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Housing Supply And Demand

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Almost every type of trade in the UK follows a sort of supply & demand type relationship - If things are cheap, then people will buy more of them; if things are expensive, then people will buy less of them.

This is because demand is flexible. If a pair of jeans are expensive, I can choose not to buy thm at all, buy a different brand, buy a pair of chinos instead (well, some people do, anyway!), or even buy a pair of shorts, or a skirt!

Hwever, in the housing market, then the demand side is fairly static. I need a place to live, whether that house is bought by a BTL'er or a FTB'er, is immaterial. Trading up, or moving, occurs, on average, fairly consistently, maybe on average once every 10 years.

The annual amount of house sales on this basis is then maybe around 750,000 per year. Sure, people can put off trading up, but that can only ever be a short term effect.

The fallacy is that house sales are driven by demand. Demand, as I propose above, is fairly static.

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The fallacy is that house sales are driven by demand. Demand, as I propose above, is fairly static.

I disagree.

1. Suppose houses only cost £1,000. Now i'd like a couple of holiday homes as well please. Suppose flats are £1,000 but houses £1 million. I think i'll "demand" a flat. Suppose flats are £100,000 but houses £150,000. I think i'll "demand" a house. So the type of property and quantity demanded is sensitive to price like anything else.

2. Demand includes ability to pay as well as willingness. If the bank will only lend you £100k not £150k, you still want exactly one house to live in, but now you can't pay as much for it. This drives prices down even though you still only want one house.

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Almost every type of trade in the UK follows a sort of supply & demand type relationship - If things are cheap, then people will buy more of them; if things are expensive, then people will buy less of them.

This is because demand is flexible. If a pair of jeans are expensive, I can choose not to buy thm at all, buy a different brand, buy a pair of chinos instead (well, some people do, anyway!), or even buy a pair of shorts, or a skirt!

Hwever, in the housing market, then the demand side is fairly static. I need a place to live, whether that house is bought by a BTL'er or a FTB'er, is immaterial. Trading up, or moving, occurs, on average, fairly consistently, maybe on average once every 10 years.

The annual amount of house sales on this basis is then maybe around 750,000 per year. Sure, people can put off trading up, but that can only ever be a short term effect.

The fallacy is that house sales are driven by demand. Demand, as I propose above, is fairly static.

I have been thinking about this recently but have come to a different conclusion.

In my opinion, the demand curve for housing have been making roughly parallel shifts to the right from about the late 1990s until about 2008 due to the following factors :

- Easy credit

- Speculative flows

The supply curve has made much smaller roughly parallel shifts to the right over the same time period due to two factors :

- Demographics

- Restrictive planning

The net result was that we saw rising prices and increasing volumes from a market that was roughly in equilibrium.

Since 2008, the demand curve has made parallel shifts back to the left due to a reversal of the two factors that caused it to shift to the right. The supply curve continues to inch further left.

The net result is seller's expectations and buyers demands have left the market in disequilibrium since 2008. The problem will only get worse as the point of market equilibrium continues to drift lower (in terms of both price and volume) as the demand curve will continue to shift to the left.

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Value and Scarcity are a Man Made illusion. If Supply is restricted for the betterment of thieves, then Demand is not possible. Upon this price system, the monetary system was created.

Just as the present day planning system, based upon the theft of Land, via acts such as the Enclosures act, exists to keep us in serfdom. But Land had to be stolen in the first instance, to enable its existence. Hence 'Property is Theft'

This land was common land, before it was stolen, by parliamentary landowners, for purposes of 'agriculture' [Personal Profit]

Our Government, and ruling classes, have a long history of protecting this corruption, including performing many horrendous murders of their own citizens.

Which I'm sure they would do again, if pushed hard enough.

Only 1.3% of inhabited UK land is residential land.

To work our entire lives to pay for a handful of bricks and mortar, on a piece of land which should be yours anyway is ludicrous.

And now even that has been taken away from us.

We are now expected to work our entire lives, for nothing. No capital, to pay off the banks assets, in effect, working to pay for other peoples houses.

The only sane reaction to this is anarchy

Edited by Milton

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I disagree.

1. Suppose houses only cost £1,000. Now i'd like a couple of holiday homes as well please. Suppose flats are £1,000 but houses £1 million. I think i'll "demand" a flat. Suppose flats are £100,000 but houses £150,000. I think i'll "demand" a house. So the type of property and quantity demanded is sensitive to price like anything else.

