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Pieman Pieface

The argument against 'Lack of Supply' being the main reason for HPI

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I was having a debate with a friend the other week about sky high housing prices in London the other day. Most of my friends think I'm nuts for even suggesting that house prices might crash or at the very least go up forever. The debate sort of hung on my opinion that a large driver of the craze to own houses and the mental pricing is to do with easily available credit and a lack of alternatives when it comes to placing your savings. My friends were of the opinion that it was basically about a lack of supply and if that was true then house prices will never go down because they can't build housing fast enough to keep up. 

Well I didn't quite know how to argue my case here, so I was hoping I could get some help on here. I mean, I know lack of supply is a factor, as is over population, but at the same time I personally feel those factors are ovehyped as a way of thinking the status quo will always remain the same. 

Am I correct? Am I wrong? If I'm correct then how do I prove my case next time? Any help would be appreciated.

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I was having a debate with a friend the other week about sky high housing prices in London the other day. Most of my friends think I'm nuts for even suggesting that house prices might crash or at the very least go up forever. The debate sort of hung on my opinion that a large driver of the craze to own houses and the mental pricing is to do with easily available credit and a lack of alternatives when it comes to placing your savings. My friends were of the opinion that it was basically about a lack of supply and if that was true then house prices will never go down because they can't build housing fast enough to keep up. 

Well I didn't quite know how to argue my case here, so I was hoping I could get some help on here. I mean, I know lack of supply is a factor, as is over population, but at the same time I personally feel those factors are ovehyped as a way of thinking the status quo will always remain the same. 

Am I correct? Am I wrong? If I'm correct then how do I prove my case next time? Any help would be appreciated.

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Reality is that chunks of Prime London have been dropping for a year and a half.Outer boroughs holding the average price up.

Rest of the UK yet to catch on that it's over.

The rise in inventory levels is down to steadily increasing supply but record low transaction rates in the main

 

On 01/02/2017 at 6:56 PM, Sancho Panza said:

October data out.It features continued EA poverty in Central London

Some of my favourite Londinium charts where volume has tanked and continues to do so.

SW1X had 2 sales in Oct 20126 compared 14 in Oct 2014 and 4 in Oct 2015

SW3 had 42 in Oct 2014,28 in Oct 2015 and a lowly 16 in Oct 2016

chart(20).png

chart(21).png

chart(22).png

chart(23).png

 

 

 

On 01/02/2017 at 7:03 PM, Sancho Panza said:

SW7 Kensington Transactions Oct 2014 33 Oct 2015 18 Oct 2016 5.........................They may add a couple more but that's a huge difference.

W8 was 18 25 and 10 transactions respectively

 

chart(24).png

chart(25).png

chart(26).png

chart(27).png

 

On 01/02/2017 at 7:14 PM, Sancho Panza said:

I may have a new favourite.

Check out SW10.

Love the virtual exponential nature of the inventory graph.

chart(28).png

chart(29).png

 

Edited by Sancho Panza

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Yes, you're right.

As you can see in the graph, the population has not deviated significantly from housing stock and that lending and house prices correlate well.

UK-House-Prices-1997-2014.png

Source: http://positivemoney.org/issues/house-prices/

You can also see the trend when plotting house prices against rents. Rents are set by the ability to pay via wages, not via lending. You can see that Canada and Australia are worse off that us, although Vancouver probably skews Canada's figures somewhat, as does London for ours. The USA allowed their house prices to correct after 2008/2009 so they're in much better shape.

 

2044735.png

 

You can play with that tool here: http://infographics.economist.com/2015/globalhpi_20150415/

 

Edited by Eddie_George

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Ask them how many homeless families they have seen because, houses are in such short supply, they can't find one to rent?

2 hours ago, Pieman Pieface said:

My friends were of the opinion that it was basically about a lack of supply and if that was true then house prices will never go down because they can't build housing fast enough to keep up

A trap for fools.

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There is a slight wrinkle to the "supply has kept up with population growth" argument, which is that housing affordability has suppressed household formation amongst young people. So if houses weren't so expensive, more young people would be shacking up and producing more children etc. Fixing under-supply of housing without fixing over-supply of credit wouldn't do anything on its own, but there's definitely an element of younger generations being stuck in the crappier end of Britain's housing stock (or mum and dad's spare bedroom) because of a lack of alternatives.   

 

Screenshot 2017-02-03 14.43.32.png

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2 minutes ago, allornothing said:

Not sure I really understand. Just anecdotal, but in a desirable area close to me in Scotloand that i'm looking at, there are generally about 10 houses for sale, and each one has at least 6 notes of interest  within a week or two. If supply were to swindle to 5 houses for sale, there would be more interest in each property, leading to upward price pressure?

Am I oversimplying this?

 

 

 

Don't think you are.

