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gruffydd

Is There A Correlation Between House Building Rates And House Prices?

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It makes sense that mortgage debt is the main driver of house prices...

However, is there a direct correlation between house building rates and house prices - has anybody ever attempted to put both on a graph, say in post war Britain, alongside house price inflation?

It'd be interesting to see the interaction

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There's a long run 10:1 ratio between transactions and private builds. Which gets to the point that prices are a function of demand wrt supply of homes in terms of homebuilder/landowner profit maximisation: http://www.savills.co.uk/research_articles/141280/187750-0

Long run? It doesn't even go back to when Nixon closes the gold window. It's effectively a longitudinal series for the long boom in asset prices as the financial system stops fulfilling any purpose aside enriching bankers who discuss risk management by saying "You'll be gone, I'll be gone", (h/t

).

It's the story of how the financial system failed and how it embedded a ludicrous faith in property in the boomers.

Long run. Hilarious.

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Alright pops, there's a ratio originating from before I was born. The point was about private building vs wider market including prices. I didn't say anything about about non-private builds/boomer priorities or finance/BTL driven demand.

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I thought that chart was very interesting.

Is there any other conclusion other than a captured industry acting as a monopoly?

One conclusion is certainly that the fundamental cause of the problem is not lack of supply originating from planning and regulations. Private building is an optimisation exercise for highest profit and therefore expecting non-state supply to effect affordability is wrong.

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There are two variables: new supply and transaction volumes that are highly correlated. The r2 must be over 90%.

Explanations possible:

+ the two variables are impacted by other factors equally (interest rates, recessions, GDP etc.).

+ overal transaction volumes are determined by new supply.

+ new supply is determined by transaction volumes (monopolistic behaviour).

Surely point 1) holds to an extent. Macro factors impacting overall transaction vols would also impact new supply. But you wouldn't get that level of correlation surely.

We jumped to point 3) assuming monopolistic behaviour. But what if low new supply volumes drive higher prices at the bottom of the pyramid and restrict overall transaction volumes?

If this market where a text book free market what would that graph look like?

Edited by growlers

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Small and insignifcant. The more building the higher prices but not clear relationship.

The correlation that matters is ease of lending. #banHTB

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There are two variables: new supply and transaction volumes that are highly correlated. The r2 must be over 90%.

Explanations possible:

+ the two variables are impacted by other factors equally (interest rates, recessions, GDP etc.).

+ overal transaction volumes are determined by new supply.

+ new supply is determined by transaction volumes (monopolistic behaviour).

Surely point 1) holds to an extent. Macro factors impacting overall transaction vols would also impact new supply. But you wouldn't get that level of correlation surely.

We jumped to point 3) assuming monopolistic behaviour. But what if low new supply volumes drive higher prices at the bottom of the pyramid and restrict overall transaction volumes?

If this market where a text book free market what would that graph look like?

I'm not sure it matters if one or all three of the explanations are correct. Worth noting that the chart only refers to private housebuilding supply. It's just showing that developer output is managed to maximise profits with respect to demand and tenure (Bland/KB's point).

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I'm not sure it matters if one or all three of the explanations are correct. Worth noting that the chart only refers to private housebuilding supply. It's just showing that developer output is managed to maximise profits with respect to demand and tenure (Bland/KB's point).

But can you draw that conclusion?

If point 2) held then transaction volumes would be determined by new supply.

That is, supply restricted. Developers build as much as they can within planning constraints. Prices rise due to supply limitations and this shuts off access to new enterants. Transaction volume falls.

You are arguing that developers restrict supply and target price. Supply the variable and price / transaction volumes the output. This chart doesn't necessarily prove this does it?

Would the chart look any different in a market impeded by chronic supply constraints?

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I'm not arguing that developers restrict supply although they can. I'd argue they supply exactly as much as they can sell given demand, optimised for max price.

Rather than repeat what I've previously written on this, the relationship isn't exclusive to the UK which is what you'd expect if it was function of our (hypothetically planning constrained) regulations. See for example Bill McBride's work on Calculated Risk for analysis of US existing to new home sales ratio, which highlights the role of distressed sales in that market: http://www.calculatedriskblog.com/2015/09/comments-on-august-new-home-sales.html

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Alright pops, there's a ratio originating from before I was born. The point was about private building vs wider market including prices. I didn't say anything about about non-private builds/boomer priorities or finance/BTL driven demand.

