Sunday, September 5, 2010

Bootle’s latest bear food

Are housing troubles resurfacing - Roger Bootle

Sober overview from an acknowledged housing perma-bear, with working... He doesn't buy the suggestions that we'll see flat prices, nor that supply and demand are the key to house prices - not in the traditionally proposed manner, at least.

Posted by notyethomeless @ 09:57 PM (2982 views)
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33 thoughts on “Bootle’s latest bear food

  • mark wadsworth says:

    No, ultimately it has little to do with supply and demand – it has to do with easily available credit.

    The fun bit is watching some of the Home-Owner-Ists (homeowners holding out for higher prices) laying into another wing of the Home-Owner-Ists (the bankers, who blew the bubble and creamed of a few per cent for their troubles) for failing in their duty to prop up house prices, while the third wing (the government) flails about blindly trying to subsidise house prices, bail out banks and tax us all into oblivion at the same time.

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  • @Mark Wadsworth
    Didn’t he just say that (i.e. credit as part of the demand):
    “And demand does not mean the airy aspiration to live somewhere nice, or the “need” for housing, neither of which has any economic content. Rather, it means the willingness and ability to pay the going price. Ability is affected by income, interest rates and the availability of credit.”

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  • He does list availability of credit as a factor. Other than the remark about supply and demand it is one of the better articles.

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  • “Let me say that the average level of house prices is determined by the balance of supply and demand. But the supply is the stock of houses, and that stock does not change much from year to year. So movements in prices from one year to the next are principally caused by shifts in demand. And demand does not mean the airy aspiration to live somewhere nice, or the “need” for housing, neither of which has any economic content. Rather, it means the willingness and ability to pay the going price. ”

    Best analysis, I have read in ages..

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  • He’s incorrect when he states that the ‘supply’ (in terms of the demand/supply that determines prices) is largely fixed. The ‘supply’ can be just as volatile as demand since it represents the properties actually for sale – the recent rally in house prices has been as much a reflection of limited supply (of houses for sale) as it has been strong demand.

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  • Hello Mark

    Have another read – he does talk about the ABILITY.

    Ability is affected by income, interest rates and the availability of credit. Willingness is affected by many things but one of them is what people think will happen to prices in future. Like other asset markets, therefore, housing is subject to a substantial speculative influence. If prices are expected to fall then much “demand” which was present when prices were expected to rise will evaporate. I suspect that both the ability and the willingness are about to fall.

    The housing market is very much subject to the laws of supply and demand. I’ve been talking about the components of demand for some time on this forum. It’s as plain as day that “desire” is always there (for most people would like a bigger/better house), but that the other two components “willingness” and “ability” have been artifically expanded. I’d actually also argue that supply has expanded since we are always net adding to housing stock – in some areas too much, in some too little is a fair comment.

    So, it’s just a question of time – not if.

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  • mark wadsworth says:

    Growler, yes of course he said that. I was just agreeing with him.

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  • Not a lot to disagree with in this piece.

    Mark, when you say “it has to do with easily available credit” I would agree that easy credit opens the door for many people; but what makes them step through that door is a combination, not only of need, but of fear and greed as well.

    If the fear of prices rising out of reach is replaced by the fear of prices falling; and the greed associated with the expectation of easy wealth evaporates; most people will not be attracted by easy credit, however attractive the terms, and will look at alternatives to satisfy their need for housing.

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  • It’s called elasticity of demand. People tend to buy as much space as they can afford. Hence the price of houses is mostly explained by interest rates and the availability of credit, not the number of houses being built.

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  • “The willingness and ability to pay the going price”. Indeed, but he says nothing about the main determinant of that – governmental decisions to enhance that willingness and ability.

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  • Cyril,

    People DID tend to buy as much space as they could afford, when it appeared to be a sound investment to do so; but I don’t think you can assume that will continue.

    Against a falling market, people are more likely to be minimalist in their ambitions.

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  • mark wadsworth says:

    Uncle T, sure, it’s all a bit chicken and egg…

    Rising prices -> people want to buy
    People want to buy -> banks willing to lend
    Rising prices -> banks willing to lend
    Banks wiling to lend -> rising prices
    Rising prices -> banks willing to lend

    and so on and so forth in a Home-Owner-Ist death spiral. This doesn’t work nearly as well on the way down of course because the Home-Owner-Ist government will do anything it can to bail out banks and prop up house prices.

    And yes, I know that you say that the Tories are nowhere near as Home-Owner-Ist as New Labour 1997 – 2010 but I have seen no evidence to support that contention in the past four months, and going by the obese one’s attempt to halve new construction, there’s plenty of evidence to say that the Tories are even more Home-Owner-Ist.

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  • mark wadsworth says:

    UT: “Against a falling market, people are more likely to be minimalist in their ambitions.”

    Indeed – when it comes to buying.

    But how many renters or sell-to-renters are currently renting a much more expensive home than they would currently wish to or be able to afford to buy? Mrs W and I certainly ‘traded up’ when we sold to rent and from what others on here have said, I would guess that goes for a lot of people.

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  • MoneyWeek had a similar argument, a while back:

    Falling mortgage rates won’t stop the housing bust
    “Pent-up demand” is a nonsense concept, economically speaking. Almost anyone will buy almost anything at the right price. You could say there’s a lot of pent-up demand for a Ferrari that costs less than £10,000. You could say there’s a lot of pent-up demand for free pizza.

    Roger Bootle’s article in the Telegraph is saying the same thing – the economic sense of “demand” (as in supply & demand) refers to both the desire and the ability to pay, not just the desire. I would argue that not only has the ability to pay fallen (with banks demanding higher deposits), but the desire is also falling as people lose their job security and fear for falling house prices.

