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How Much Is A House Actually Worth?


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HOLA441

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 ...

From memory, the quarterly mortgage lending went up by a factor of 3 (nominal) from 1994 to 2006. That is the source of your house price boom (or should I say bubble?).

Edited by Toto deVeer
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HOLA442

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.

There is obviously demand for good housing and there is competition for houses.

However, prices achieved out of this are almost wholly derived from how much people can borrow. Tweak lending multiples and prices will follow (much more fluidly in a rising market)

I just don't buy your argument that demand is a function of credit. Demand = willing to pay, credit = willing and able to pay.

Edited by Kyoto
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HOLA443

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.

This is EXACTLY why the supply of credit must be tightly regulated. Like drug dealer and user, neither borrower or lender can be trusted to stop themselves until the situation reaches critical and life threatening levels.

Edited by Britney's Piers
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HOLA444

There is obviously demand for good housing and there is competition for houses.

However, prices achieved out of this are almost wholly derived from how much people can borrow. Tweak lending multiples and prices will follow (much more fluidly in a rising market)

I just don't buy your argument that demand is a function of credit. Demand = willing to pay, credit = willing and able to pay.

Except that maximum available credit had (has?) for so long had nothing to do with ability to pay. I hate to use the term on what has been an informative thread but ... 'liar loans' ... anyone?

So, if 'able to pay' was not being measured at all then it fails to be a relevant distinction. Consider: 'ability to pay' was (is?) never being tested and was being enabled (enforced?) after the fact by QE/mortgage payments/BTL mortgage interest tax write-offs/artificially low interest rates and the banks lack of willingness to repossess ... then, to a large degree, and for a limited time, at least:

'willing to pay' is equivalent to 'willing and able to pay'

... since as long as you signed the document(s) early enough in the boom or fast enough (in the case of the ponzi-ed up BTLer) under BTL-specific corporate tax law ... then your ability to pay was 'gauranteed'.

HPC is all about 'able to pay' being tested again ... that's why banks aren't lending ... they have no way of testing ability to pay when they don't know what the labour market is likely to do.

Aidanapword

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HOLA445

This was posted by Donald Trump a new poster in reply to a query on what was a house worth.

I'm posting it here as a topic since I think it is worth debate.

Link to the original question

http://www.housepricecrash.co.uk/forum/index.php?showtopic=100481&st=0

I agree with the central point that house prices are set by the availability of credit rather than supply demand. Suppy/demand only affects the volume of a market.

Consider the following example. Imagine you have an economy with X amount of money in it and a given commodity is in high demand and so fetches Y price. If you halve the amount of X in the economy then house prices will adjust to become worth Y/2. Conversely, if you double X, then house prices will become worth Y*2

Meanwhile, in the real world, Bangladesh is very densly populated and real estate is at a premium in terms of supply/demand. The market volume is very high but the price relative to say, the UK, is very low.

Why?

Because of the relatively lower levels of available credit.

Edited by tallguy
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HOLA446

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.

Boy that was a faceplant. Must have been tired last night.

Let me rephrase it.

If you have 15 houses, and 10 buyers;. do you think that homes will remain unowned?

Of course not.

Those 2 or 3 of the 10 will buy up that excess inventory, and park it, causing a shortage of supply.

What now causes rising prices? The supply of money, in the form of bank lending. We've just been through this cycle in the US.

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

There, I feel better now,

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HOLA447

There is obviously demand for good housing and there is competition for houses.

However, prices achieved out of this are almost wholly derived from how much people can borrow. Tweak lending multiples and prices will follow (much more fluidly in a rising market)

I just don't buy your argument that demand is a function of credit. Demand = willing to pay, credit = willing and able to pay.

We might be dancing on the head of a pin here, but surely real demand requires both a willingness and an ability to pay? Willingness without ability isn't really demand is it?

Further, it does seem like only a technicality (and doesn't really affect the thrust of Donald Trump's original piece), but I would tend to agree with Mr Yogi that it's the increase of credit that permitted buyers not merely to have willingness, but to continue to have the ability -- which, against the odds, allowed that willingness to remain as demand for all those irrational years.

Ultimately, though, I think Donald Trump's text does deserve a wider audience.

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HOLA448

We might be dancing on the head of a pin here, but surely real demand requires both a willingness and an ability to pay? Willingness without ability isn't really demand is it?

Further, it does seem like only a technicality (and doesn't really affect the thrust of Donald Trump's original piece), but I would tend to agree with Mr Yogi that it's the increase of credit that permitted buyers not merely to have willingness, but to continue to have the ability -- which, against the odds, allowed that willingness to remain as demand for all those irrational years.

