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Why not? It seems obvious that cheap credit would drive up prices. For example people could just be bidding up to what they can pay off in about 30 years. If th

Why not? It seems obvious that cheap credit would drive up prices. For example people could just be bidding up to what they can pay off in about 30 years. If they simply do that, cheaper credit would rise house prices.

wuschel 5y ago
I was just wondering. It's hard to understand markets, IMHO, and I have no feeling how a potential balance between cost of money, supply and demand should look like in a sector like housing. Do you have any references or literature that would give me a better understanding? Originally, I also thought that proper restriction of foreign investment might be a good solution. I agree with you that it must be domestic actors that are to drive prices upwards. On a social level, this is going to generate a lot of problems, as it locks out people w/o access to credit to take part in the market. It is crazy what happens in cities like Berlin in regard to gentrification. But even other cities that do not have a hype status are affected by this.
- ChuckNorris89 5y ago
  >It is crazy what happens in cities like Berlin in regard to gentrification Can you elaborate on this?
  - wuschel 5y ago
    Sure. In the case of Berlin inner city districts like Kreuzberg, Prenzlauer Berg et cetera have been rapidly changing in the last 10 to 20 years. This is in part because population is dying off/moving away, but also because developers are buying apartments and are actively removing the old inhabitants in order to be able to charge higher rents. There are laws in Germany that regulate the increase in rental payments. However, with the current price levels in housing, only a new contract with a tenant can give an investor an income that justifies the price payed for a property. The 'historic' population that can not afford the new level of rent is pushed out to the outskirts of the city [1]. Other cities of this tier e.g. London have similar population and price effects. [1] "Plattenbau" in Berlin - not so trendy. See: https://www.bz-berlin.de/media/plattenbau-sanierung-in-marzahn-hellersdorf-2 https://www.bz-berlin.de/media/plattenbau-sanierung-in-marza...
    - MichaelZuo 5y ago
      How does the regulation work for properties after major renovations? Can the rent be increased significantly if it becomes more luxurious? What about when the landlord or close family want to move in, and then after a few years moves on?
- sokoloff 5y ago
  > it locks out people w/o access to credit to take part in the market I think it’s been 40+ years since everyday people without any access to credit had broad practical access to buy housing. (This kind of makes sense. You’re buying something with 50+ years of future utility and probably haven’t saved 25+ years of housing costs to put down in cash.)
roel_v 5y ago
But then why not before these low rates? If people were bidding up to maximum lending capacity as a % of total income back when mortgage rates were, say, 6%; and now they do the same but at mortgage rates of 2%; then there is a ceiling to house prices, but we've passed that ceiling a long time ago. So something else must have changed, too. (I did this math some time ago for the Dutch market and our prices were already like 20 or 30% over what you would expect by this logic; and prices have gone up 20% since then, just in the last year. How insane is that?). Maybe another factor is that people who are not first time buyers now have a lot more money from the sale of their previous house. We always focus on the first time buyers, but those are only a small part of the market, and for couples with two high incomes, houses are affordable still. So maybe higher assortative mating leads to higher spending potential in first time buyers, and the rest of the money just comes from people selling their first houses and upgrading. It's quite hard to model though, I don't really see a way to test this hypothesis in a few spare minutes here or there like many simpler theories are.
- IkmoIkmo 5y ago
  It's likely simply scarcity related. If you can borrow 800k based on your income and you accept 200 square metres for that price, and there is such scarcity (100 viewings per home, 2% success rate) that you're unable to find a home, it may lead you to accept a 190 square metre home at the same 800k price. If such a trend continuous for a decade, you may see that suddenly people accept to pay 800k for a 100 square metre home (such as happened in Amsterdam, the Netherlands). The net effect is that housing prices per square metre doubled: a 100 square home went from 400k to 800k, and a 200 square home went from 800k to 1.6m. No change in financing capacity is necessary for this to occur. Only a shortage of homes creating a cycle where people keep accepting less space at the same price, thereby increasing the prices per square metre throughout the entire market, thereby pushing prices of homes up. I believe that's what's happening. The media fuels this process by constantly writing articles about shortages (even though objectively speaking, in the past decades home sizes have sharply increased while household size (persons-per-home) has decreased, i.e. there is objectively more housing per person than ever before). Of course there is a limit to this logic. But in the Netherlands for example, the average space per person is about 50% higher than in Germany (culturally quite similar country). So there seems room for Dutch to accept smaller homes. And there's some examples (e.g. Hong Kong) that show that a high-income country with housing shortages also can push people to accept smaller homes in their budget. This effect isn't immediate because prices are sticky. People cannot accept too much change rapidly without believing its overpriced. Over time, these 'overpriced' price levels are normalised and seen as the new normal, accepted, and a new concept of 'high' emerges. But it's not instant. Second, homes are mortgaged and thus must pass an appraisal. Appraisers also don't accept radical changes as they're based on reference objects of a few months ago, so there's a limit to the speed of price change.
IkmoIkmo 5y ago
Sure but average household income is about 100k, home prices 1 million or 10x that figure. Even with the low interest rates you can't qualify for mortgages much more than 5x your income, even if you wanted to, so it'd mean there's massive amounts of personal wealth (e.g. 500k per home average) flowing into the market, which I doubt is the case. Not sure what factor I'm missing but it doesn't all seem in line with eachother.

wuschel 5y ago

I was just wondering. It's hard to understand markets, IMHO, and I have no feeling how a potential balance between cost of money, supply and demand should look like in a sector like housing. Do you have any references or literature that would give me a better understanding? Originally, I also thought that proper restriction of foreign investment might be a good solution. I agree with you that it must be domestic actors that are to drive prices upwards. On a social level, this is going to generate a lot of problems, as it locks out people w/o access to credit to take part in the market. It is crazy what happens in cities like Berlin in regard to gentrification. But even other cities that do not have a hype status are affected by this.

