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Why High House Prices Are Partly Down To Austerity - Wren-Lewis

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simon wren-lewis @sjwrenlewis

Why high house prices are partly down to austerity http://goo.gl/fb/nGj8eS

snip...

The reason for this that everyone focuses on, understandably, is stagnant housing supply. However, housing can also be seen as an asset. Just as low real interest rates boost the stock market because a given stream of expected future dividends looks more attractive, much the same is true of housing (where dividends become rents). Stock prices can rise because expected future profitability increases, but they can also rise because expected real interest rates fall. With housing increasingly used as an asset for the wealthy, or even as a way of saving for retirement, house prices will behave in a similar way. A shortage of housing supply relative to demand raises rents, but even if rents stayed the same falling expected real interest rates raise house prices because those rents become more valuable compared to the falling returns from alternative forms of wealth.
That is why a good part of the house price problem comes from the macroeconomy: not just current low real interest rates, but also low expected rates (secular stagnation). The idea that house prices are tied down by the ability of first time buyers to borrow (and therefore to real wages or productivity, modified by changes in the risks lenders were willing to take) seems appropriate to a world where the importance of the very wealthy was declining, and most people could imagine owning their own home. We now seem to be moving to a more traditional world (remember Piketty) where wealth is more dominant, and with low interest rates that may also be a world where renting rather than home ownership becomes the norm for those who are not wealthy and whose parents are not wealthy.
There may be factors behind secular stagnation (low long term real interest rates) that we can do little about, but there are things we can do right now that will raise interest rates, and thereby tend to lower house prices. The most important of those is to stop taking demand out of the economy through continuing fiscal consolidation (aka austerity). This boost to demand that comes from ending fiscal consolidation will allow central banks to raise interest rates more quickly. While central banks may only be able to influence real interest rates in the short term, because so much uncertainty exists about what this long term involves the short term may have a powerful influence on more distant expectations.
We can also have some positive influence on the longer term by increasing public investment, including forms of public spending (that may not be classified as investment) that encourage private investment. It should also include building houses where (or of a kind) the private sector will not build. That will have beneficial effects in terms of raising real interest rates in both the short and longer term.
Ever rising house prices lead to unprecedented high levels of private debt, and also destroy the dream of many young people to own their own home. One answer is to build more houses, but another is to run better macroeconomic policies. That house prices continue to rise during a period of fiscal austerity is not an anachronism. It is not a bug but a feature of an age of austerity.

Emphasis mine. Agree with all of it.

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Don't really buy it. HPI was stalled until Gidiot started with his help to buy and other 'initiatives' Hardly austerity type programs.

Whether or not there is austerity in some areas (local govt is the only one I can find), it isnt in the housing or construction sector, where there have been numerous 'stimulus' programs.

Then we have interest rates. Deliberately not raised in the inflation blip of 2010-2013. That would have cut off any HPI from 2012.

The article is politicized nonsense IMO. He's trying to apply this vague 'austerity' term (which no one ever actually defines. Its about as tangible as the 'trickle down economics' zeitgeist) to some specific outcome. Doesnt work like that. Specific policies are keeping housing unaffordable.

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No attribution of nominally high prices to massive distortions of credit, printing of money, massive insanity on the part of successive governments etc etc?

Edited by Errol

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WHAT AUSTERITY??? HAHAHAHAHAHA

1. 70% of public spending ring-fenced.

2. Total spending UP!

Largest twin deficits in developed world. Austerity? :lol:

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" A shortage of housing supply relative to demand raises rents"

My mates rent in Northampton never went up for 10 years.

My rent in Northampton was half the cost of buying and only went up 4 times, by a peppercorn amount, in 6 years.

In conclusion....there is no suppy issue.

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That house prices continue to rise during a period of fiscal austerity is not an anachronism. It is not a bug but a feature of an age of austerity.

In term of true austerity and falling living standards there's an equal argument that it's the high house prices actually creating a nation's austerity rather than the other way round. A bit like the equivalent outcome of having invested in the wrong thing for years on end.

Interesting that he talks about fiscal austerity but doesn't mention the massive increase in public sector debt.

Edited by billybong

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WHAT AUSTERITY??? HAHAHAHAHAHA

1. 70% of public spending ring-fenced.

2. Total spending UP!

Largest twin deficits in developed world. Austerity? :lol:

What he said.

More spending it not...well...less spending

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In term of true austerity and falling living standards FOR THE 99% there's an equal argument that it's the high house prices actually creating a nation's austerity rather than the other way round. A bit like the equivalent outcome of having invested in the wrong thing for years on end.

Interesting that he talks about fiscal austerity but doesn't mention the massive increase in public sector debt.

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In term of true austerity and falling living standards FOR THE 99% there's an equal argument that it's the high house prices actually creating a nation's austerity rather than the other way round. A bit like the equivalent outcome of having invested in the wrong thing for years on end.

Interesting that he talks about fiscal austerity but doesn't mention the massive increase in public sector debt.

Exactly - and also in overall relative terms compared to many other nations.

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We're borrowing £1,000,000,000 every 4 days from wonga.com and the UK official bank balance is sitting at -£1,500,000,000,000.00

I doubt if you look up 'austerity' in the Dictionary it would provide such a description.

Actually - having had a Wiki - it appears the technical definition of 'austerity' could be applied to what is happening just now. I doubt most would define the definition this way though.

https://en.wikipedia.org/wiki/Austerity

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Houses as "giffen goods" who thought it?