Ultimately, though, I think Donald Trump's text does deserve a wider audience.

Housing is different from, say investment in art, for example. Housing is shelter, a basic need for each participant in the economy. Thus a shortage is assured in any case. It only takes a small percentage of buyers to create a shortage of this essential, and then the supply of credit governs prices.

I would have thought that, if one permitted only one dwelling per family in the UK, there would be plenty to go around.

Edited by Toto deVeer
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HOLA449

There is obviously demand for good housing and there is competition for houses.

However, prices achieved out of this are almost wholly derived from how much people can borrow. Tweak lending multiples and prices will follow (much more fluidly in a rising market)

I just don't buy your argument that demand is a function of credit. Demand = willing to pay, credit = willing and able to pay.

But that's the whole point I'm making.

Desire = willing to pay.

Demand = willing and able to pay!

Without the necessary funds, demand does not exist - it is merely desire.

Hence when credit is increased, demand increases.

This is basic 'O' level economics...

Edited by Mr Yogi
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HOLA4410

But that's the whole point I'm making.

Desire = willing to pay.

Demand = willing and able to pay!

Without the necessary funds, demand does not exist - it is merely desire.

Hence when credit is increased, demand increases.

This is basic 'O' level economics...

yep

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HOLA4411

We might be dancing on the head of a pin here, but surely real demand requires both a willingness and an ability to pay? Willingness without ability isn't really demand is it?

It's certainly not dancing on the head of a pin; understanding this is crucial to understanding the nature of the law of supply and demand, and how it governs house prices in exactly the same way as it governs all other prices.

'Demand' is defined as the willingness and ability to pay for a particular thing. 'Supply' is the availability of that thing.

Both supply and demand in the housing market are influenced by many external factors; most notably availability of credit in the case of demand, and planning controls in the case of supply. Nothing can change the fundamental fact however, that it is the equilibrium of supply and demand that sets the market price at any one time.

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HOLA4412

But that's the whole point I'm making.

Desire = willing to pay.

Demand = willing and able to pay!

Without the necessary funds, demand does not exist - it is merely desire.

Hence when credit is increased, demand increases.

This is basic 'O' level economics...

I understand your logic, but I don't agree with your conclusion. Consider:

Price = f(demand,supply)

Correct? But given desire is constant:

demand = f(credit)

Correct? Therefore:

Demand is not an independent variable, in the end. Supply of credit is.

Therefore your ultimate conclusion is wrong.

Edited by Toto deVeer
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HOLA4413

Demand is not an independent variable, in the end. Supply of credit is.

Of course demand is a variable - it is influenced by many factors; the most important in the case of the housing market being the availability of credit.

Generally speaking, demand will rise proportionately to the availability of credit, all other things being equal.

It is the increase in demand that causes house prices to rise however. The increase in the availability of credit merely fuels demand.

And vice versa when credit is withdrawn.

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HOLA4414

Of course demand is a variable - it is influenced by many factors; the most important in the case of the housing market being the availability of credit.

Generally speaking, demand will rise proportionately to the availability of credit, all other things being equal.

It is the increase in demand that causes house prices to rise however. The increase in the availability of credit merely fuels demand.

And vice versa when credit is withdrawn.

I do agree that there are other very important independent variables associated with demand. This could include things like population, trends in divorce rates (or single households), and most importantly, taxation policy, which in the UK, is heavily biased towards home ownership.

However, what I illustrated above, in a simplistic way, is:

Price = f( supply of housing,supply of credit )

after substitution. Therefore I have to agree that the OP's article (and it's opening statement assertion) is spot on.

Edited by Toto deVeer
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HOLA4415

I do agree that there are other very important independent variables associated with demand. This could include things like population, trends in divorce rates (or single households), and most importantly, taxation policy, which in the UK, is heavily biased towards home ownership.

However, what I illustrated above, in a simplistic way, is:

Price = f( supply of housing,supply of credit )

after substitution. Therefore I have to agree that the OP's article (and it's opening statement assertion) is spot on.

At the risk of sounding pedantic, easy credit fuels demand. Demand fuels house prices.

This is a very simple fact and you can disagree all you want. You'd still be wrong, though.

Buy a basic economics text book.

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HOLA4416
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HOLA4417

So with the basic value of bricks and mortar embedded in property, supply and demand sets the price. This hasn't changed. Credit has already been reduced for the last 3 years and has dropped prices. Due to aspiration of sellers price reduction is a slow process. But there will be a bottom limit that prices can fall to due to reduced credit. I think we are almost there. Yes I think house prices will reduce further but it will be job losses reducing demand not lack of credit.