ChuckNorris89 5y ago
>It is crazy what happens in cities like Berlin in regard to gentrification Can you elaborate on this?
- wuschel 5y ago
  Sure. In the case of Berlin inner city districts like Kreuzberg, Prenzlauer Berg et cetera have been rapidly changing in the last 10 to 20 years. This is in part because population is dying off/moving away, but also because developers are buying apartments and are actively removing the old inhabitants in order to be able to charge higher rents. There are laws in Germany that regulate the increase in rental payments. However, with the current price levels in housing, only a new contract with a tenant can give an investor an income that justifies the price payed for a property. The 'historic' population that can not afford the new level of rent is pushed out to the outskirts of the city [1]. Other cities of this tier e.g. London have similar population and price effects. [1] "Plattenbau" in Berlin - not so trendy. See: https://www.bz-berlin.de/media/plattenbau-sanierung-in-marzahn-hellersdorf-2 https://www.bz-berlin.de/media/plattenbau-sanierung-in-marza...
  - MichaelZuo 5y ago
    How does the regulation work for properties after major renovations? Can the rent be increased significantly if it becomes more luxurious? What about when the landlord or close family want to move in, and then after a few years moves on?
sokoloff 5y ago
> it locks out people w/o access to credit to take part in the market I think it’s been 40+ years since everyday people without any access to credit had broad practical access to buy housing. (This kind of makes sense. You’re buying something with 50+ years of future utility and probably haven’t saved 25+ years of housing costs to put down in cash.)

roel_v 5y ago

But then why not before these low rates? If people were bidding up to maximum lending capacity as a % of total income back when mortgage rates were, say, 6%; and now they do the same but at mortgage rates of 2%; then there is a ceiling to house prices, but we've passed that ceiling a long time ago. So something else must have changed, too. (I did this math some time ago for the Dutch market and our prices were already like 20 or 30% over what you would expect by this logic; and prices have gone up 20% since then, just in the last year. How insane is that?). Maybe another factor is that people who are not first time buyers now have a lot more money from the sale of their previous house. We always focus on the first time buyers, but those are only a small part of the market, and for couples with two high incomes, houses are affordable still. So maybe higher assortative mating leads to higher spending potential in first time buyers, and the rest of the money just comes from people selling their first houses and upgrading. It's quite hard to model though, I don't really see a way to test this hypothesis in a few spare minutes here or there like many simpler theories are.

IkmoIkmo 5y ago
It's likely simply scarcity related. If you can borrow 800k based on your income and you accept 200 square metres for that price, and there is such scarcity (100 viewings per home, 2% success rate) that you're unable to find a home, it may lead you to accept a 190 square metre home at the same 800k price. If such a trend continuous for a decade, you may see that suddenly people accept to pay 800k for a 100 square metre home (such as happened in Amsterdam, the Netherlands). The net effect is that housing prices per square metre doubled: a 100 square home went from 400k to 800k, and a 200 square home went from 800k to 1.6m. No change in financing capacity is necessary for this to occur. Only a shortage of homes creating a cycle where people keep accepting less space at the same price, thereby increasing the prices per square metre throughout the entire market, thereby pushing prices of homes up. I believe that's what's happening. The media fuels this process by constantly writing articles about shortages (even though objectively speaking, in the past decades home sizes have sharply increased while household size (persons-per-home) has decreased, i.e. there is objectively more housing per person than ever before). Of course there is a limit to this logic. But in the Netherlands for example, the average space per person is about 50% higher than in Germany (culturally quite similar country). So there seems room for Dutch to accept smaller homes. And there's some examples (e.g. Hong Kong) that show that a high-income country with housing shortages also can push people to accept smaller homes in their budget. This effect isn't immediate because prices are sticky. People cannot accept too much change rapidly without believing its overpriced. Over time, these 'overpriced' price levels are normalised and seen as the new normal, accepted, and a new concept of 'high' emerges. But it's not instant. Second, homes are mortgaged and thus must pass an appraisal. Appraisers also don't accept radical changes as they're based on reference objects of a few months ago, so there's a limit to the speed of price change.

IkmoIkmo 5y ago

Sure but average household income is about 100k, home prices 1 million or 10x that figure. Even with the low interest rates you can't qualify for mortgages much more than 5x your income, even if you wanted to, so it'd mean there's massive amounts of personal wealth (e.g. 500k per home average) flowing into the market, which I doubt is the case. Not sure what factor I'm missing but it doesn't all seem in line with eachother.