;)

Fair cop.

It's actually quite an intriguing correlation and it is stable over a long enough time span, and is stable over the transformation of lending as the building societies are displaced by the banks.

That said, I cannot make any sense of Neal Hudson's decision to place it in his analysis, or how there is any need to "break the 10 to 1 ratio".

He seems to be accepting as an unquestioned premise the idea that prices are high because there is unmet demand for housing, however as we've argued a ton of times, rents are stable and whenever you want to rent you can rent. If you want housing in the South East you can get it. It may not be quite as close to central London as you'd like, but it's there for the taking. Whilst house prices are out of whack with earnings that is not in and of itself evidence that there is unmet demand for housing.

As always with a question that might be considered an economic question there are so many interlinked parts that an observation of a correlation is just another puzzle. I have to say the thing about the graph that surprised me is how 1997-2008 boom transaction volumes were so small compared to 1989 boom transaction volumes.

Worth pointing out that if the millions of homes that had been bought at stupid prices by BTL mugs had been sold at lower prices to owner-occupiers then there wouldn't be so much excitement about a lack of affordable housing, and that if people returned to selling the house they already owned when they a bought new one the transaction volumes would be higher, so if the 10:1 ratio held up you'd have more building, (if the same correlation continued to prevail)

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BBC - Ebbsfleet: Model garden city?

"In a revealing article published last year, Francis Salway, former chief executive of the largest listed property company in the UK, Land Securities, explained that developers don't relish huge empty sites like the former quarries at Ebbsfleet.

They like "established demand" and "existing communities", he wrote, which prove people really do want to live there. The developers like to "limit the forthcoming supply" - that is, to ration how many homes come on to the market at one time so that the market is not flooded.

They don't like long projects which risk being hit by a downturn and they don't like high "up front" costs - cleaning up sites and building new roads and sewage plants."

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The clear relationship is that rising prices incentivise builders to get on with it no-expenses-spared, whereas falling prices mean they have to cut costs.

Unfortunately the way that happens in Blighty means that rising prices feed straight though to higher prices for land you can build on. Which means you don't need a price fall, just a slowdown in price rises, for builders to have to consider the pennies and start tightening.

A land value tax would help. As would a restructuring of the industry to separate ownership of building land from contractors doing the work - so the latter become one step removed from price fluctuations.

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BBC - Ebbsfleet: Model garden city?

"In a revealing article published last year, Francis Salway, former chief executive of the largest listed property company in the UK, Land Securities, explained that developers don't relish huge empty sites like the former quarries at Ebbsfleet.

They like "established demand" and "existing communities", he wrote, which prove people really do want to live there. The developers like to "limit the forthcoming supply" - that is, to ration how many homes come on to the market at one time so that the market is not flooded.

They don't like long projects which risk being hit by a downturn and they don't like high "up front" costs - cleaning up sites and building new roads and sewage plants."

Full tin-foil-hat warning taken as read, I took R4 reporting this morning of the fact that the government didn't want to make a compulsory purchase of the land in question as a veiled threat that they would if the building volumes didn't pick up within this parliament. The suggestion that the developers are throwing a daft veil of "we must make a profit" over the fact they overpaid for the land and have a good cartel going is not so much a tin-foil-hatted observation as a statement of the bleeding obvious.

It can't be a new joke, but it's new to me. Can we call this new form of economic organisation based on crap banks betting their balance sheets on crap houses crapitalism? Crapitalism, so shit that regardless of, you know, Joseph F**king Stalin, it's still managed to somehow breathe new life into socialism. :D

Hpcer: "I see Mark's got a new Range Rover. Leased, I presume"

Other hpcer "No, he bought it with a bank loan from RBS. He's a very successful crapitalist."

Edited by Bland Unsight

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I would guess an unusual spurt in building would also indicate a run to the exits, with some participants looking to cash in near a local peak in prices. That would coincide with high build costs as exceptional demand skewed prices /demand for resources further.

