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House Prices Are Not Driven By Supply & Demand


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Some people believe that house prices are driven by the law of supply and demand. The Law of supply and demand basically states that if there is more demand than supply then prices rise and if there is more supply than demand then prices fall until an equilibrium is reached between supply and demand at which point prices remain steady.

However, the UK housing market doesn't really exhibit this behaviour because at present because house prices are so high there are few first time buyers and people able to afford property which means that demand is low and because demand is low this means that house prices should have fallen considerably to restore the balance of supply and demand but this has not happened.

The reason that house prices do not exactly follow the law of supply and demand is that house prices are driven by greed and speculation and sentiment and future expectations of house prices. Once house prices have risen home owners are reluctant to drop the asking price and remain stubborn and resistant to dropping the asking price even when demand drops.

House prices represents human nature in that the vendor wants to make the most amount of money from the sale of their house even in the face of falling demand. There is currently a Mexican stand-off in the housing market in that home owners are refusing to lower their asking prices and potential buyers are refusing to pay the asking prices. This has led to a stagnation and gridlock in the housing market in which sellers and buyers refuse to budge from their entrenched positions. It is really a question of who cracks first and caves in.

A seller can remain stubborn and maintain a high asking price for their property but if their are no buyers willing to pay the asking price then the property will languish on the property market and eventually the seller will become frustrated at the lack of interest in their property and will lose patience and will have no choice but to lower their asking price.

What has driven house prices so high is a stampede by buyers to get onto the property ladder for fear that they will be left out and not get a foot on the ladder. This has created an artificial surge in demand by panic stricken buyers which has caused house prices to surge upwards. However, now that house prices have risen so high there are few people willing or able to buy at such high prices but sellers are naturally reluctant to drop their asking prices.

The housing market basically has two states, stop and go, or a speculative phase and a non-speculative phase. The housing market tends to snap from one phase to another. As soon as there is a recovery in the economy house prices rise sharply in anticipation of rising demand and to take speculative advantage of rising demand. As soon as the economy enters a decline then house prices will snap back to what is considered sensible prices because when the economy is in decline no one is willing to pay alot of money for property.

Property prices are driven by greed and fear. During a boom greed becomes the predominant factor as vendors try to cash in on rising speculative demand by ramping up property prices. During a recession fear becomes the main factor as vendors worry about falling prices and try to sell their properties before prices fall further.

Although supply and demand has an influence on property prices it is really greed and speculation and fear that ultimately drives property prices.

It is up to the buyer to ensure that they do not fall into the trap of believing that the high asking price that a vendor wants for their property represents the true and realistic price of the property but instead reflect what the vendor wants based on greed and speculation.

The onus is on the buyer to stay out of the property market when prices are so obviously out of line with reality. The high house prices that prevail today are well beyond fair value and buyers are best warned to stay out of the property market until prices reach sensible and realistic levels.

Edited by Bill Gates
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Some people believe that house prices are driven by the law of supply and demand. .........................

However, the UK housing market doesn't really exhibit this behaviour .....

================================================

I don't agree.

The market *does* exhibit this behaviour....

over a long period of time.....

measured in years, not months.

At the moment we are seeing a large supply of houses slowly piling

up in the market place, from about December through February,

then increasing month by month till the present state of affairs -

***************Plentiful Supply.

Buyers are few.... and choosy... and in no rush to purchase.

*************Demand is low.

And prices, over a period of months... have begun to fall...

gradually.... then, during the last month or two, more positively.

I am now seeing, in my own area, in specific types of property

which interest me, definite drops of about 10% from six to 12

months ago.

The time it takes to market and sell a house (about four months)

makes it difficult to see the trends happening.

But they do.

Many things influence the demand (or desire) for house purchase

- media advertising/sales pressure/easy credit/advice/example/etc

and the supply (or desire to sell) -

Interest rates/employment/economy/pensions/etc

but, in essence, it is driven - just like any market - by :-

High Demand + Low Supply = High Price

Low Demand+High Supply=Low Price.

In my opinion.

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you are so right

I've just been looking at rightmove in my local area where 3 years ago you could buy a nice 3 bed semi for £130k. The prices are ludicusly high, and surprise surprise the same overpriced cr*p that was on the market in jan is still there, sorry but these guys have missed the boat. Unless they drop the price by a sensible amount (>10%) they will NEVER sell, but as you say people are greedy and that's what will cause the market to crash. Anyone agree??

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Your analysis is accurate in that it shows that markets are not always logical or consistent with the theory of supply and demand as taught in text books. However, supply and demand are the ultimate driving force behind the markets even if "equilibrium" is never reached in the sense that economists mean (because this relies on participants being logical).

Property prices are "sticky" due to sellers' pyscology and the problem of negative equity. This leads to the problem that we have today, where demand far outweighs supply, yet prices are not falling very quickly. The side-effect of this is a fall in the volume of houses sold.

