ salaries and you find it appealing to live like a minimum-wage worker with no family, it should raise a red flag.
- wpdev_63 8y ago
  Many people live alot more comfortably within a van than they do in their stationary home. They can go to the beaches during the summer weekends and go out to colorado during the ski season and bring their home with them. This is one of the many couples that are doing it these days:https://faroutride.com https://faroutride.com If you get 90% of your home comfort in a finished conversion van and you save 50% if your wealth, it's a no brainer. You'll also be avoiding the inevitable housing crash. Why on god's green earth would an employer care about where you live?
  - conanbatt 8y ago
    You'd be living in an illusion to believe living in a van is a higher quality of life than having a proper place. Its a ridiculous comparison, no matter how hipster some modern choices can become. Would you raise a child in a van? Down by the river?

ouid 8y ago

Well there's also the MITC, but no, the market determines the price.

jondubois 8y ago

Corporate growth is a major culpit. Corporate growth means that corporations open up more HQs and offices and create more jobs in major urban centers. By taking market share away from small regional businesses, corporations are destroying jobs in regional towns and creating jobs in big cities instead. People are increastly forced to move to big cities to find jobs. As more people move to big cities, demand for real estate in those cities goes up. Big cities struggle to increase the supply of real estate due to limited space. By moving to big cities, value-creating workers are increasingly forced to compete against wealthy owners of capital for the limited supply of real estate. Wealthy owners of capital don't need to work for their money, so they're willing to spend a lot more to buy houses that they don't even need; this drives up house prices for everyone else.

lifeisstillgood 8y ago

South East England has an interesting problem - for a decade or more Dirty Money from Russia, China and elsewhere has poured into London, as bankers and lawyers turned a blind eye. As the "big" properties in London went into the multi millions the original owners moved out one rung, and those owners moved out one and so on. The commuter belt is apparently shored up by billions of dirty money But now it's drying up. Maybe tougher enforcement, more likely competition from NY / Nevada and Brexit uncertainty but it seems to have tanked the market.

true_tuna 8y ago

But there’s also extremely constrained supply. Look at Mountain View CA from 2000 to 2010. The city blocked new housing religiously for a decade while welcoming tens of thousands of new jobs. Now traffic is insane, housing prices are insane. Tell me simple supply and demand is not at play here. If we add jobs we gotta add housing. It’s baffling that we’d try to do anything different. And yet every city in the Bay Area is happy to welcome new jobs and blocks new housing at every turn. There’s a muddy field right next to google campus. Been vacant for at least a decade. Zoned for hotel. Nobody wants or needs a hotel there. High density housing yes. Hotel no. I’m not interested in any conversation about the housing crisis that ignores this simple idea. Add a job? Permit a housing unit. Do that for a decade and then we can talk about the other factors.

masonic 8y ago
The city blocked new housing religiously for a decade Specific examples? (I'm a MV resident for 26 years and have seen no such examples.) There have been significant blocks against new retail (e.g. the "gorilla" campaign that killed the Home Depot at El Camino and the Americana), but not housing. There's little bare land except on the Bay side of 101.

acd 8y ago

Banks create money out of thin air, fractional reserve banking. When the banks go bust the Central banks save the debts. People speculate in house prices, people loan more for their new home than their old one, new debts are created. It goes on until there is a bust in the market, either financial shock, or price discovery that the loans are not sustainable.