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CunningPlan

The Effect Of Demand (As Understood By A Simpleton)

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Ok, been reading a lot of these threads recently and I think I am getting to grips with how it works.


Discussing this with others whilst keeping within their logic and assumption range is not so easy.


I understand that stating ‘it’s demand and supply, innit – more demand means higher prices’ is heresy statement #1.


This is my simplistic view.


Price is not set by how much people want a house. It is set by how much someone is prepared to lend them to buy a house. If 5 people wanting to buy a house have identical salaries, and can achieve a loan of 4x salary, that will be the price. (ignoring BTL, Parental help etc)


If a sixth person is able to borrow 5x salary, he will become the buyer and set the new price for that type of property. The others will now need to find a 5x loan if they wish to buy. 5x becomes the new norm.


Alternatively, if one of the original 5 inherits £30k, he will become the buyer, meaning that the price is now 4x salary plus £30k for future transactions.


This explains why my parents could buy on 3x – that was all anyone could get and therefore set the price. As soon as it became 3x joint, singles were priced out as were those with stay at home partners. A joint salary became necessary to pay the new prices effectively created by the change in lending criteria..


This is all great on paper but does not satisfy my mythical pub mate. He will still say that demand MUST be having an effect since he has an economics CSE.. After all, the population is rising and so are prices; therefore one is the cause of the other and he will not be swayed from this. Since population is forecast to keep rising, so will prices.


My take is that demand is having an effect but not on actual houses prices. The big effect is housing quality. There is an argument that we are not building enough houses but since the homeless are not increasing at the same rate as the population they must be going somewhere.


What is happening is the current housing stock is becoming far more ‘efficiently’ utilised. There must be, on average, more people per house, more people per bedroom and also more people per sq metre of property to accommodate the population growth. This is why so many more people still live with parents / share or live in the rapidly growing number of HMO sh**holes.


My mythical pub mate’s eyes have now glassed over (could be the conversation, could be the 3 pints of stella) so I need something for him to try and remember.


Availability of Funding is what sets the price. Demand sets the quality of what is available.


Has anyone got a better way of explaining this to the hard of thinking?

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Availability of Funding is what sets the price. Demand sets the quality of what is available.
Has anyone got a better way of explaining this to the hard of thinking?

"demand" in the economic sense is purchasing power, not desire or aspiration. I would really like a Ferrari F40 but since I lack the 1/2 million odd quid to buy one, my desire doesnt translate in to economic demand.

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I'd say keep it simple - supply and demand of credit sets house prices because access to credit creates effective demand (i.e. demand that can be realised in an actual purchase) at higher prices - and then let your hypothetical pub mate ask questions. I think the idea of 'quality' needlessly complicates the issue and the idea that we're using our housing stock more 'efficiently' overall isn't really accurate. Yes many people are living in very cramped conditions, but if we compare the number of bedrooms per household with the occupancy rate in Homeownership and renting in England and Wales - detailed characteristics then it seems clear that the current housing stock is pretty adequate to the current population, it's just misallocated:

figure3_tcm77-316383.png

figure4_tcm77-316386.png

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Demand/overcrowding sets the quality but can also be a factor in setting a house price if say 10 people x the rent is more than the normal say 2 people x the rent. It's a bit like the effect of joint incomes in house purchase.

Even allowing for the per person rent in an overcrowded house being much less than the normal situation the total rent of 10 can add up to significantly more than the total rent of 2. Otherwise why do it.

So there could be a situation where the quality is poor but the house is relatively expensive (expensive reflecting the total rent possible due to overcrowding).

As there are about 600,000 immigrants each needing immediate accommodation (emphasis on the word immediate) that could mean 120,000 new overcrowded houses a year (if at say an average of 5 to a house). Some will occupy the 300,000 emigrants houses of course and maybe some will be less crowded than others. So the areas where overvaluation is as a result of more people per house although currently relatively localised will tend to expand quite rapidly every year. Then there's the general increase in population which will have a more gradual effect.

Accepted that funding (credit) levels is the main factor by a long chalk.

Edited by billybong

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This particular confusion between the idea of demand as what people aspire to as opposed to what they can actually afford is just the tip of a vast and depressing iceberg of absurdity when it comes to matters economic.