Used to live in a largely residential area, during the boom in university places families moved out and landlords moved in because rental to 5 individuals outstripped the purchasing power of young couples to compete for the housing. If part of the push to get 50% of young going to university was based on the universities themselves building their own accommodation before allowing increased numbers then none of that extra demand would have occurred.

The local market was then pushed to a price that reflected rental income in vs mortgage costs at prevailing interest rates. 

 

 

 

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I would imagine that a large percentage of property owned outright or owned via debt the actual owner lives nowhere near, in or around London......anyone got the stats?;)

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56 minutes ago, allornothing said:

Not sure I really understand. Just anecdotal, but in a desirable area close to me in Scotloand that i'm looking at, there are generally about 10 houses for sale, and each one has at least 6 notes of interest  within a week or two. If supply were to swindle to 5 houses for sale, there would be more interest in each property, leading to upward price pressure?

Am I oversimplying this?

 

 

 

 

If you got 10 people chasing 5 houses then they will sell for what the 5 richest people of the 10 can afford.

If youve got 20 people chasing 5 houses then the same applies - the 5 richest determine the price.

So ultimately what sets prices is the buying power of the richest buyers, not the number of buyers (so long as buyers outnumber sellers).

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I am not convinced of the supply and demand argument, and I think that much house bubble activity is simply a reflection of bank financial models kicking along the multiples they are willing to lend based on what the recent HP data is showing them. Much of this can skewed by little more than a surge in money-laundering activity by Chinese/Russian investors. A one-year surge will then therefore lead to a year 2 lending surge based on supposed massive HPI in a particular city.

It confounds me, for example, that bubbles appear so local in any one country, and in a way that is seemingly strikingly at odds with locally observed economic reality.

Why, for example, is there a massive housing bubble in the Canadian cities of Vancouver and Toronto, but not, ( to my understanding), in Montreal or Calgary. I've been to all four cities in recent years, and nobody can tell me that there is a vast difference in prosperity or salaries amongst those four cities.

Australia ? Same shit. Massive property bubble in Sydney, a somewhat smaller one in Melbourne. Perth, which is a lovely city, is going backwards in terms of HPI, and Brisbane is just treading water. But to me, the standard of life- including salaries- in the latter two cities is no different to Sydney/Melbourne, while the quality of life is out of sight better.

So why do some cities blow bubbles and others not ?

My theory ? Stop the influx of HP valuation sustaining bank data, and you'll stop the bank lending that leads to a constantly reinflating bubble.

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Without conditions of scarcity there is no competitive bidding, without competitive bidding there is no mechanism for inflation.  Scarcity and loose credit run in parallel to create the desired effect for the established wealthy - asset inflation...and wealth reallocation towards the rich.

If there were 100 houses on the market and 90 buyers, regardless of the credit available you can see that it will be the sellers bidding the price down as they compete for the buyers.  Conversely if you have 90 houses and 100 buyers then the competitive bidding between the buyers fuelled by credit creates inflation.  If you have 90 houses and 150 buyers then you have even more potential buyers and the likelihood is that from that larger pool the bidding will go higher...

Even in scenario with 100 houses and 101 buyers there is still competitive bidding at the margin to create inflationary pressure.

Sure there are lots of variables such as BTL (they are buyers acting as proxy for the occupational tenant).  They may be lots of empty houses but these are not 'supply' unless on the market.

In my view this is how the market broadly works...I know some disagree but it seems obvious to me.

 

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Nobody is going to convince me that there is a housing shortage in the UK.

Everytime I do an internet search of any area, at least 30% of the properties have no furniture. I do not think that it a selling technique whereby the agent says "move all the furniture out while I take photos".

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The easiest way to argue against this is to ask why interest rates have been at ultra low levels for seven years. Ask what would happen if banks were forced to lend at a maximum of 4x income like they used to? Ask how many new builds would be sold if the government didnt hand out taxpayers money as a deposit?What do they think would happen to prices if rates were raised to an historical average for britain of 4.5 percent?  If all this happened and not a single house was built where do they think prices would be in a years time?

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so if its only loose lending duelling hpi why do some areas have rampant inflation and others deflation or static prices...same credit conditions...???

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The misunderstanding is to think that the issue is houses, rather than land.

If land was freely available, houses would be built and there would be no issue.  Supply would ramp up, and houses would quickly be cheaper than cars.  

Land is the constraint. It isn't free, and you can't create it.  Supply isn't the issue because there is no more supply.

Of course by land I mean land with planning permission.

In Britain, you could effectively create land by granting planning permission, but this new supply doesn't respond to price.

So the market can't create land, even if the state could.

Also, any old land won't do. It has to be near a source of employment.  Geometry is still the constraint even in massive countries like Australia and the US.  

That is why the analogies fail. That is why houses prices (rents really) are primarily a function of demand.  And rents have more or less tracked incomes, as the theory predicts.