How much is a house actually worth. It is worth whatever someone is willing to pay for it!!!!

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HOLA4418

At the risk of sounding pedantic, easy credit fuels demand. Demand fuels house prices.

This is a very simple fact and you can disagree all you want. You'd still be wrong, though.

Buy a basic economics text book.

You are being pedantic.

You can certainly use your mythical and non-existent abstract term 'demand'.

I choose to live in the real world where things that can be measured, such as the supply of money, are relied upon.

Whilst the abstraction of demand is a conduit that leads us to the real, measurable factors, it does not exist in reality. Only the measurable factors do.

Perhaps you should extend your knowledge beyond 'O' level economics.

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HOLA4419

I would say reading your posts Toto that you are wrong in the assumption that things have to be bought on credit. Fair enough this is a bit abstract with something that costs as much as a house but at some point we will reach the point where we consider the cost of the bricks in the ground, save up, and buy it even if no credit were available. Fair enough prices would be reduced but there is a bottom level. The lowest price depends on credit but the price does not reduce to zero if no credit is available.

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HOLA4420
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HOLA4421

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.

I agree....but there is another factor to consider, the weakness of the pound and overseas available credit and purchasing power.....think of Spain and what happened there over the last 20 odd years....who pushed up their prices, not the Spanish and where did the credit come from? ;)

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HOLA4422

I agree....but there is another factor to consider, the weakness of the pound and overseas available credit and purchasing power.....think of Spain and what happened there over the last 20 odd years....who pushed up their prices, not the Spanish and where did the credit come from? ;)

But surely that isn't 'another factor', it's just an example of the factor

The model does have holes though

Much of what toto is saying is spot on imo, but i would add something

Notice that prices in some places weren't pushed up by credit avilable in the uk. This is because the borrower is chasing local economic activity when he buys real estate as an 'investment'. Less local economy , = lower prices. Also consider that the availability of credit is caused by a productive economy.

Edited by Stars
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HOLA4423

The price spiral of the last decade seems to demonstrate that property is a luxury good rather than a necessity good, and that it has an income inelasticity of demand of greater than one. What this means is that is that beyond that absolute barest minimum necessary for survival (i.e. it keeps the rain and wind off) property has no intrinsic value and the price of it will always increase somewhat above the overall increase in wealth. And, yes, the credit supply is a factor of wealth (the macroeconomic analogue to income inelasticity of demand is wealth inelasticity of demand). The implication is that the wealthier we get, either in terms of increase in GDP or expansion of the broad money supply, the more we spend on the "consumption" of property.

Sometimes it's hard to think we're not the subject of one of BF Skinners experiments.

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HOLA4424

But surely that isn't 'another factor', it's just an example of the factor

The model does have holes though

Much of what toto is saying is spot on imo, but i would add something

Notice that prices in some places weren't pushed up by credit avilable in the uk. This is because the borrower is chasing local economic activity when he buys real estate as an 'investment'. Less local economy , = lower prices. Also consider that the availability of credit is caused by a productive economy.

You are right people with money borrowed or not buy where they can get a regular income from it or they see there will be a demand for it when they come to sell it....why do people buy in a certain area? because there is a good local economy, good infrastructure, good jobs or say a good university or even an area of natural beauty that provides a good quality of life......the last option may become more important for people that have money, made from the sale of property or made from a successful business or other wise investments.....technology now means we are more able to work and study from anywhere and sell to anybody, so where there was once an area of high demand, that area may not be so in demand in the future. ;)

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HOLA4425

I would say reading your posts Toto that you are wrong in the assumption that things have to be bought on credit. Fair enough this is a bit abstract with something that costs as much as a house but at some point we will reach the point where we consider the cost of the bricks in the ground, save up, and buy it even if no credit were available. Fair enough prices would be reduced but there is a bottom level. The lowest price depends on credit but the price does not reduce to zero if no credit is available.

Yes you are right, it has been a generalization. It seems logical to me that in the absence of any credit (take my 10 buyers, 15 properties example) that the prices would be based upon available cash, rather than credit. But even in this case I would contend that the excess properties would be acquired by the two or three, and taken out of supply.

This is why I see the actual house price range falling somewhere between what would be supported by available credit and cash.

But under our elastic currency fiat system we must continually increase the supply of it and there must always be a money supply in the form of credit that is generally increasing. Otherwise there is a risk of collapse. Therefore I do not think that prices will ever again reach the cash-based price, unless the entire system collapses. But then price (or worth?) could be established by barter, as occurred when Chile's economy collapsed, and clapped out cars were being traded for flats in Santiago.

Edited by Toto deVeer
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