2. Demand includes ability to pay as well as willingness. If the bank will only lend you £100k not £150k, you still want exactly one house to live in, but now you can't pay as much for it. This drives prices down even though you still only want one house.

I agree, if you had such extremes as you propose in (1) then yes demand does rise.

However, back in the real world, that's never going to happen.

wrt. (2), I see it as having three components - want, need and ability. I was really only looking at the 'need' aspect. Just because people can't afford a place (ability) does not mean that the demand is not there. There is still the same amount of demand, just no sales to go with it. The solution (in the caser of housing) of course, is better affordability, not more lending.

I take your point regarding second homes, there's also population increase. However, these I would suggest are relatively minor components to the whole demand issue.

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In the short run, credit price and availability are the major determinants of demand.

Whilst physical supply and demand are key factors in the long run, the rate of house formation and building is barely perceptible compared to the existing stock over a shorter period like a year.

There is probably also an important 'Gifford good' element; people's willingness to buy houses can even increase as they see prices climb.

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wrt. (2), I see it as having three components - want, need and ability. I was really only looking at the 'need' aspect. Just because people can't afford a place (ability) does not mean that the demand is not there. There is still the same amount of demand, just no sales to go with it. The solution (in the caser of housing) of course, is better affordability, not more lending.

The "need" part only really goes as far as a roof over your head, and the same roof can cover several people. The "need" part is easily met (otherwise there would be a lot more people living on the streets), but the desire for a bit more space to yourself pushes the demand for more than that upwards.

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I agree, if you had such extremes as you propose in (1) then yes demand does rise.

However, back in the real world, that's never going to happen.

wrt. (2), I see it as having three components - want, need and ability. I was really only looking at the 'need' aspect. Just because people can't afford a place (ability) does not mean that the demand is not there. There is still the same amount of demand, just no sales to go with it. The solution (in the caser of housing) of course, is better affordability, not more lending.

The extremes in (1) just serve to make the point clearer. The theory doesn't need extremes to play out - as proven by the fact that, in reality, some people already do own a holiday home. The lower property prices, the more people would buy one. The exact price at which they'd be willing and able to buy is different for each person, of course.

In Economics, demand is tied to price, and is not about need at all - just about ability and willingness. A transaction will take place if the current price is at or below the level you are willing and able to pay (regardless of whether you need the item - look how much tat is bought and thrown away unused). If not it won't. If the current price is above the level you are willing and able to pay your demand for the commodity at that price is zero.

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I have been thinking about this recently but have come to a different conclusion.

In my opinion, the demand curve for housing have been making roughly parallel shifts to the right from about the late 1990s until about 2008 due to the following factors :

- Easy credit

- Speculative flows

The supply curve has made much smaller roughly parallel shifts to the right over the same time period due to two factors :

- Demographics

- Restrictive planning

The net result was that we saw rising prices and increasing volumes from a market that was roughly in equilibrium.

Since 2008, the demand curve has made parallel shifts back to the left due to a reversal of the two factors that caused it to shift to the right. The supply curve continues to inch further left.

The net result is seller's expectations and buyers demands have left the market in disequilibrium since 2008. The problem will only get worse as the point of market equilibrium continues to drift lower (in terms of both price and volume) as the demand curve will continue to shift to the left.

Luckyone, how about this possibility

in a bubble, demand goes up as prices go up, we have seen this bizarre sentiment when amateur investors/speculators felt reassured that an investmnet flat was very expensive

therefore in a bubble, imho, the demand curve inverts, thereby pushing the new equilibrium price far off to the right and leading to the precipitous price rises we see in a bubble (happening to gold now imho) - ie both the demand and supply curves become positive slopes and intersect a long way off to the right, whereas normally the demand curve has a negative slope.

In my opinion, thinking how this equilibrium point balances, this means that the limiting factor on house prices under this equilibrium scenario is availability of funding - at the far right of the graph, builders have gone into overdrive building, say, town centre apartments, and are requiring a certain price to pay for them as they have pushed into more costly building territory in order to be able to build so many (brown field sites, needing to build new infrastructure, etc etc), whereas at the far reaches of the demand curve, buyers cannot pay that much more for this extra inventory because new buyers entering the market at this stage are not liquid enough, and lenders are maxed out on their ability to lend; it is not ability to service the debt that is limiting, as in a normal demand curve, but ability to raise the debt in the first place which has a positive increment with price since lenders have psychologically bought into the bubble too, hence the curve is inverted.

