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Guest Happy Harry
I was still running my business then mainly covering east Greater London and Essex. Strange but during 97 and 98 in the commercial sector many new businesses were starting up and existing ones expanding. ( confidence in the new government perhaps )

The same thing applied in the domestic sector, customers were moving up to bigger properties. Many of them had high paid jobs in the city.

In 1999 although new customers were around in the commercial and residential sections for us, the previous gains were lost, businesses closed down and domestics moved on. A form of stagnation I would say for my business.

Business started to pick up again  in 2001 ( after the general election ) and by the end of 2002 the warning signs appeared once more. Time to go I thought and sold up April 2003.

Charlie my son runs his own elecrical contracting business with many blue chip customers, and also does a lot of upmarket domestic work. We compared your info with his own performance during the periods stated. The results are more or less identical. This year has been very slow for him. He smiled and said you done right by getting out. :D

Updated 6-00pm

Since the middle of the current year he has noticed a drop of 20% in new business.

Running now at 2003 levels. He says it does`nt look good.

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Tom / Van,

Yes, my original post was set up to demonstrate how pricing works with regard to supply/demand equalibrium, and was over-simplified to make this easy to understand (I demonstrated it as just a single supplier).

However, as Van rightly says, this would actualy create a monopoly situation in which the sole supplier would have full pricing power. However, this could only be maintained if he had a complete "barrier to entry" in his market. Otherwise, as is the case in this example, another supplier would simply come along and produce the same product at a lower price.

As long as there is:

1. Excess demand in a market; and

2. The pricing level for some or all of that demand is higher than the gross cost of production; and

3. There are no barriers to entry for competition in the market (be these legislative, excessive startup costs, excessive lead time into production, excessive risk levels, etc);

4. There are no resource constraints prevented higher total production levels in the markets (i.e. enough labour and materials available)

if all the above are met then there will always be competition in supply to meet the unsatisfied demand inthe market.

It's true that in your monopoly example that it would be most financially profitable for me to simply market one of my apples at £80, and put the other 19 straight into the bin as soon as I'd picked them. However, as Van said, someone else would come along and produce apples at a lower price. It is unlikely that this new market entrant should move straight into the "£1-per-apple" market, as it is actually still most profitable for him to price as highly as his segment of the market can maintain. I.e. he sell an apple at £40. This would mean he could sell to the second richest person, AND the richest person would also now move from the original supplier to the new entrant (why should he now pay £80 for an apple, when he can now pay £40 for the same apple). The new entrantant now has two customers, and the original seller must now either reduce his prices to match or go out of business.

However, now the is still 18 people demandin apples, and a price point still exists where apples can be produced and sold to these demanders for a profit. Therefore ANOTHER entrant will come along and price even lower.

These market forces will continue until either all demand is met, or the price point becomes so low that it is operating at a minimum level of profitability.

Demand is only really TRUE demand if it is demand at price point above a minimum level of profitability. For example, I would buy a top sports car if it was £5. But since the costs per unit are probably at least £5,000 materials, £5,000 labour, £5,000 R&D, then my "Demand for a sports car at £5 a unit" cannot be counted towards real demand. In this example, demand only gets counted as demand if it is demand at a price point of £16,000 or over, unless production costs per unit can be reduced.

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Will the supply/demand argument hold for a house price crash?

If supply is greater than demand and a seller really wants or needs to sell, they will have to lower their asking price. How do we know there aren't lots of potential buyers ready to swoop when prices have gone down a little bit? If this were the case, this would increase demand and prices would stop falling. Might this not happen? Also, how many sellers need to sell as opposed to would like to sell?

An argument I've seen against this is that having seen prices fall, potential buyers will wait in expectation that prices may fall again. How long would buyers really wait though? Might prices not go down 10%, stop and start going back up again? If this happened, this could hardly be regarded as a crash could it? The question is, at what point will demand equal supply again? I have this horrible feeling that bears are holding out for a crash that may well not happen.

Just some thoughts. Feel free to rip them to shreds. :)

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Annoyingly you can't post attachments on HPC otherwise I'd attach a diagram, but I'll do my best explain what has happening in the housing market in micro economic terms:

1 - On a graph of price versus quantity The supply curve is a line starting in the bottom left hand corner of the graph and ending in the top right hand corner i.e. more people are willing to sell their properties if the price is high

2 - On the same graph the demand curve starts in the top left hand corner of the graph and goes down to the bottom right hand corner i.e. less people are willing to buy if the price is high

3 - These two lines cross at the point sets the market price and the market volume.