The sad reality is that most people do not have a clue how the system works and that seems to include people who work in the financial services sector. It's a startling fact that about a year ago the Bank of England felt it necessary to publish on it's website a document explaining how money is created ex nihilo by private banks- something that one might have expected the type of person perusing the Bank of England's website to be very aware of in the first place- but apparently not.

So don't be too hard on your mythical mate down the pub- he is in good company because it seems that even the majority of 'experts' in the field of economics are in the dark as to some very basic facts- such as how money is created in the modern economy.

The PDF can be viewed here;

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf

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My take is- Like many myths it has an element of truth. Supply and demand is important in so far that for upwards pressure to exist you need a situation of scarcity. Our leaders ensure this situation is preserved via mss immigration and planning laws. However to be clear prices can fall with scarcity still an issue if credit restrict.

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I'm just watching, a place in the su: summer sun.

I kid you not, the presenter/estate agent said, something like, prices here have only collapsed 30% here since the recession due to the high demand.

there you go, demand matters not when people aren't prepared to pay insane asking prices, despite high demand :lol:

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Ok, been reading a lot of these threads recently and I think I am getting to grips with how it works.

Discussing this with others whilst keeping within their logic and assumption range is not so easy.

I understand that stating its demand and supply, innit more demand means higher prices is heresy statement #1.

This is my simplistic view.

Price is not set by how much people want a house. It is set by how much someone is prepared to lend them to buy a house. If 5 people wanting to buy a house have identical salaries, and can achieve a loan of 4x salary, that will be the price. (ignoring BTL, Parental help etc)

If a sixth person is able to borrow 5x salary, he will become the buyer and set the new price for that type of property. The others will now need to find a 5x loan if they wish to buy. 5x becomes the new norm.

Alternatively, if one of the original 5 inherits £30k, he will become the buyer, meaning that the price is now 4x salary plus £30k for future transactions.

This explains why my parents could buy on 3x that was all anyone could get and therefore set the price. As soon as it became 3x joint, singles were priced out as were those with stay at home partners. A joint salary became necessary to pay the new prices effectively created by the change in lending criteria..

This is all great on paper but does not satisfy my mythical pub mate. He will still say that demand MUST be having an effect since he has an economics CSE.. After all, the population is rising and so are prices; therefore one is the cause of the other and he will not be swayed from this. Since population is forecast to keep rising, so will prices.

My take is that demand is having an effect but not on actual houses prices. The big effect is housing quality. There is an argument that we are not building enough houses but since the homeless are not increasing at the same rate as the population they must be going somewhere.

What is happening is the current housing stock is becoming far more efficiently utilised. There must be, on average, more people per house, more people per bedroom and also more people per sq metre of property to accommodate the population growth. This is why so many more people still live with parents / share or live in the rapidly growing number of HMO sh**holes.

My mythical pub mates eyes have now glassed over (could be the conversation, could be the 3 pints of stella) so I need something for him to try and remember.

Availability of Funding is what sets the price. Demand sets the quality of what is available.

Has anyone got a better way of explaining this to the hard of thinking?

House prices, like all prices, are set by supply and demand. It's just that supply of land is essentially fixed, and so irrelevant, compared to the demand for an unearned rental income, which is limited only by the lending policies of banks.

As has already been said, demand means desire backed by the ability to pay, so increased mortgage lending is increased demand.

In other markets, such as the market for cars, lending money to people will result in more goods being produced and prices won't be affected as much. Useful land in places with good jobs cannot easily be produced, so prices must rise.

Effectively, the limited supply of houses is auctioned off to the highest bidder, and all the bidders have massive bank loans.

Don't bother arguing from theory though. It is a simple fact that there are more houses, per person, than ever so the housing crisis cannot be about population growth, because the total number of houses has kept pace.

How can there be a housing shortage when so many people have two or three or more?

Edited by BuyToLeech

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House prices, like all prices, are set by supply and demand. It's just that supply of land is essentially fixed, and so irrelevant, compared to the demand for an unearned rental income, which is limited only by the lending policies of banks.

As has already been said, demand means desire backed by the ability to pay, so increased mortgage lending is increased demand.