Eventually the law of supply and demand will assert itself and prices will head to the appropriate level.

Edited by Ah-so
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Ah, sorry, I didn't realise you were just trolling.

I'm not trolling, I'm currently remortaging my house and found your site. I do see negative equity as a short term problem. With a 25 year mortgage, I don't care if I owe more than the house is worth, if I'm not trying to sell it. The figures do reflect that over time house prices will rise again.

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House prices ARE determined by supply and demand, but you have to consider carefully what actually affects supply and demand.

If houses are considered to be a great investment when compared to alternatives (such as the stock market or the building society), demand goes up and equilibrium prices rise.

The problem of recent years has been that of demand and not supply. As soon as speculative demand dried up, prices started to fall.

Despite what Kate Barker and others have said, there never was a problem with supply, so paving over our green and pleasant land with Barratt boxes was never a good idea!

However, one thing about the housing market is that it is not an efficient market (due to low liquidity and imperfect information), so it can take a while for prices to migrate to their equilibrium levels (hence the 'sticky downwards' phenomenon). Therefore an overnight crash can never happen in the same way as it can with the stock market.

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I'm not trolling, I'm currently remortaging my house and found your site.  I do see negative equity as a short term problem.  With a 25 year mortgage, I don't care if I owe more than the house is worth, if I'm not trying to sell it.  The figures do reflect that over time house prices will rise again.

Peach, I've only been on this site a few months and already posts like yours are making me want to go and shoot someone..

Yes prices will rise slowly over time, however only in line with wage increases, ie they're not *REALLY* rising. Have a look at the attached graph of house prices to salary, over time it sits at around 3.5 times.

In other words,relative to what we earn, prices don't really go up at all.

You may tell me that your parents paid £3000 for their house in 1970, but guess what, a ticket to Glastonbury cost £1. They now cost £125. It's called inflation. Yep, the house now costs around £300k (if the ticket to Glasto was still valid, it'd be a better buy!)

Secondly, buying at the top of the bubble is not clever at all. How would you feel having to pay an extra £500 a month into a mortgage for 10 years, because that is how long the UK housing market usually takes to recover after a bust.

£500x12monthsx10years= £60000

Maybe you can afford to piss that much money down the drain, but for the average person that amount of wealth destruction will lead to a retirement in poverty.

Edited by BandWagon
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I'm not trolling, I'm currently remortaging my house and found your site.  I do see negative equity as a short term problem.  With a 25 year mortgage, I don't care if I owe more than the house is worth, if I'm not trying to sell it.  The figures do reflect that over time house prices will rise again.

Peach, I appreciate what you are saying, but it is very dangerous to try & predict the future by looking at the past. You appear to me to be using the 'houses will always rise in the long term' myth.

I have read very convincing theories on Hpc, stating that changing demographics & too many Mcjobs mean that this could be the last massive housing bubble we will see.

This is the mother of all housing bubbles and it is very difficult to forsee how this will turn out out as we are in unknown territory, especially if we get a depression instead of a recession.

Some recent house buyers may never escape their neg equity.

Edited by Saving For a Space Ship
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With a 25 year mortgage, I don't care if I owe more than the house is worth, if I'm not trying to sell it

LOL. So you don't mind being stuck in a house for a decade or more, unable to sell it because it's worth less than your mortgage, paying twice the amount for that stupid mortgage that your neighbour is paying after buying a house a few years later... all in the hope that prices will rise again later?

I guess you must be another of the millionaire BTLs on the board who can afford to lose a few hundred thousand and not worry about it.

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I'm not trolling, I'm currently remortaging my house and found your site.  I do see negative equity as a short term problem.  With a 25 year mortgage, I don't care if I owe more than the house is worth, if I'm not trying to sell it.  The figures do reflect that over time house prices will rise again.

Having the sh*ts for a few days is a short term problem.

Lets say that the FTB'r buys her/his place for 110K that just about get them a 1 bed ex council flat. This FTBr is 30 years old even that is low i think the average is at 34 now.

This FTB'r has an average paying job of 18k (both these values im using from my area - Gloucestershire.

5 years ago this same 1 bed ex council cost about 45K which 5 years+ ago people like him/her could easily afford.

All is well so far, this FTB'r struggles a little but its supposed to be hard at first.

World moves on 3 years.

The FTB'r has had a standard payrise of 3% a year. He/she is now on 19.6K

Interest rates have moved from there historical low and are now at 6%

He/She is finding the payments increasing difficult.

He/She realises that they are 33 now and starts thinking of the future a little more kids etc.

There has been a market correction and he/she is now in negative equity.