of course when this point came about in 2003 the BoE/govt fixed this by lowering rates and increasing public sector borrowing and housing benefits, but at some point the music stops (money simply runs out), and the demand curve un-inverts (this is happening now in peoples' perceptions as they consider the real value of houses) and you get a mighty snap back as the equlibrium point switches position quickly, which is what the BoE and govt are trying to control

edit: and I also feel that the resulting position of the un-inverted demand curve will be further to the left than it was to start with, due to the build-up of debt

Edited by Si1

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Of course credit is part of the answer. Indeed, short term it is the biggest mover as demographics are quite slow, as is any meaningful change to overall supply.

And in terms of how the market behaves, it is very similar to stocks or commodities traded in the markets....just much slower.

The first part of price weakening is a lack of buyers at current prices and sellers unwilling to sell at lower prices believing that they can get a better price.

And hence volumes can drop off a cliff until one or other of the sides of the trade gives in.

Direction is important for deciding future price moves.

But that is not "demand" in the VI sense of the word. the base demand is peoples need to have accommodation, which is relatively constant.

The "demand" that you talk of (and I happen to agree with) is the demand that is purely driven by the banks willingnesss to lend.

Shouldn't policy therefore be driven to maintain sales of houses, rather than price? The need for housing remains constant, so if sales are kept at an (averaged) constant, then the price would then reflect a true market value.

At the minute, sales are particularly low, so banks should not be shy in repossessing, dropping prices, and getting the sales volumes back to a base level?

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Luckyone, how about this possibility

in a bubble, demand goes up as prices go up, we have seen this bizarre sentiment when amateur investors/speculators felt reassured that an investmnet flat was very expensive

therefore in a bubble, imho, the demand curve inverts, thereby pushing the new equilibrium price far off to the right and leading to the precipitous price rises we see in a bubble (happening to gold now imho) - ie both the demand and supply curves become positive slopes and intersect a long way off to the right, whereas normally the demand curve has a negative slope.

In my opinion, thinking how this equilibrium point balances, this means that the limiting factor on house prices under this equilibrium scenario is availability of funding - at the far right of the graph, builders have gone into overdrive building, say, town centre apartments, and are requiring a certain price to pay for them as they have pushed into more costly building territory in order to be able to build so many (brown field sites, needing to build new infrastructure, etc etc), whereas at the far reaches of the demand curve, buyers cannot pay that much more for this extra inventory because new buyers entering the market at this stage are not liquid enough, and lenders are maxed out on their ability to lend; it is not ability to service the debt that is limiting, as in a normal demand curve, but ability to raise the debt in the first place which has a positive increment with price since lenders have psychologically bought into the bubble too, hence the curve is inverted.

of course when this point came about in 2003 the BoE/govt fixed this by lowering rates and increasing public sector borrowing and housing benefits, but at some point the music stops (money simply runs out), and the demand curve un-inverts (this is happening now in peoples' perceptions as they consider the real value of houses) and you get a mighty snap back as the equlibrium point switches position quickly, which is what the BoE and govt are trying to control

edit: and I also feel that the resulting position of the un-inverted demand curve will be further to the left than it was to start with, due to the build-up of debt

I have wondered about this too : did houses become Giffen Goods where demand actually rose when prices rose or did the demand curve shift massively to the right because of speculative flows and easy credit?

Is the normalisation on the demand side since the peak of the bubble the result of a normalisation of a Giffen Good or a massive shift back to the left of the demand curve because speculative flows stopped and credit conditions tightened?

In the end, the answer is only really theoretical. We know for sure that the pre 2008 equilibria are gone forever. The new equilibrium is at lower prices and lower volumes. We are nowhere near a new equilibrium yet.

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Strange that the supply 'fundamental' doesn't apply to that sparsely populated country known as China:

Ghost Towns

Why strange? It didnt apply to ireland or spain either.

Or is it that the fundamental of demand didnt change but housebuilders got carried away and forgot about that minor detail?

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I have wondered about this too : did houses become Giffen Goods where demand actually rose when prices rose or did the demand curve shift massively to the right because of speculative flows and easy credit?

This.

People speculated, beleiving they were on to a "sure thing" and the banks bankrolled their folly.

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This.

People speculated, beleiving they were on to a "sure thing" and the banks bankrolled their folly.

So you agree - it's demand, in the credit availability sense, rather than the housing need sense?

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  • 331 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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