4 - During the upswing of the house price bubble the supply curve was moving upwards (people were demanding more and more cash for their properties). This was OK becasue the demand curve was also moving up as people were willing to pay more and more for properties and so the market was in balance

5 - At some point around last June the demand curve stopped moving up due to interest rates rising and FTB being priced out of the market, basically people could not longer afford to keeping the demand curve rising

6 - Initially this results in a lower volume of sales (the point where the two lines cross is moving to the left as the supply curve continues to rise and the demand curve is static or falling) it now takes longer to sell a house - we saw this in July and August

7 - Eventually people get fed up with waiting for their house to sell and will accept less for their properties this casues the supply curve to fall - this means that the market price where supply equals demand drops and you finally get a fall in market price - you can see this happening in Sept, Oct

Once they start are moving supply and demand curves tend to get momentum and keep moving in one direction - this is sometimes called the law of expectation - i.e. people expect prices to fall so the demand curve falls as they try and protect themselves from future falls

TPT

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Annoyingly you can't post attachments on HPC otherwise I'd attach a diagram, but I'll do my best explain what has happening in the housing market in micro economic terms:

1 - On a graph of price versus quantity The supply curve is a line starting in the bottom left hand corner of the graph and ending in the top right hand corner i.e. more people are willing to sell their properties if the price is high

2 - On the same graph the demand curve starts in the top left hand corner of the graph and goes down to the bottom right hand corner i.e. less people are willing to buy if the price is high

3 - These two lines cross at the point sets the market price and the market volume.

4 - During the upswing of the house price bubble the supply curve was moving upwards (people were demanding more and more cash for their properties). This was OK becasue the demand curve was also moving up as people were willing to pay more and more for properties and so the market was in balance

5 - At some point around last June the demand curve stopped moving up due to interest rates rising and FTB being priced out of the market, basically people could not longer afford to keeping the demand curve rising

6 - Initially this results in a lower volume of sales (the point where the two lines cross is moving to the left as the supply curve continues to rise and the demand curve is static or falling) it now takes longer to sell a house - we saw this in July and August

7 - Eventually people get fed up with waiting for their house to sell and will accept less for their properties this casues the supply curve to fall - this means that the market price where supply equals demand drops and you finally get a fall in market price - you can see this happening in Sept, Oct

Once they start are moving supply and demand curves tend to get momentum and keep moving in one direction  - this is sometimes called the law of expectation  - i.e. people expect prices to fall so the demand curve falls as they try and protect themselves from future falls

TPT

May I attempt a summary? Let me know if I've got it wrong.

Prices rose during the bubble because people of posotive sentiment (could and were willing to afford it), it then reached a natural high where it just could not go further due to the same affordability constraints, therefore prices will now start falling, but will overshoot their "natural" value because of reverse sentiment!

or

Busts follow Booms!

Topher Bear

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the silliest quote I've read in a while:

"While rising interest rates have influenced the recent run of house price falls, the key reason for the stagnating house price environment is that house prices have finally reached their peak in the current cycle," said John Wriglesworth, Hometrack housing economist.

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Standard monetarist doctrince postulates that inflation is caused by an increase in money supply chasing a finite number of goods in the economy, causing the purchasing power of money to fall.

This is exactly what has happened in the housing market - banks are lending out much more than ever before specifically aimed at the housing market, thereby cheapening the purchasing power of money and pushing up house prices to the stratospheric levels that we've reached.

It's haas been the biggest and most successful con of the last 50 years. Households now have far greater liability, less disposable income, and yet somehow think they are far better off because their house is "worth more". The shysters responsible should be thrown behind bars and left to rot.

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the silliest quote I've read in a while:

"While rising interest rates have influenced the recent run of house price falls, the key reason for the stagnating house price environment is that house prices have finally reached their peak in the current cycle," said John Wriglesworth, Hometrack housing economist.

Unless I am missing something it seems like a very sensible quote except the bit about "stagnating".

The funny thing is that Wriglesworth is accepting that this is the end of a huge peak but refuses even to think about the possibility that there will a trough to follow.

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