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Full tin-foil-hat warning taken as read, I took R4 reporting this morning of the fact that the government didn't want to make a compulsory purchase of the land in question as a veiled threat that they would if the building volumes didn't pick up within this parliament. The suggestion that the developers are throwing a daft veil of "we must make a profit" over the fact they overpaid for the land and have a good cartel going is not so much a tin-foil-hatted observation as a statement of the bleeding obvious.

It can't be a new joke, but it's new to me. Can we call this new form of economic organisation based on crap banks betting their balance sheets on crap houses crapitalism? Crapitalism, so shit that regardless of, you know, Joseph F**king Stalin, it's still managed to somehow breathe new life into socialism. :D

Hpcer: "I see Mark's got a new Range Rover. Leased, I presume"

Other hpcer "No, he bought it with a bank loan from RBS. He's a very successful crapitalist."

Perhaps on the veiled threat, but otherwise this is what happens with cartel or monopoly markets. I certainly think people should let go of the capitalist/socialist politics thing. For example, according to the ONS, reclassification of Housing Associations and their borrowing as public sector means an additional ~£60 billion in public sector nebt debt. Or with gross book value of assets of ~£135bn, p.3 & p.21 this Government is undertaking one of the biggest nationalisations in our history.

Edited by northshore

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-Deleted by Venger

Posted on wrong thread.

Edited by Venger

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"we must make a profit"

They would be content to just sit on the land as they know that their buddies in government will always be there to support prices. They even signal when prices are going to be boomed like Osbornes' keynote speech at the property development 1 Commercial Street in the run up to the general election.

Currently builders only need to meet cash flow requirements, keep the front as builders and satisfy shareholders and any little political pressure. Volumes are probably decided by getting together, looking at last year's volumes etc and using the traditional ratios divvying it all up between them with a special effort just before the general election.

Builders shouldn't own land - it should be taken from them by compulsory purchase. Right now right away.

Edited by billybong

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On a related theme, Government says Conservative council scheme to build more council houses is 'unacceptable' because they'll be exempt from right to buy: http://www.bbc.co.uk/news/uk-england-manchester-34643523

A Department for Communities and Local Government spokeswoman said it applauded efforts made by councils to build new affordable homes for local people. But she added: "However, the actions of a handful of councils to stop the aspiration of some tenants to own their own home through right-to-buy is unacceptable. "We will not support any council setting up a housing company, unless their tenants continue to have the right-to-buy."

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In case you're interested, another article on builds/transactions with bit more info/charts: http://brickonomics.building.co.uk/2015/11/housing-policy-if-the-answers-arent-working-maybe-we-need-to-be-asking-different-questions/

What causes house building to respond to transactions?

Looks like the wrong question/inference. More likely (one posits) they are both responding to........the credit cycle.

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Looks like the wrong question/inference. More likely (one posits) they are both responding to........the credit cycle.

Perhaps, although you've previously said prices are a function of supply but that infers prices are a fuction of credit (demand) with respect to (managed) supply. I agree.

My interpretation of the relationship only really relates to supply having nothing to do with planning/regs and everything to do with optimising for max private profit. This aspect, increasingly ex social output, seems fairly obvious.

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Perhaps, although you've previously said prices are a function of supply but that infers prices are a fuction of credit (demand) with respect to (managed) supply. I agree.

My interpretation of the relationship only really relates to supply having nothing to do with planning/regs and everything to do with optimising for max private profit. This aspect, increasingly ex social output, seems fairly obvious.

You can have a secular undersupply (last 40 years, say) and still see a cyclical collapse in demand (& supply) during recessions. Im not sure thats controversial.

Edited by R K

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You can have a secular undersupply (last 40 years, say) and still see a cyclical collapse in demand (& supply) during recessions. Im not sure thats controversial.

It's controversial without better defining what's meant by undersupply. Affordable housing (and I mean affordable, not a hpc) will never be achieved while dialogue centres on assumed private-sector led supply rates relative to demand, regardless of whether there's actually under-, enough- or over-supply.

Assuming a secular undersupply is correct, where the solution lies in planning relaxation and private windfall gains, will achieve nothing except making landowners even wealthier and non-landowners/lower paid/younger poorer. That's not something I hope for, and is why differentiation makes all the difference in assessing the right questions and answers.

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