In other markets, such as the market for cars, lending money to people will result in more goods being produced and prices won't be affected as much. Useful land in places with good jobs cannot easily be produced, so prices must rise.

Effectively, the limited supply of houses is auctioned off to the highest bidder, and all the bidders have massive bank loans.

Don't bother arguing from theory though. It is a simple fact that there are more houses, per person, than ever so the housing crisis cannot be about population growth, because the total number of houses has kept pace.

How can there be a housing shortage when so many people have two or three or more?

UK house prices are #### all to do with supply and demand and everything to do with a ponwified speculative investment bubble.

the housing market supply and demand based prices ended around 2002 and have already destroyed the banking system once.

the next collapse night well cause even worse.

Edited by TheCountOfNowhere

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In this country, we have a cartel of land owners, nimbies and investors who control land use.

There is no market, just control, by vested interests .

Prices at the moment are set by a very small number of people who are buying the very few houses coming to the market.

As far as the majority of potential home owners go, there is no market as they have long since been priced out.

Seems a daft way to run society to me.

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UK house prices are #### all to do with supply and demand and everything to do with a ponwified speculative investment bubble.

the housing market supply and demand based prices ended around 2002 and have already destroyed the banking system once.

the next collapse night well cause even worse.

Pricrs are set by supply and demand. Maybe it's a bubble, maybe it isn't. I'm not even sure I know what a bubble is.

Regardless, prices are set by supply and demand. That is all.

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In reply to those that claim hpi is f##k all to do with supply and demand I would like to ask what mechanism pushes prices up if supply is greater than demand. Even if credit is plentiful if nobody is in a competitive bidding situation price will trend down. For hpi you need competitive bidding ie more demand than supply and credit to realise the demand.

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Easy: extend credit to people to buy other people's homes as 'investments', also known as buy-to-let. No extra people need to be housed but the effective demand for houses massively increases, because of the supply of, and demand for, credit.

Edited by Neverwhere

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Regardless, prices are set by supply and demand. That is all.

I agree. Supply of credit creates demand where it couldn't exist without that supply of credit.

What is happening is the current housing stock is becoming far more efficiently utilised. There must be, on average, more people per house, more people per bedroom and also more people per sq metre of property to accommodate the population growth. This is why so many more people still live with parents / share or live in the rapidly growing number of HMO sh**holes.

Which is a disaster for the economy. Number of occupants per household going up means less toasters, fridges, magnolia paint etc sold.

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@Wayward:

Economics 101 says that human wants are infinite. It is *effective* demand - that backed up by funds - which is important. If credit is cheap and available, particularly to BTLers, then there are barely any limits to this demand.

The commonly peddled line is that if we increase supply, this will sort everything else out. The problem here is that BTL will always be in a better position to snap up this new supply (and any old supply), thus keeping prices high.

Stamping on BTL is the way to sort out the demand side, and that will sort out prices, with little need for changes to supply.

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@Wayward:

Economics 101 says that human wants are infinite. It is *effective* demand - that backed up by funds - which is important. If credit is cheap and available, particularly to BTLers, then there are barely any limits to this demand.

The commonly peddled line is that if we increase supply, this will sort everything else out. The problem here is that BTL will always be in a better position to snap up this new supply (and any old supply), thus keeping prices high.

Stamping on BTL is the way to sort out the demand side, and that will sort out prices, with little need for changes to supply.

This.

The term "demand" simply refers to the amount of people/companies that want to buy. BTL rides over the salary multiple "norm" of previous generations. If many people want to buy, in order to rent out for profit then they are the "demand" that drives the price. In effect BTL LLs compete with each other and are willing to pay more than OO because they (LL) see a return whereas the OO sees a cost.

House prices will collapse/correct/crash (chose your poison) when/if BTL stops being the highly popular route to riches that many people imagine it to be. As we have discussed so very many times on here - that is sentiment driven. Timing is therefore guesswork.

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One thing that people are ignoring is that now some people get their accomodation paid for by the rest of us this both reduces supply for us (increasing costs) and reduces our ability to pay - a real double whammy.

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In this country, we have a cartel of land owners, nimbies and investors who control land use.

There is no market, just control, by vested interests .

