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Everyone needs a roof over the head, and the proportion of household income that went into housing has been steadily going up since the 1980's. So it's not corr

Everyone needs a roof over the head, and the proportion of household income that went into housing has been steadily going up since the 1980's. So it's not correct that asset inflation does not affect everyday cost of living.

JamesBarney 5y ago
We need to disentangle housing the good the thing you pay rent for, from a house an asset that produces housing. Why would low interest rates cause rent to increase? Intuitively I would think that low interest rates would make it cheaper to fund the creation of new housing lowering rents. I imagine the increase in rents is because we've made it more difficult to build things because of zoning, permitting etc..., and we're building better houses that are more insulated, fire proof, more outlets, etc... We also haven't made builders that much more productive over the last 40 years.
- HarryHirsch 5y ago
  Housing prices went up 20 % between 2016 and now because zoning became more difficult? That doesn't compute. Clearing price is set by the maximum payment mortgage a household can afford, i.e. principal + interest. If the interest rate is lower, that results in a higher cash price, and that's what we see. Of course politicians at all levels and households who have already are uninterested in seeing a change to the status quo, so no surprise that there are supply constraints as well. All that started when housing became a popular investment vehicle sometimes in the late 1970's. The fact that entry-level housing is extra scarce because it's less profitable for the builder than a doctor's palace doesn't help either.
  - JamesBarney 5y ago
    I understand how interest rates increase the price of house. It's a fairly straightforward calculation. But what is your theory for the mechanism by which lower interest rates causes an increase in the price of rent?
    - HarryHirsch 5y ago
      That's households that are priced out of a mortgage, so they have no alternative but to rent. In emergencies you can go to a food bank, but you absolutely need a roof over the head.
  - mikem170 5y ago
    I agree that interest rates are a factor. But so is the supply/demand curve. Housing supply is regulated by zoning and cannot freely increase with the changing market, and housing demand increased due to many Millennials reaching family and home buying age. Those are both also factors, not only interest rates.

JamesBarney 5y ago

We need to disentangle housing the good the thing you pay rent for, from a house an asset that produces housing. Why would low interest rates cause rent to increase? Intuitively I would think that low interest rates would make it cheaper to fund the creation of new housing lowering rents. I imagine the increase in rents is because we've made it more difficult to build things because of zoning, permitting etc..., and we're building better houses that are more insulated, fire proof, more outlets, etc... We also haven't made builders that much more productive over the last 40 years.

HarryHirsch 5y ago
Housing prices went up 20 % between 2016 and now because zoning became more difficult? That doesn't compute. Clearing price is set by the maximum payment mortgage a household can afford, i.e. principal + interest. If the interest rate is lower, that results in a higher cash price, and that's what we see. Of course politicians at all levels and households who have already are uninterested in seeing a change to the status quo, so no surprise that there are supply constraints as well. All that started when housing became a popular investment vehicle sometimes in the late 1970's. The fact that entry-level housing is extra scarce because it's less profitable for the builder than a doctor's palace doesn't help either.
- JamesBarney 5y ago
  I understand how interest rates increase the price of house. It's a fairly straightforward calculation. But what is your theory for the mechanism by which lower interest rates causes an increase in the price of rent?
  - HarryHirsch 5y ago
    That's households that are priced out of a mortgage, so they have no alternative but to rent. In emergencies you can go to a food bank, but you absolutely need a roof over the head.
- mikem170 5y ago
  I agree that interest rates are a factor. But so is the supply/demand curve. Housing supply is regulated by zoning and cannot freely increase with the changing market, and housing demand increased due to many Millennials reaching family and home buying age. Those are both also factors, not only interest rates.