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The Old 'supply And Demand' Line

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Just a thought whilst listening to Monday(?)'s Radio 4 programme and all the talk of supply and demand.

If 'Supply and Demand' is what is keeping house prices at these levels and causing only the very small slides we have seen to date, why is demand radically different to demand back in 1990?

The UK population as increased by 3.8 Million since 1995 when house prices bottomed out. Looking at the number of new builds you see in every city in the UK, there must be at least a couple of million new properties on the market since then, (I cannot find any stats on this) meaning the number of houses per capita has not moved up much. The divorce rate in the UK has fallen from around 1.3% to 0.9% in that time, so unless I am missing something, I cannot see that the demand for number of households vs number of homes would have increased.

Are there any statistics on the number of actual 'homes' or 'households' in the UK? I could not find anything on the ONS.

So, really what is driving this 'demand'? Second homes? Banks still lending more than they did in 1990? Parents surrendering their 'nest egg' to their kids to get them 'on the ladder'?

Or is Supply and Demand a complete cop out by those trying to explain the current house prices trend?

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It's a minor component at best, although some people still want to use it as an excuse to build over yet more of the country. In some places there's a supply issue, that's true, and such places will usually be more expensive than places with greater supply (quality notwithstanding), but the shape of increases and decreases is pretty much the same wherever you go. In other words yes, it does affect prices, but it's got little or nothing to do with the bubble.

That said, I would be interested in seeing graphs of population, occupancy rates, and building and demolition rates if any has got them.

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So, really what is driving this 'demand'? Second homes? Banks still lending more than they did in 1990? Parents surrendering their 'nest egg' to their kids to get them 'on the ladder'?

Or is Supply and Demand a complete cop out by those trying to explain the current house prices trend?

BTLers getting liar loans to buy properties at inflated prices.

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BTLers getting liar loans to buy properties at inflated prices.

Assuming you mean Self Cert mortgages?

Are self cert mortgages still available though? I thought the 'Liar Loans' thing died in the fallout of the banking crisis a few years ago?

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...is Supply and Demand a complete cop out by those trying to explain the current house prices trend?

1. Yes, using 'S&D' as an explanation is entirely meaningless.

2. The price of every good or service that has ever been sold [other than unusual cases of rationing and so on] was set by supply and demand.

3. It follows from 2. that bubble prices were indeed set by the forces of supply and demand.

4. But as has been explained on here a gazillion times or so, the demand for property ownership is determined by a wide range of factors, most of which can and do go up as well as down [unlike the UK’s population, which is, consistently, slowly but surely growing]. These factors include laxity of lending [which is very significantly down on 2007 levels], general exuberance & speculative mania [ditto], interest rates [which unfortunately have gone down a lot, thereby tending to increase demand and also choke supply] , government subsidies which serve to inflate demand for home ownership [which unfortunately hasn’t yet gone down by nearly as much as it should have done], etc.

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Or is Supply and Demand a complete cop out by those trying to explain the current house prices trend?

I sincerely hope these people are just thick. Yes, I'm sure that if the banks were willing and able to supply the large amounts of mortgage lending that current houseprices demand, then HPC could be put off for ever.

I'm sure that if employers were willing to supply the wage increases to match inflation that people would like (but don't demand unless they are bankers), then HPC could be put off at least in nominal terms.

The supply has to be affordable or it's meaningless to talk about demand. Free Ferraris all round time...

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The reason that house prices will not drop much further is more to do with supply than demand. The majority of sellers will not sell if they cannot get a buyer to offer them what they consider to be the market price for their home. Why should they sell when they dont have to ?

If a buyer is looking to buy at rock bottom price that provides a compelling case as an alternative to renting, why would a seller sell when they are either going to have to buy another house or rent one ?

Unless they're forced by circumstances (more kids, lost old job and new one is in another town etc.), which was surely the main driving force for people selling in the past before the market went crazy? Then there are the houses dropping out of the top of the chain as people die; many people won't want to hang on to them and will prefer to sell, and probably won't be quite as concerned with getting what it's "worth". It probably adds up to a slow drop, not the quick crash many are hoping for.

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Surely its the availability of credit relative to wage multiples that drives price?

Although interest rate driven level of repayment affordability drives the issue as well, I might well be able to borrow 3.5-5 times my salary, but if the repayments mean too much of a change in lifestyle I might only want to borrow 2x.

A millionaire with a huge pot of cash is always going to be able to outbid someone on a wage driven multiple of credit, but if the multiple skyrockets then said millionaire may decide he doesn't want to pay that much for the property in question?

So logically available credit drives prices more than supply?

As far as I can see there is far more supply than (credit assisted) demand at the moment.

:edited to add payment affordability.

