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How Much Is A House Actually Worth?

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I don't think it's THE Donald Trump, but it's a nice piece. I salute the guy.

+1 says it all really - could not put it better myself.

All those 'experts' who witter on about - if only the banks will start lending again, if only they broiught back 100% interest only mortgages again, it will all be OK. should read and digest that scholarly summation of what has gone wrong. :)

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Very nicely written and good on the guy for posting it. I might forward that in response to pushy folks desperate for me and others in the family to get on the ladder.

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"The point is (and I've been saying it for the past 15 years), that house prices are primarily controlled by availability of credit and not by supply and demand. "

I know I've said this before. It is so true; Joe and Josephine Sixpack will pay as much money as the bank will lend them for a house. In an elegant symmetry, the house will cost as much as the bank is willing to lend them (with some lag).

If that second part holds true, house prices should meander downwards until the credit tap is turned on again.

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"The point is (and I've been saying it for the past 15 years), that house prices are primarily controlled by availability of credit and not by supply and demand. "

I know I've said this before. It is so true; Joe and Josephine Sixpack will pay as much money as the bank will lend them for a house. In an elegant symmetry, the house will cost as much as the bank is willing to lend them (with some lag).

If that second part holds true, house prices should meander downwards until the credit tap is turned on again.

Imo - this is a better way of thinking about it

Credit allows a competing buyers to draw more of land's future utility into it's present price. Because land can't be replaced and is needed for economic activity, buyers are jostling over a position (landowner) which can't be competed with and so there no upper limit (theoretically) to the amount they can rationaly bid to hold it (so they will bid as much as they can). It's not the numbers that cause a problem with real estate, it's an imbedded infinity in land ownership that screws up rational borrowing

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Whilst the credit tap is diminished I have this niggling worry that more QE will preveal to help banks repair poor balance sheets, pass new liquidity tests as well as leaving some left over to help keep credit flowing.

At the same time, by manipulating the interest down to such a low levels, the Bank of England is helping keep mortgages affordable, reducing the likelyhood of distressed sales and helping prop up property prices.

This could lead to a stagnant market...one that doesn't crash, or even fallen hugely, perhaps just drifts some and then loses some more against inflation.

Buyers can't afford to buy at the inflated prices so will either stay put, stay renting or living at home etc.

Sellers won't find many buyers able to buy at the price they need, or perhaps can't raise the required mortgage for the new pad, or have urgent need to sell due to low interest rates protecting their mortgage payments.

I'm sure this Conservative led government will not want to make the same mistakes of the Thatcher years, by increasing interests rates and causing a housing slump with the negative equity and repossesions that followed.

,

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An excellent piece; however he makes a mistake in the first line.

The point is (and I've been saying it for the past 15 years), that house prices are primarily controlled by availability of credit and not by supply and demand.

This is just plain wrong. House prices are completely set by supply and demand - just like all other prices.

Easy availability of credit simply increases demand by placing more money in peoples' hands with which to buy a house. Restricted availability of credit reduces demand. Assuming supply remains more or less constant this in itself will go a long way to setting prices.

Supply and demand is still the key however. It is important to understand the mechanism. Anyone who argues that the law of supply and demand does not control house prices does not understand what 'demand' is in economic terms.

Edited by Mr Yogi

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An excellent piece; however he makes a mistake in the first line.

This is just plain wrong. House prices are completely set by supply and demand - just like all other prices.

Easy availability of credit simply increases demand by placing more money in peoples' hands with which to buy a house. Restricted availability of credit reduces demand. Assuming supply remains more or less constant this in itself will go a long way to setting prices.

Supply and demand is still the key however. It is important to understand the mechanism.

Except, the 'rising price' component of a house's price is in fixed supply (land) and so we can more or less ignore supply (supply is fixed where it is important)

So we only have demand left.

We can strip out further redundancy by noting that demand for land / housing is a function of the productivity of the economy and also the availability of credit is also more or less a function of the productivity of the economy.

So rather than arguing whether house prices are a function of credit or demand we can go straight to sleeker, more elegant and accurate rule: land price is a function of the productivity of the economy

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I'd still only buy one.

Yes, but the more money you had access to, the more you'd be able to pay for it. And the more you'd have to pay for it if you still wanted to buy it.

That is the effect on demand of more availability of credit.