Lets say for arguments sake that prices in general fell by 25% (sounds alot dosnt it, but keep in mind that -40% would put it back to historical averages and gernerally markets overshoot)

He/she has a few credit card bills , and no savings because interest rates started getting back to historical norms and he/she now even now is juggling the bills.

He/She realises that they will need another bedroom and a little more space so try to sell thier home so they can upgrade.

He/She looks in thier pocket and realises that they dont have £27.5K to get themselves out of negative equity.

The 110K they borrowed 3 years ago will now buy them a 3 bed semi. No one seems to want to buy their 1 bed ex council for £110K.

I hope thier biological clock was put on hold, i hope they are content.

Yea, negative equity is a short term problem aint it.

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Having the sh*ts for a few days is a short term problem.

Lets say that the FTB'r buys her/his place for 110K that just about get them a 1 bed ex council flat. This FTBr is 30 years old even that is low i think the average is at 34 now.

This FTB'r has an average paying job of 18k (both these values im using from my area - Gloucestershire.

5 years ago this same 1 bed ex council cost about 45K which 5 years+ ago  people like him/her could easily afford.

All is well so far, this FTB'r struggles a little but its supposed to be hard at first.

World moves on 3 years.

The FTB'r has had a standard payrise of 3% a year. He/she is now on 19.6K

Interest rates have moved from there historical low and are now at 6%

He/She is finding the payments increasing difficult.

He/She realises that they are 33 now and starts thinking of the future a little more kids etc.

There has been a market correction and he/she is now in negative equity.

Lets say for arguments sake that prices in general fell by 25% (sounds alot dosnt it, but keep in mind that -40% would put it back to historical averages and gernerally markets overshoot)

He/she has a few credit card bills , and no savings because interest rates started getting back to historical norms and he/she now even now is juggling the bills.

He/She realises that they will need another bedroom and a little more space so try to sell thier home so they can upgrade.

He/She looks in thier pocket and realises that they dont have £27.5K to get themselves out of negative equity.

The 110K they borrowed 3 years ago will now buy them a 3 bed semi. No one seems to want to buy their 1 bed ex council for £110K.

I hope thier biological clock was put on hold, i hope they are content.

Yea, negative equity is a short term problem aint it.

Spot on but it could be far... far... worse. Buyer stretches themselves with a 4, 5, 6 times earnings mortgage - buying at or near the peak :o

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Ultimately I think that we'll end up as a society where some people can afford houses and others can't. Already I have to accept that I can't afford a Ferrarri. In the future others will have to accept that all they can do is rent.

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Ultimately I think that we'll end up as a society where some people can afford houses and others can't. Already I have to accept that I can't afford a Ferrarri. In the future others will have to accept that all they can do is rent.

This is a little simplistic to say the least.

What in your opinion will prop up the housing market at current levels and higher (as your comment implies) if there are no FTB,s no new BLT,s (as they won,t be able to afford a house either)?

There will be nothing to drive the market!

The writing is clearly on the wall abundant and cheap credit has created a big bubble.....bubbles either stock market or housing related always burst just look at historical evidence.

I don,t know your personal circumstances to confirm this however I would advise that if you are ignoring the current figures out (retail, housing, energy prices etc) then try to be a little more open minded as there is a very real chance this could get rather nasty.

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Peach - why are you remortgaging? Call me old fashioned, but increasing debt isn't a great thing to do.

Assuming you are successful, and marginal rate of tax is 49% (NI plus income tax) then the "pre tax" cost of your mortgage borrowing is around 11% or so - so you need about that return on any money taken out to be ahead of just paying off your mortgage debt.

Seriously, paying down mortgage is such an investment "no brainer" I am intrigued that you have better use of the money.

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Guest prudence
Negative equity is only a short turn problem, anyone who found themselves in negative equity at the time of the last crash - but kept the repayments up - is quids in now.

It took around eight years for many properties to return to even their nominal price peak. That is eight years of having your capital doing nothing. Your sort of thinking - if you wait long enough it will eventually come out alright - is for people who haven't got the intelligence or ability to use money wisely...............

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Peach - why are you remortgaging?

Because I originally borrowed 100% two years ago, the deal I got from Bank of Scotland was expensive and about to get even more unfavourable after the discounted period was up. I now have 10% equity, so can get a cheaper deal from The Woolwich.

What in your opinion will prop up the housing market at current levels and higher (as your comment implies) if there are no FTB,s no new BLT,s (as they won,t be able to afford a house either)?

I'm not sure. Mobile phones and the internet boom certainly helped drive the economy for a while. But now everyone has a mobile and the internet clearly bust. Maybe someone will invent a flying car? Or maybe the government will decide to re-open the mines, now that importing power isn't cheap anymore.

That is eight years of having your capital doing nothing.

I didn't buy the house as an investment to speculate on. All I wanted was a roof and to be able to meet the repayments.

Edited by Peach
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  • 439 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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