Edited by SirGaz

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The theory of supply and demand says "the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers" (Wikipedia) right now it's at a point where it is yet to settle and when it does settle, transactions rise, then it'll be at a point where prices are lower. Transactions are low because there is a mismatch of buyers and sellers which is not letting it settle.

Edited by cica

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Yes there will always be a minority of forces sales or deceased estates etc and as you say they are dip feed and will not have much of an impact. The plus side of the forced seller is that they cannot leave the market they must either buy or lease the same product from the same market after the sale.

As has been stated in other threads, the current situation (IMO) of 'if we can't get what we want we wont sell' is a temporary market anomaly - people are able to put their lives on hold for a certain amount of time but you cannot maintain this status quo for long: what about all those couples that plan / have started to have families? When one child becomes 2 or 3? What about those who are just about clinging on at the minute and whose job is in the public sector? What about those losing their jobs? There are lots of reasons why eventually people need to sell up - most of them can temporarily not do so because of ZIRP or are putting their lives on hold but it is not a medium or long term position.

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The reason that house prices will not drop much further is more to do with supply than demand. The majority of sellers will not sell if they cannot get a buyer to offer them what they consider to be the market price for their home. Why should they sell when they dont have to ?

If a buyer is looking to buy at rock bottom price that provides a compelling case as an alternative to renting, why would a seller sell when they are either going to have to buy another house or rent one ?

...quite simple really they sell at a certain percentage drop and buy at the same percentage drop....they will only sell if they drop the price and they will only buy if the seller drops their price....lower prices = less debt so everyone wins. ;)

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The reason that house prices will not drop much further is more to do with supply than demand. The majority of sellers will not sell if they cannot get a buyer to offer them what they consider :lol: to be the market price for their home. Why should they sell when they dont have to ?

The problem with your argument is that you fail to recognise that the market will be dragged down by those that have to sell, (and will) which I would imagine is a greater force than those that don't (and won't)

IMO, for your argument to make sense, a higher percentage of sellers would have to fall into the category "Selling, but don't have to sell"

In fact, would you mind listing some reasons why someone would have their house on the market if they didn't have to sell it?

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But I could present the same argument from the point of view of those above that must buy. For them that must buy they must find a willing seller and this is what keeps the market where it is. Once they have found a willing seller then that is the market price. Those that must bale in a hurry have the benefit of this level and will sell at that level or only slightly below it even though in theory they would go much lower they dont need to thanks to the floor in prices supplied by the owners that wont sell.

How do non-sellers put a floor in the market? Do they do this by keeping the number of transactions down?

I'm confused.

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Market price is the price that a willing seller will sell a house to a willing buyer. It is not set by misguided would be buyers.

You have to put yourself in the shoes of the seller not the buyer.

So on a street of identical houses all 'worth' (to the owners) £200k, say someone on the street has to sell but can't until they reduce the price to £170k.

You're saying everyone elses house is unaffected and they're still worth £200k because they don't have to sell?

Surely market price is set by both seller and buyer?

Edited by Reck B

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Market price is the price that a willing seller will sell a house to a willing buyer. It is not set by misguided would be buyers.

You have to put yourself in the shoes of the seller not the buyer.

You seem to be trying to have it both ways, but your argument boils down to "prices won't drop because people won't sell at low prices". So... prices are set by the things that don't sell - how does that work exactly?

Just out of curiosity, why do you seem to want house prices to stay so high? What is your situation?

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No if in the above case the seller sells at 170K then thats the floor.

Because there were no buyers at the aspirational price of £200k

There were buyers at the price of £170k. (the market price), set by the buyers ability to buy and the sellers need to sell.

Of course this is a very simple example and there are other factors affecting buyers ability to buy such as mortgage availability, rates, deposit requirement (all of which aren't going to be helping maintain the market either.)

Still, If all sellers just hang on in there, whilst unemployment, interest rates and inflation ravage their ability to service the mortgage and hold onto the comforting belief that their house will never be worth less than £200k, the market will never crash. :D

Edited by Reck B

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Most people buy houses with debt. So whilst the supply and demand for houses can be important. What is more important is the demand and supply of the debt that is required to buy them with.

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House prices did crash between mid 2008 - early 2009

S+D can be lots of things. Supply of cheap and easy credit, demand from the speculative quarter dependant on that cheap and easy credit.

While credit is similar to trough levels, low rates now means very few forced sales. The actual value of credit now going into the housing market is about right, trouble is, activity should be twice what it is, and consequently prices half what they are.

Kirsty et al argue simply population growth = house price growth. It isnt that simple.

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The supply & demand mantra is and always was utter gash.

It's also the reason why mindlessly building hundreds of thousands of new homes won't work either.