Edited by Mr Yogi

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So rather than arguing whether house prices are a function of credit or demand we can go straight to sleeker, more elegant and accurate rule: land price is a function of the productivity of the economy

That's an interesting idea.. so I googled it.

saupload_uk_house_prices_gdp_trend_nov08.png

The above chart at MarketOracle.. shows quite a lot of variance.

How do you account for that in your model?

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Our Donald Trump is a wise man.

I not that he's been through it in the 90s. That was a walk in the park compared to this bubble, which makes its formation even worse - a betrayal of ordinary people of treasonable proportions.

In 10 years where I live property increased 125% and that is with loads of new housing BTW, this was all about the supply and availability of credit and the maniacal willingness to take on the debt.

Our economy was hollowed out for bricks and mortar and widescreen TVs on the never-never.

To be honest I'm not sure we'll come back from this. We certainly won't whilst the denial of the real problem continues.

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An excellent piece; however he makes a mistake in the first line.

This is just plain wrong. House prices are completely set by supply and demand - just like all other prices.

Easy availability of credit simply increases demand by placing more money in peoples' hands with which to buy a house. Restricted availability of credit reduces demand. Assuming supply remains more or less constant this in itself will go a long way to setting prices.

Supply and demand is still the key however. It is important to understand the mechanism. Anyone who argues that the law of supply and demand does not control house prices does not understand what 'demand' is in economic terms.

Disagree. It all comes down to the supply of credit. The article is spot on.

No matter how many houses there are on the market, there will always be buyers if the banks will lend.

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That's an interesting idea.. so I googled it.

saupload_uk_house_prices_gdp_trend_nov08.png

The above chart at MarketOracle.. shows quite a lot of variance.

How do you account for that in your model?

Economic growth is not the same as thing the productivity of the economy. You can have high productivity and low growth and vice versa

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Disagree. It all comes down to the supply of credit. The article is spot on.

No matter how many houses there are on the market, there will always be buyers if the banks will lend.

You can disagree all you want - you're still wrong on the technicalities.

Availability of credit affects demand. Supply and demand affect prices. There is no short-cut.

This is just a simple fact.

Edited by Mr Yogi

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Economic growth is not the same as thing the productivity of the economy. You can have high productivity and low growth and vice versa

:blink: Ok. what data you are using for 'economic growth'?

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Disagree. It all comes down to the supply of credit. The article is spot on.

No matter how many houses there are on the market, there will always be buyers if the banks will lend.

+1

Hence why people with no jobs bought houses in the USA

If you can hook me up with a free Ferrari California I will have one right now.

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Except, the 'rising price' component of a house's price is in fixed supply (land) and so we can more or less ignore supply (supply is fixed where it is important)

So we only have demand left.

We can strip out further redundancy by noting that demand for land / housing is a function of the productivity of the economy and also the availability of credit is also more or less a function of the productivity of the economy.

So rather than arguing whether house prices are a function of credit or demand we can go straight to sleeker, more elegant and accurate rule: land price is a function of the productivity of the economy

You dream of finding E=mc2, don't you?

As do we all.....

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You can disagree all you want - you're still wrong on the technicalities.

Availability of credit affects demand. Supply and demand affect prices. There is no short-cut.

This is just a simple fact.

If you have 15 houses, and 10 buyers. do you think that homes will remain unowned if the bank is prepared to lend?

Of course not.

Those 2 or 3 of the 10 will buy up that excess inventory, and park it, causing a shortage of supply and rising prices. We've just been through this cycle in the US.

Now that credit has collapsed, guess what? Prices are collapsing too.

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Yes, but the more money you had access to, the more you'd be able to pay for it. And the more you'd have to pay for it if you still wanted to buy it.

That is the effect on demand of more availability of credit.

Demand doesn't mean price? Or does it, in economics land?

Sure the seller would get away with selling it for the highest price a person could afford, and what they can afford depends on the availability of credit, fine. But what's that got to do with demand?

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Don't understand this at all.

If people want something enough some of them will keep borrowing as much as they can until they get it. That doesn't mean it's rational (or desirable). Drugs work on a similar principle.

Obviously if nobody will lend much then that restricts the price, but - as with drugs - some will try & circumvent the situation. But to make out the present situation is down to credit availability is plain wrong.

No demand = no customers. Banks could supply unlimted credit for the purchase of dog excrement, but you still wouldn't find many takers.

Interesting this; if banks were tightly regulated, wouldn't that mean that people who got round the system would be buying at artificially low prices? Hmmm. Bit of a free market conundrum going on here ...

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  • 244 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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