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House Prices Are Lead By An Inefficient Market

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Hi

I've come to think that because the supply of houses is restricted whilst credit has been extended and people have been allowed to have several mortgages house prices will always be in an "auction" situation.

An auction situation: demand exceeds supply so people have to bid against one another to secure the item rather than paying for the fundamental cost of the item.

If people could build freely in order to meet demand then houses would be worth the price of the land (there would not be a big difference between the price of land with and without planning as it would be easy to secure). Demand would have to be kept in line by only allowing people to own one primary residence.

Housing used to cost 3 times wages. This was because it cost that much to build a house. Productivity has increased. Houses should now cost under 3 times median wages for a basic house.

The restriction of supply means an inevitable auction situation. This means high borrowing for all participants. This means you have to pay back loads of interest to banks and also have a regular job where you work all hours so the government can take 30% of it (at least).

Productivity on everything has gone up. It used to be a man could work and provide for his family and his wife could stay at home. The efficiency on food production and clothing has gone up so now we are just left working all hours for housing.

Why does life have to be like this? If we had supply meeting demand in housing people could choose. If they want to dine out at fine restaurants and have an ipad they can work 5 days a week in a stressful job. If they want to spend time with their kids they can go work 3 days and have enough for food and clothing.

I believe that until housing supply meets demands there will be no HPC as the auction scenario plus near endless credit will always lead to people signing their lives away to get a house. People should be focussing more on planning law and on laws on multiple ownership. Anything else simply isn't going to see a return to fundamentals.

Interest rates is just fiddling at the edges. If they go up it will flush out the market causing a big dip but then you have to get a mortgage at the increased rate. You might fare a bit better if you have a big deposit but again this isn't the price correction due to the fundamental forces of supply and demand.

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Hi

I've come to think that because the supply of houses is restricted whilst credit has been extended and people have been allowed to have several mortgages house prices will always be in an "auction" situation.

An auction situation: demand exceeds supply so people have to bid against one another to secure the item rather than paying for the fundamental cost of the item.

If people could build freely in order to meet demand then houses would be worth the price of the land (there would not be a big difference between the price of land with and without planning as it would be easy to secure). Demand would have to be kept in line by only allowing people to own one primary residence.

Housing used to cost 3 times wages. This was because it cost that much to build a house. Productivity has increased. Houses should now cost under 3 times median wages for a basic house.

The restriction of supply means an inevitable auction situation. This means high borrowing for all participants. This means you have to pay back loads of interest to banks and also have a regular job where you work all hours so the government can take 30% of it (at least).

Productivity on everything has gone up. It used to be a man could work and provide for his family and his wife could stay at home. The efficiency on food production and clothing has gone up so now we are just left working all hours for housing.

Why does life have to be like this? If we had supply meeting demand in housing people could choose. If they want to dine out at fine restaurants and have an ipad they can work 5 days a week in a stressful job. If they want to spend time with their kids they can go work 3 days and have enough for food and clothing.

I believe that until housing supply meets demands there will be no HPC as the auction scenario plus near endless credit will always lead to people signing their lives away to get a house. People should be focussing more on planning law and on laws on multiple ownership. Anything else simply isn't going to see a return to fundamentals.

Interest rates is just fiddling at the edges. If they go up it will flush out the market causing a big dip but then you have to get a mortgage at the increased rate. You might fare a bit better if you have a big deposit but again this isn't the price correction due to the fundamental forces of supply and demand.

It does look rather like 'things are different this time' as the old saying goes. The structure of the housing market seems to have changed fairly radically since the falls of the 1990's.

However I'm still not sure about the impact of market psychology. No one likes to buy an asset when the prices are falling. Yet its the way to get a cheaper asset. So I think that sentiment could cause cyclicity to return. Having said that. Maybe a large number of properties hitting the market due to repo's would just get absorbed by renewed demand.

The number of negative supply factors appear to outstrip demand side factors now.

My own experience suggests we are only just starting to experience the down cycle psychology. The situation will be much clearer in a years time. With negative sentiment in the general economy it will be the toughest test for the theory you are espousing. There will be no 2005 style reboot of HPI by the government this time.

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It's a good theory, but we've had this system more or less forever, so it doesn't explaion the bubble.

What has changed is banking - so theres your culprit.

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The market is an auction. That is how resources are allocated.

Not so.

Resources are allocated by banks, which are isssued orders via the CB in the form of interest rates and other policies.

It's a central command economy with the commands cleverly hidden.

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The market is an auction. That is how resources are allocated.

What market?

The poor suckers who just want somewhere to live are forced to bid against the bottomless taxpayer purse and against newly-printed credit. That's no market!

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I would question a couple of your points. Firstly:

Housing used to cost 3 times wages. This was because it cost that much to build a house.

I would argue most of the available housing stock was first sold for far below 3x today's wages - the reason houses cost 3x wages is that was what the banks would lend.

The restriction of supply means an inevitable auction situation.

I would argue that supply is no more or less restricted than it used to be. In fact a while ago I calculated that the increase in housing stock since the bubble began, based on the average household size, has actually exceeded the population increase. Over this time, rents have increased in line with inflation, no more, what does that does that tell you about the supply of housing?