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If that was the case then prices would be dropping at a significant rate.

That (hopefully) will happen in time, The CV2 area of Coventry has 90+ pages of propertys for sale on Rm alone, ranging from 400k+ to under 60k, the fact that the banks are not 'apparently' lending at vast multiples of wage income means that most buyers cannot get the credit required to pay the inflated prices, the market is at the moment, very stagnant, only until prices drop to available credit levels and harmonise ie. the sellers next property drops accordingly, nothing is going to happen and the market will continue to stagnate.

The whole 'supply and demand' argument is fundamentally flawed.

In fact I think the supply and demand issue is only valid if everybody had essentiallythe same amount of cash/credit to buy with.

When the determining factor of how much credit you can get is truly down to how much you've saved, how much you earn, and how much you are willing to commit to repaying long term then prices will reflect earnings much more closely, and thats no bad thing!

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Dont get to carried away with your fictitious scenario most of us would never have the opportunity to buy like that ever.. You are once again assuming that all sellers are desperate this is not the case forced sellers are by far a minority of the market and for your example above there will be far more streets where this is not the case and there will also be streets where the next house sells for 210k.

I never assumed that all sellers are desperate to sell. IMO It will only take a small percentage. A percentage which will grow, over time, through rate rises, redundancies, lending restrictions etc. Also, with the already low volume of sales, these few forced sales will be amplified onto the rest of the market.

Out of interest, what percentage of the houses up for sale on the market right now are being sold by those who don't need to sell?

Becasue the market prce is set by actual sales and nothing else. So if sellers are not prepared to sell at lower prices than yesterday the market price cannot be dropping can it ?

Is this not a contradiction?

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The reason that house prices will not drop much further is more to do with supply than demand. The majority of sellers will not sell if they cannot get a buyer to offer them what they consider to be the market price for their home. Why should they sell when they dont have to ?

If a buyer is looking to buy at rock bottom price that provides a compelling case as an alternative to renting, why would a seller sell when they are either going to have to buy another house or rent one ?

i kind of think this is a pretty rubbishy argument, to be honest... historically most of the really big global real estate bubbles have burst [ireland & japan being two of the biggest & most obvious ones] and this kind of sibley-style "sellers won't sell for less than they think it's worth" argument did not apply one iota less in those markets... everyone who's ever selling anything is always looking to get a high price... if one is looking for a reason for why the UK real estate bubble is 'different' other explanations such as 'frankly our prices didn't go up nearly as quickly or as high as in japan or ireland' or 'we have ZIRP, ireland didn't', 'japan had deflation, we don't' or even 'we have decent population growth and we're building very little' are fare more plausible than the sibley line.

Edited by the flying pig

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Most people buy houses with debt. So whilst the supply and demand for houses can be important. What is more important is the demand and supply of the debt that is required to buy them with.

+1

I'm guessing here that one of the underlying assumptions of the classic Supply and Demand curve is that the amount of money available in the system is fixed

To make sense in a real world situation the S&D curve for housing would have to be adjusted to reflect changes in the money supply

Edited by Charlton Peston

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For the sake of the argument lets say that the average home seller has 30% equity at current fair market value, and lets say that they have owned their home for 7 years. This means that the mortgage would have been taken out seven years ago as well. This is the average sellers position that a buyer must negotiate with.

I dont know what % of listings on the market must be sold I would guess a figure of 10%.

Let's say, let's say...! Let's say an example which includes rosy assumptions to support my opinion without backing it up with any evidence. that way, I'll always be right. ;)

'If' the average equity held by homeowners with their houses on the market is 30%, What good is an equity cushion of 30% if there's no income to pay the remaining 70%?

How much of this 30% equity cushion has magically appeared over the 7 years of HPI fueled by a credit boom and how much will magically disappear when(imo) it deflates again.? Without HPI, 7 years of mortgage payments on 200k at 5% will reduce a mortgage to what... £190K? what i'm driving at here is a huge percentage of equity isn't real. It was real when it suited the banks and the Labour Party. now it's gone. People don't yet realise it's gone because they don't have to call upon it. Your sellers who don't-have-to-sell-so-don't, can carry on thinking they have the comfortable blanket of equity around them and that they won't sell for under £200k. They'll realise when its remo/selling time and the valuer says "£170k - your neighbours sold their identical property for this last week."

I dont know what % of listings on the market must be sold I would guess a figure of 10%.

I guess it depends what is meant by 'must' in this instance. If must means "a fair to strong requirement to sell a house within xx months" that 10% looks more like >50%, imo.

There can't be 90% of people marketing their houses to "just see what I can get and if it doesn't hit my valuation I won't sell."

Edited by Reck B

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  • 312 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
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      • up 5%



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