In any case, this is all backwards. The onus is on people who believe in a 'shortage' to explain their extraordinary claim.  

There has been an explosion in the number of landlords, an explosion in mortgage debt, and interest rates are at historical lows.  More borrowed money is being flung at housing than ever.  

Meanwhile, the number of houses has more or less kept pace with population increases.

Yet somehow it's this second factor, something has moved a little but in the wrong direction, that is supposed to be causal?  

I'd need a lot of evidence to buy that.

So where's the evidence?  I've seen none, certainly not in the mainstream.

The logic is simply that there must be a shortage because prices are high.  It's taken as self-evident, so don't even bother with evidence.  

Or at least they assume the public will take it for granted, and they are right about that.

 

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2 hours ago, white110 said:

Nobody is going to convince me that there is a housing shortage in the UK.

Everytime I do an internet search of any area, at least 30% of the properties have no furniture. I do not think that it a selling technique whereby the agent says "move all the furniture out while I take photos".

 

It depends how you define shortage. Is there enough houses to put a roof over everyone head, probably yes. Is there enough houses to avoid scarcity market mechanics (i.e. biding up prices via credit) - no.

 

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3 hours ago, allornothing said:

That's not quite how i see it.

I'm not sure it's right that demand side pressures only kick in the very instant sellers out number buyers, and are completely moot till then. 

If a house has many notes of interest, I am more likely to bid higher. If a house has a single note, i'm more likely to try my luck as I can see demand is less.

Also, the average  buying power of the top 25% percentile of a sample of 20, is going to be higher than the top 50% percentile of a sample of 10.

 

of course there will be a marginal effect if buyers significantly outnumber seller vs only just but it wont be a massive price driver.

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5 minutes ago, goldbug9999 said:

 

It depends how you define shortage. Is there enough houses to put a roof over everyone head, probably yes. Is there enough houses to avoid scarcity market mechanics (i.e. biding up prices via credit) - no.

 

Why wasn't this an issue in 1996 when there were fewer houses per person?

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9 minutes ago, BuyToLeech said:

Why wasn't this an issue in 1996 when there were fewer houses per person?

Credit availability (or lack thereof), in particular this was just before the rules were changed to allow BTL in its current form and the ensuing massive surge of credit pumped into the market.

Edited by goldbug9999

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The quote below turns the supply and demand argument on it`s head IMO ....on top of an already existing over supply in the ROI yet prices were rising at that moment in time (all be it modestly)  ....it`s more about availability of credit rather than scarcity of actual houses    H/T Neverwhere  http://www.housepricecrash.co.uk/forum/index.php?/topic/207824-ireland-a-btl-case-study/&do=findComment&comment=1102863978

Quote

In the above post I probably should have compared the amount of newly completed residential units with the amount by which the respective populations had grown (I blame the lateness of the hour ;)) which would be as follows:

The Irish population grew by 4,499 people over 2014, and 11,016 new residential units were completed in Ireland in 2014.

The UK population grew by 202,739 people over 2014, and 144,990 new residential units were completed in the UK in 2014.

So in 2014 the UK, with full tax breaks for landlords, built 0.72 new residential units for every new person added to our population and Ireland, with reduced tax breaks for landlords, built 2.45 new residential units for every new person added to their population!

 

Edited by long time lurking

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25 minutes ago, goldbug9999 said:

Credit availability (or lack thereof), in particular this was just before the rules were changed to allow BTL in its current form and the ensuing massive surge of credit pumped into the market.

Exactly. 

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1 hour ago, goldbug9999 said:

Credit availability (or lack thereof), in particular this was just before the rules were changed to allow BTL in its current form and the ensuing massive surge of credit pumped into the market.

BTL was insignificant prior to 2008 (fewer than 10% of all mortgages). The real damage was caused by interest only. In 1988 alone, more than one million homebuyers took out interest only loans. By 1992, three out of four mortgages were interest only. Endowment policies fell out of favour after the dotcom bust when they were replaced by i.o. loans with no repayment vehicle attached.

Edited by zugzwang

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11 hours ago, Eddie_George said:

Yes, you're right.

As you can see in the graph, the population has not deviated significantly from housing stock and that lending and house prices correlate well.

UK-House-Prices-1997-2014.png

Source: http://positivemoney.org/issues/house-prices/

You can also see the trend when plotting house prices against rents. Rents are set by the ability to pay via wages, not via lending. You can see that Canada and Australia are worse off that us, although Vancouver probably skews Canada's figures somewhat, as does London for ours. The USA allowed their house prices to correct after 2008/2009 so they're in much better shape.

 

2044735.png

 

You can play with that tool here: http://infographics.economist.com/2015/globalhpi_20150415/

but millions are immigrating here and landing free Council Houses.

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