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CriticalEye

Lack Of Long-run View On House Prices In Oecd's Lates Report

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This week OECD published a report on the house price boom. The report is informative in many ways, and in particular I fancied the display of house price developements in almost all OECD countries. But their view on long run equilibrium prices puzzles me a bit as there seem to be very little focus on supply considerations. In particular they seem to think that, in the long run, prices will be higher the if interest rates stay low.

As I see it, as long as there is no shortage of land, in the long run house prices will be solely determined by construcion costs as entrepreneurs will enter the construction bussiness and boost supply to the point where margins disapair. At least this is the general IO result for markets with entry. However, as the number of new constructions is very low compared to the full housing supply, this takes time and in the mean time it is quite natural that prices boost. However, in the long run house prices should equal contruction costs, and these are truly lower the lower the interest rates!

Of course in many countries and major cities there may be a tightening shortage of land, but there is no such country considerations in the report and for many of the countries reviewed, like Norway and Sweeden, certainly there cannot be shortage of land (does anybody live there?). In Japan, where space is certainly scarcer, there has not been a price boom, and thus shortage of land does not seem to be the main story.

My prediction is that prices will decline to the level at which construction of houses started to boost. Should'nt this be the case?

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Of course in many countries and major cities there may be a tightening shortage of land, but there is no such country considerations in the report and for many of the countries reviewed, like Norway and Sweeden, certainly there cannot be shortage of land (does anybody live there?). In Japan, where space is certainly scarcer, there has not been a price boom, and thus shortage of land does not seem to be the main story.

OH NO! :o

You might get a response from one of our resident bulls... The pickled herring fingered King of the Castle... That is, unless some matador has put him out of his misery....

B)

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houseprice.JPG

Attached here is a timesseries of the estimated real price of housing i Oslo since 1840 (data was found at the home page of the central bank, www.norges-bank.no).

Over the period as a whole there is practically no trend at all.. I know that a similar times series for britain, allthough shorter (since 1950) displays a yearly growth rate of 2%, which is not much either.

Does this mean that prices will eventually come down?

It's a matter of time?

:rolleyes:

post-3645-1133977765_thumb.jpg

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Hey, no interest in my graph?

Ok, it's not the biggest capital in the world, but 160 years of real house prices are not that common.

I think the lack of trend here is quite interesting...

:blink:

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On the y-axis is a nominal house price index for Oslo divided by a consumer price index. Other than that I don't know exactly how to read the numbers. I do not know what is the base year or the measurement unit of the house price index, e.g. if it's for a certain type of appartment of simply average square meter price. But this is well dokumented on the central bank homepage, in the working paper section.

The challenges for these long series are really that the quality aspect of housing has changed during the period. And also the CPI is a bit hard to interpert. There wasn't many cars or pc's in the consumer price index in 1840. Anyhow, smart people has tried to correct for such features when constructing the indexes.

The reason for having interest in such a long series is really the observation that the real house price cycles are really huge in time span. Booms and bust periods lasts much longer than in the equity markets. Thus we need to compute a very long series to pin down the trend.. :o

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On the y-axis is a nominal house price index for Oslo divided by a consumer price index. Other than that I don't know exactly how to read the numbers. I do not know what is the base year or the measurement unit of the house price index, e.g. if it's for a certain type of appartment of simply average square meter price. But this is well dokumented on the central bank homepage, in the working paper section.

The challenges for these long series are really that the quality aspect of housing has changed during the period. And also the CPI is a bit hard to interpert. There wasn't many cars or pc's in the consumer price index in 1840. Anyhow, smart people has tried to correct for such features when constructing the indexes.

The reason for having interest in such a long series is really the observation that the real house price cycles are really huge in time span. Booms and bust periods lasts much longer than in the equity markets. Thus we need to compute a very long series to pin down the trend.. :o

Are you in Oslo?

I am in Sweden....... :)

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This week OECD published a report on the house price boom. The report is informative in many ways, and in particular I fancied the display of house price developements in almost all OECD countries. But their view on long run equilibrium prices puzzles me a bit as there seem to be very little focus on supply considerations. In particular they seem to think that, in the long run, prices will be higher the if interest rates stay low.

As I see it, as long as there is no shortage of land, in the long run house prices will be solely determined by construcion costs as entrepreneurs will enter the construction bussiness and boost supply to the point where margins disapair. At least this is the general IO result for markets with entry. However, as the number of new constructions is very low compared to the full housing supply, this takes time and in the mean time it is quite natural that prices boost. However, in the long run house prices should equal contruction costs, and these are truly lower the lower the interest rates!

Of course in many countries and major cities there may be a tightening shortage of land, but there is no such country considerations in the report and for many of the countries reviewed, like Norway and Sweeden, certainly there cannot be shortage of land (does anybody live there?). In Japan, where space is certainly scarcer, there has not been a price boom, and thus shortage of land does not seem to be the main story.

No, in all countries house prices grow in line with the money available to buy them.....so will grow in line with incomes and income multiples............eg ave price 50 years ago was £3800..........about 3.5 times the average salary........

Houses are more expensive in Japan than in New Zealand because of supply but in any given market increases in the supply of housing are too slow to affect prices in the short to medium term.............

So whatever happens to HPs over the next 10 years a change in the supply won't be behind it....

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But then the profit margins in construction just continue to rise, and more and more entrepreneurs will enter the market. Are there really limits to the number of houses that can be build in a coupple of years if building them is just profitable enough?

Has construction i Britain boomed in the last 10-5 years?

I have attatched a graph here. It shows nominal housing prices for Oslo divided by nominal gdp for Norway 1840-2003. This variable, which shows the historic developement in the cost of buying a house in income units, litterally drops to the floor. How do you explain that? :rolleyes:

hoseprice_income.bmp

It might be more instructive to view nominal gdp divided by the nominal house price index instead. It tells you the purchasing power in house units. It has been steadily increasing, but however been falling since the aftermath of the norwegian bank crisis in 1992..income_houseprice.bmp

hoseprice_income.bmp

income_houseprice.bmp

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  • 335 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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