As others have mentioned, the blame lies almost entirely on the availability of credit. By 2007, around half of all mortgages were some form of self-certification (ie no proof of income required) and around a third were interest-only. Is it a surprise that prices rose as high as they did? Given that lending like this almost brought the entire financial system down, I can't see it returning for a very long time and even though the PTB may try their utmost to prevent it, it is why prices will eventually fall in line with sensible income multiples.

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It's a good theory, but we've had this system more or less forever, so it doesn't explaion the bubble.

What has changed is banking - so theres your culprit.

We are on the same page. The restriction of supply leads to an auction scenario. This means an appetite for more credit. Banks fill this need by increasing the available leverage. This can happen because on one side the government are restricting supply and on the other they are under-regulating banking.

However if I could self-build I would choose that over paying for an asset that has decoupled from wages in real terms. If you have a good supply of housing plus liberal planning laws no amount of loose credit would make people pay so far over the cost to build. So planning restrictions create a vacuum into which bank lending happily rode.

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The market is an auction. That is how resources are allocated.

It's not a true market. Imagine if the government controlled making new mobile phones and set the limit at 10M. You think you could get a crappy Nokia for a tenner on ebay then?

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We are on the same page. The restriction of supply leads to an auction scenario. This means an appetite for more credit. Banks fill this need by increasing the available leverage. This can happen because on one side the government are restricting supply and on the other they are under-regulating banking.

However if I could self-build I would choose that over paying for an asset that has decoupled from wages in real terms. If you have a good supply of housing plus liberal planning laws no amount of loose credit would make people pay so far over the cost to build. So planning restrictions create a vacuum into which bank lending happily rode.

Small point.

Credit isn't lending.

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Small point.

Credit isn't lending.

Hmm - it is in the sense I mean it.

There is a root cause to this. If you had liberal planning laws that met demand with supply and allowed self-build, restricted house ownership (no more than one per couple say) and you had loose lending on housing you wouldn't get where we today.

Yet before loose lending we had a supply problem and prices were rising, only not as bad.

So the root cause is planning and the subsequent catalyst is lending. If you don't get the root cause you can't fix the problem.

People are thinking too small on this. They want housing to be expensive again instead of an absolute fortune. I want it to be at-cost. The former is fiddling at the edges.

In an auction scenario the calculation for house prices is:

total wage less all food / energy / transport expenses == mortgage spend

This is because we are forced to declare what we can pay, not what the house is worth in absolute terms.

Under this formula it doesn't matter how productive society becomes. If we collectively add more value then we get paid more, so mortgage spend increases. If we become more efficient food / energy / transport costs decrease, again increasing the available amount for mortgage spend.

The auction scenario will shaft you whichever way you go because it absorbs all spare capacity, then the banks and government get to take a cut. Limiting lending multiples will help limit the effect of the "catalyst" but it will not sort out the root cause.

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Hmm - it is in the sense I mean it.

I don't think so, which is why i raised, but lets see.

There is a root cause to this. If you had liberal planning laws that met demand with supply and allowed self-build, restricted house ownership (no more than one per couple say) and you had loose lending on housing you wouldn't get where we today.

Well if we didn't parcel the earth into little strips called land then there wouldn't eb the issue at all, but go on.

Yet before loose lending we had a supply problem and prices were rising, only not as bad.

So the root cause is planning and the subsequent catalyst is lending. If you don't get the root cause you can't fix the problem.

People are thinking too small on this. They want housing to be expensive again instead of an absolute fortune. I want it to be at-cost. The former is fiddling at the edges.

In an auction scenario the calculation for house prices is:

total wage less all food / energy / transport expenses == mortgage spend

This is because we are forced to declare what we can pay, not what the house is worth in absolute terms.

Under this formula it doesn't matter how productive society becomes. If we collectively add more value then we get paid more, so mortgage spend increases. If we become more efficient food / energy / transport costs decrease, again increasing the available amount for mortgage spend.

The auction scenario will shaft you whichever way you go because it absorbs all spare capacity, then the banks and government get to take a cut. Limiting lending multiples will help limit the effect of the "catalyst" but it will not sort out the root cause.

But banks don't lend.

They extend credit.

That's why prices have gone north. While you are right about the issues to do with the land market (though your perspective is if you will forgive me, limited in scope) the fact is that banks once allowed to extend credit would bubble something. i'd rather end all bubbles than just end housing ones.

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I don't think so, which is why i raised, but lets see.

Well if we didn't parcel the earth into little strips called land then there wouldn't eb the issue at all, but go on.

But banks don't lend.

They extend credit.

That's why prices have gone north. While you are right about the issues to do with the land market (though your perspective is if you will forgive me, limited in scope) the fact is that banks once allowed to extend credit would bubble something. i'd rather end all bubbles than just end housing ones.

Hi - yes - that is seeing the big picture from a different perspective. We are in agreement that credit is a big part of the problem. Easy credit is creating insane issues.

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Hi - yes - that is seeing the big picture from a different perspective. We are in agreement that credit is a big part of the problem. Easy credit is creating insane issues.

Easy credit?

Credit full stop, I think.

The ability of banks to simply say they have resources when in fact they are insolvent and that being upheld in the courts is lunacy. But here we are.

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  • 338 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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