In economics and consumer theory, a Giffen good is a product that people consume more of as the price rises and vice versa—violating the law of demand.

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Don't really buy it. HPI was stalled until Gidiot started with his help to buy and other 'initiatives' Hardly austerity type programs.

Whether or not there is austerity in some areas (local govt is the only one I can find), it isnt in the housing or construction sector, where there have been numerous 'stimulus' programs.

Then we have interest rates. Deliberately not raised in the inflation blip of 2010-2013. That would have cut off any HPI from 2012.

The article is politicized nonsense IMO. He's trying to apply this vague 'austerity' term (which no one ever actually defines. Its about as tangible as the 'trickle down economics' zeitgeist) to some specific outcome. Doesnt work like that. Specific policies are keeping housing unaffordable.

You (and predictably, sadly) others are confusing macro fiscal tigtening leading to a lower real interest rate - the major trust of the post - with htb.

If you dont want to "get" that because there is still a deficit then I cant help you Im afraid.

Killerbunny is little more than a troll & I dont feed trolls.

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From the Wikipedia austerity link ^


A historical example in which austerity measures failed was in the aftermath of the Great Recession, where many European countries implemented such policies: unemployment rose to higher levels and debt-to-GDP ratios increased, despite reductions in budget deficits (relative to GDP).

So debt to GDP ratios increased but still austerity.

That seems to tie in with the Fed chart in the link below

Suggesting that their increasing debt policies have cornered their economies and it's the increasing debt reliance (the stage in the cycle of debt) causing the austerity rather than the so called austerity policies themselves. The extra debt doesn't work for the general economy anymore - although it might be made to appear to work if focused locally on specific sectors that the economy's propaganda statistics are also focused on. Even that ploy isn't working so much now.

That also ties in with the central bankers' admission through their BIS that their ZIRP/QE etc policies have failed and don't work (except to line their own pockets).

Edited by billybong

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No.

CeuBPNFWsAQfG0a.jpg

So a collapse in lending growth compared to pre-2008 but higher prices.

Youve shot your own fox Im afraid.

Also it is very curious to see some hpcers NOT wanting to see an increase in supply of/investment in new homes. Really cannot get my head around that.

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Simon Wren-Lewis is one of Gordies idiots.

Zero post content. Added to troll/ignore list.

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So a collapse in lending growth compared to pre-2008 but higher prices.

Youve shot your own fox Im afraid.

Also it is very curious to see some hpcers NOT wanting to see an increase in supply of/investment in new homes. Really cannot get my head around that.

I can't either. Very odd indeed.

Includes Killer bunny in that group which is odd as he is happy for his wonderful "capitalism" to decide outcome of almost everything else.

Not at all surprised though. We parted company on Twitter when he regarded Scottish land reform as dangerous socialism. WTF has feudalism got to do with socialism or capitalism for that matter.

Edited by RentierParadisio

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The idea that house prices are tied down by the ability of first time buyers to borrow (and therefore to real wages or productivity, modified by changes in the risks lenders were willing to take) seems appropriate to a world where the importance of the very wealthy was declining, and most people could imagine owning their own home. We now seem to be moving to a more traditional world (remember Piketty) where wealth is more dominant, and with low interest rates that may also be a world where renting rather than home ownership becomes the norm for those who are not wealthy and whose parents are not wealthy.

This is the key point. This system is evident in low rate economies, the wealthly own all the assets because if you are close to the money you can get more for cheap. Switzerland is a land of renters and astromoical house prices. So now is the UK.

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That house prices continue to rise during a period of fiscal austerity is not an anachronism. It is not a bug but a feature of an age of austerity.

It's a feature of increasing the impoverishment of parts of the population (not just those who don't "own" a home) and the nation which accelerated during NuLabour and was only mitigated in part by increasing levels of debt and more state benefits. The current lots have continued the previous policies but their extra debt is at a stage in the cycle when it doesn't work anymore.

Edited by billybong

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Includes Killer bunny in that group which is odd as he is happy for his wonderful "capitalism" to decide outcome of almost everything else.

My wonderful capitalism would bring house prices down. #banHTB in all its forms. No green belt annihilation needed. Thus we leave our kids cheaper homes and a beautiful country.

And their kids.

And their kids.

And their kids.

...

Edited by Killer Bunny

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My wonderful capitalism would bring house prices down. #banHTB in all its forms. No green belt annihilation needed. Thus we leave our kids cheaper homes and a beautiful country.

And their kids.

And their kids.

And their kids.

...

Let the market decide what is built and where, with the help of Land Value Taxation. Get rid of the socialist planning czars who only enrich existing owners of land.

For the few to decide that 95% of UK is inviolate imposes a massive tax on everyone else.

Now if the country bumpkins are prepared to pay for their exclusive, gated, "white flight" protected greenery?

You know in parts of the "industrial north" nature has recovered remarkably quickly, to the point that local NIMBY's now regard it as 'green belt'

Edited by RentierParadisio

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So a collapse in lending growth compared to pre-2008 but higher prices.

Youve shot your own fox Im afraid.

Also it is very curious to see some hpcers NOT wanting to see an increase in supply of/investment in new homes. Really cannot get my head around that.

You conveniently forget the myriad schemes designed to prevent repossessions, including ZIRP, HTB in its many forms, SMI, FLS etc.

Many of the indebted have no need to sell and few new entrants can buy because of stricter lending rules

However, until now, the BTLers could leverage themselves up because the stricter rules did not apply to them.

Do you have to have this explained to you every time?

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