Prices at the moment are set by a very small number of people criminals, idiots and foreign "investors" who are buying the very few houses coming to the market.

As far as the majority of potential home owners go, there is no market as they have long since been priced out.

Seems a daft way to run society to me.

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@ Neverland - why would someone buy a BTL if it was guaranteed to stand empty because there are more dwellings than people - easy credit or not. BTL only exists because there is a shortly of dwellings relative to need for dwellings.

The BTL model works on the basis that they get the well first and charge us to drink. If there was water in in every tap the model wouldn't work.

You are falling into a trap - we NEED more dwellings urgently or we need to forcibly redistribute the existing stock.

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No. BTL works by displacing prospective owner occupiers and turning them into tenants. It does not increase the housing stock it just forces some people to rent. It does so by leveraging their own wages against them because a BTLer can borrow more on an interest only basis against their tenant's wages, in the form of rent, than their tenant can borrow against their own wages on a repayment basis as an owner occupier.

Cut out the BTL and allow a HPC and the stock will naturally redistribute. If we really did not have enough homes then there would be a lot more people living on the streets and a lot less spare bedrooms. This is not the case, as can be clearly seen by comparing the number of bedrooms per household with the occupancy rate in Homeownership and renting in England and Wales - detailed characteristics:

figure3_tcm77-316383.png

figure4_tcm77-316386.png

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Regardless, prices are set by supply and demand. That is all.

But if demand is a function of credit availability then prices are ultimately set by the level of credit available to buy houses. So even if you had a situation in which both supply and demand were static prices could still rise if buyers could access rising levels of credit- they would borrow more to compete for the best houses they could afford.

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Ok, been reading a lot of these threads recently and I think I am getting to grips with how it works.
Discussing this with others whilst keeping within their logic and assumption range is not so easy.
I understand that stating ‘it’s demand and supply, innit – more demand means higher prices’ is heresy statement #1.
This is my simplistic view.
Price is not set by how much people want a house. It is set by how much someone is prepared to lend them to buy a house. If 5 people wanting to buy a house have identical salaries, and can achieve a loan of 4x salary, that will be the price. (ignoring BTL, Parental help etc)
If a sixth person is able to borrow 5x salary, he will become the buyer and set the new price for that type of property. The others will now need to find a 5x loan if they wish to buy. 5x becomes the new norm.
Alternatively, if one of the original 5 inherits £30k, he will become the buyer, meaning that the price is now 4x salary plus £30k for future transactions.
This explains why my parents could buy on 3x – that was all anyone could get and therefore set the price. As soon as it became 3x joint, singles were priced out as were those with stay at home partners. A joint salary became necessary to pay the new prices effectively created by the change in lending criteria..
This is all great on paper but does not satisfy my mythical pub mate. He will still say that demand MUST be having an effect since he has an economics CSE.. After all, the population is rising and so are prices; therefore one is the cause of the other and he will not be swayed from this. Since population is forecast to keep rising, so will prices.
My take is that demand is having an effect but not on actual houses prices. The big effect is housing quality. There is an argument that we are not building enough houses but since the homeless are not increasing at the same rate as the population they must be going somewhere.
What is happening is the current housing stock is becoming far more ‘efficiently’ utilised. There must be, on average, more people per house, more people per bedroom and also more people per sq metre of property to accommodate the population growth. This is why so many more people still live with parents / share or live in the rapidly growing number of HMO sh**holes.
My mythical pub mate’s eyes have now glassed over (could be the conversation, could be the 3 pints of stella) so I need something for him to try and remember.
Availability of Funding is what sets the price. Demand sets the quality of what is available.
Has anyone got a better way of explaining this to the hard of thinking?

In sport you often hear the expression class is permanent, form is temporary or form is temporary, class is permanent. It's message is catchy and clear (apparently sometimes attributed to Bill Shankly).

So it maybe needs something like that, say 3 words for each part - for the catchy rhythm. Almost like Tiki Taka footie ;) There must be countless possibilities - such as for instance something along the lines of:

Funding sets prices - demand fills rooms.

or

Credit sets prices - demand fills rooms.

Maybe try out a few like that on your mythical pub mate. One might turn out to be a runner.

Edited by billybong

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