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House Building To Continue Into Crash?

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In economics there's something called the cobweb theory:

cobweb theory
Named by Hungarian-born economist Nicholas Kaldor (1908-1986), cobweb theory stems from a simple dynamic model of cyclical demand which involves time lags between the response of production and a change in price (most often seen in agricultural sectors). Cobweb theory focuses on the process of adjustment in markets by tracing the path of prices and outputs in different equilibrium situations. It is so named because its graphic representation resembles a cobweb with the equilibrium point at the center of the cobweb. It is sometimes referred to as the hog-cycle (after the phenomenon observed in American pig prices during the 1930s).

Applied to house prices, it should mean that when HPI goes negative, house building should continue. Two reasons for this: the lag between building starts and completions, and because the profitability of house building depends on price levels rather than whether prices are rising or falling.

This should destabilise the market. It means that supply won't contract to meet demand once people realise investing in houses isn't as safe as, well, houses. Which means price falls will be met by further price falls!

Do people agree that house building will fail to slacken off when the crash comes?

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Depends on the size of the builder.

Small operations will have a desperate rush to finish jobs and then try and unload before the going gets tough. A few of these might go under with stock unsold. Cashflow problems can mean part finished builds sitting around. The better managed firms will wind down their ops and then sit on the sidelines living on their gains through the boom years.

The Plc's will keep building, taking ever lower selling prices undercutting the secondary market. The only thing that will stop them building is when excess inventory starts to drag the balance sheet, and the auditors will no longer sign off the stock.

Too much of a firms working capital tied up in non liquid assets can easily create a cashflow crunch, but the majors have the experience, and will cut back in time.

Ultimately the number of new starts as we slide into the price correction will depend on their willingness to take conversion risk.

They will continue to make profits on their new build, as their landbanks go back a long way.

If they market valued their properties, and booked the revaluation, they could be in for a massive writedown on any unsold completed portfolio. That would stop them starting new developments sharpish as their ability to raise finance would be compromised.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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