2 ms·

"If they fall to 5%, the value of that same stream of flowers doubles to £2,000." How would that work? The idea is that people would sell assets that have belo

by lottin 7y ago

"If they fall to 5%, the value of that same stream of flowers doubles to £2,000." How would that work? The idea is that people would sell assets that have below-market returns and buy assets that have above-market returns. Asset prices will adjust accordingly and so will the respective returns which are a function of price. And this will go on until return rates equalise across all assets. This is the theory, but it's hard to imagine that in most circumstances a house can be traded for another asset. Why? Because having a place to live is a pre-requisite for being a functioning member of society. If tulips are under-performing sure I can sell my stock of tulips. If houses are under-performing I don't care. I'm not going to sell my house and buy something else, because I need a house. Thus I'm sceptical that the theory will work in the case of the housing market.

gjm11 7y ago
You need a house but you don't necessarily need exactly that particular house. More importantly, this also applies to anyone who's moving house right now. Suppose you need a new house, and you want to own rather than rent. You will be willing to buy a more expensive house if the mortgage interest rate is 1% than if it's 10%, because the amount you actually have to pay is lower when the mortgage rate is lower. Mortgage rates vary along with other interest rates. So when interest rates are lower, mortgage rates are lower, and people can and do pay more for houses.
- lottin 7y ago
  Trading a house for another house has no effect on the prices of other assets (i.e. non-housing assets) or their rate of return, which was what the original argument was about.
  - gjm11 7y ago
    Was it? I thought the original argument was mostly about how interest rates affect housing prices. The particular bit you quoted -- > If they fall to 5%, the value of that same stream of flowers doubles to £2,000 -- and asked "how would that work?" about, wasn't about how buying and selling houses affects the prices or rates-of-return of other assets, it was about how prevailing interest rates affect the prices of houses. Which is what my comment addressed. Incidentally, it's very rare to "trade a house for another house". You buy houses for money, and sell houses for money. (You often do those two things together, but often the house you buy is quite different in price from the house you sell, and in any case the buyer and the seller are different people, so this still isn't equivalent to trading one house for another.) This isn't just nitpickery; it's because houses are bought and sold for money that could be used for other things that their prices can interact with the prices of other things.
    - lottin 7y ago
      He says "interest rates on other assets", which I take to mean "rate of return of other assets" since the phrase "interest rates on other assets" doesn't make sense. Interest rate is a particular rate of return, that of money.
      - gjm11 7y ago
        He does indeed say those words. And what he means by them is that house prices change if interest rates change, not the other way around. (Whether he means interest rates specifically, or rates of return on other assets like equities, I'm not certain, but those things have some tendency to vary together and I would expect all of them to influence house prices in a similar way.)

by lottin 7y ago

gjm11 7y ago

You need a house but you don't necessarily need exactly that particular house. More importantly, this also applies to anyone who's moving house right now. Suppose you need a new house, and you want to own rather than rent. You will be willing to buy a more expensive house if the mortgage interest rate is 1% than if it's 10%, because the amount you actually have to pay is lower when the mortgage rate is lower. Mortgage rates vary along with other interest rates. So when interest rates are lower, mortgage rates are lower, and people can and do pay more for houses.

lottin 7y ago
Trading a house for another house has no effect on the prices of other assets (i.e. non-housing assets) or their rate of return, which was what the original argument was about.
- gjm11 7y ago
  Was it? I thought the original argument was mostly about how interest rates affect housing prices. The particular bit you quoted -- > If they fall to 5%, the value of that same stream of flowers doubles to £2,000 -- and asked "how would that work?" about, wasn't about how buying and selling houses affects the prices or rates-of-return of other assets, it was about how prevailing interest rates affect the prices of houses. Which is what my comment addressed. Incidentally, it's very rare to "trade a house for another house". You buy houses for money, and sell houses for money. (You often do those two things together, but often the house you buy is quite different in price from the house you sell, and in any case the buyer and the seller are different people, so this still isn't equivalent to trading one house for another.) This isn't just nitpickery; it's because houses are bought and sold for money that could be used for other things that their prices can interact with the prices of other things.
  - lottin 7y ago
    He says "interest rates on other assets", which I take to mean "rate of return of other assets" since the phrase "interest rates on other assets" doesn't make sense. Interest rate is a particular rate of return, that of money.
    - gjm11 7y ago
      He does indeed say those words. And what he means by them is that house prices change if interest rates change, not the other way around. (Whether he means interest rates specifically, or rates of return on other assets like equities, I'm not certain, but those things have some tendency to vary together and I would expect all of them to influence house prices in a similar way.)