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  • @ Cyril

    It’s not technically the elasticity of demand – but I agree with your sentiment.

    The demand curve SHIFTS up when the factors affecting demand change. Those factors are willingness, desire and ability which Bootle is saying (and many here agree) is changing for the worse. Since supply is very near inelastic (vertical) a shift down in demand (the whole curve drops down) means the price paid has to fall. How much it falls DOES depend on demand elasticity…. and that’s an interesting topic in these times….

    Discuss:

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  • Growler, I agree with what you are saying but would add another component of demand that shouldnt be forgotten: total number of households, which is expanding by about 2% every year in the UK. This is a faster rate than the growth in the housing stock (about 1%). The growth in the number of households is partly due to population growth (which is in turn partly driven by net inward migration) and partly due to a continuing decline in the average household size.

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  • Hi Greenmind

    I think you mean a component of supply, rather than demand. A net shortage of households will have the effect of shifting the supply curve back to the left – thus increasing the price cetaris paribus as they say.

    But here’s a thought:

    If the demand for housing falls as people realise they cannot purchase as they don’t have the ABILITY or WILLINGNESS, then the demand for households/dwellings falls (as my first post). Whilst people will always say and write they’d like to buy if they could (pent-up demand), the upshot is even is there is a supply shortage the demand curve will move left.

    Also, if we allow the supply function to go left due to a net 1% reduction in households, and we say supply is near inelastic as it is, the fact that demand is not as inelastic as supply (for there are alternatives to home ownership like staying with parents or renting) will mean unless demand moves back less than 1% the price will still fall.

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  • @growler
    Don’t both the demand and supply curves depend on sentiment as well as cash/credit availability. The sharp downwards shift of the demand curve due to the removal of easy credit should have resulted in quite a significant price drop at the same transaction volumes if supply is perfectly inelastic. However, volumes are half their previous level which, to my mind, indicates elasticity of supply (over the short term) and might explain why prices haven’t dropped significantly thus far. Isn’t the supply inelastic when averaged over the long term? Or at least that’s the way I understand it, which could be complete b*llocks as it’s based on my hazy memory of GCSE economics from nearly two decades ago.

    @greenmind
    “The growth in the number of households is partly due to population growth (which is in turn partly driven by net inward migration) and partly due to a continuing decline in the average household size.”

    I’m probably being thick here, but how can the average size of a household decrease if immigration is greater than the growth in housing stock? – unless there are huge numbers living on the streets?

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  • Are we not forgetting about the other foot off the brake that has driven the madness
    in recent years; the massive reduction in CGT on BTL spivs. Thankfully, the CGT foot
    is slowly been pushed down, which will at some point casue the spivs to fly off to
    other less taxed “investments”.

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  • MW,

    Some of Labour’s development schemes were motivated by a desire to punish Tory voters, so it’s not surprising that our Eric has blocked some of the more overt examples. However, neither he nor Grant have been making any suggestion that more housing isn’t needed.

    I think there’s a white paper on housing due next month – we should judge the coalition’s intentions after it’s been published.

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  • @phd
    A household = a single person or group of people who want to live in a selfcontained home of their own. If they cant afford it they will have to share with other households e.g. stay with mum and dad or share a flat (in a “House in Multiple Occupation” or HMO). Households are therefore defined independently of the housing stock. Households one of the two components of demand, the other being money/finance.

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  • This is the definition of “Household” as set out on the Government (CLG) website:

    “For the household projections and mid year estimates a household is defined as in the census:
    – one person living alone, or
    – a group of people living at the same address with common housekeeping – that is, sharing either a living room or at least one meal a day.”

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  • I think Bootle is missing the point when he says that supply is virtually fixed. It is the supply of houses for sale which is relevant for prices, not the total supply of houses. Given that the supply of houses for sale is currently very low (due to low interest rates reducing the number of forced sellers etc.), this has had a similar impact to an increase in the willingness and ability to buy (ie. demand).

    To use a gold market analogy, the total supply of gold is essentially fixed (rises by approx 2% pa due to production) but the total supply of gold for sale can be volatile, depending upon the amount of scrap gold for sale (the gold market equivalent of second-hand houses for sale), and this can affect prices as much as a change in demand.

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  • phd:
    Don’t both the demand and supply curves depend on sentiment as well as cash/credit availability. yep, that’s the DESIRE and WILLINGNESS

    The sharp downwards shift of the demand curve due to the removal of easy credit should have resulted in quite a significant price drop at the same transaction volumes if supply is perfectly inelastic. you mean shift left, not down. The result is an equilibrium that’s down by a factor that is moderated by demand elasticity. If demand were perfectly elastic (which it certainly isn’t), the drop in price would be 100% of the leftward shift in demand.

    However, volumes are half their previous level which, to my mind, indicates elasticity of supply (over the short term) and might explain why prices haven’t dropped significantly thus far. if you mean volume of credit, this affects demand (the ABILITY bit). Bootle (and a few of us here) would argue that the willingness and ability (DEMAND factors) have not yet been significantly dented due to low interst rates and not so much unemployment – hence the weak reaction of the drop in price. Supply for housing in the UK is really very vertical (inelastic) and is pretty much fixed. So what is holding the market up is down to willingness – if we accept ability is reduced. Once willingness gets shakey, down the price will go a bit like the “bubble” graphs we’ve seen as people run from property (if they bought it solely/mostly as an investment). That move will cause people to think property will get cheaper. That reinfiorces the weakening willingness.. and so on until the price stabilises or other factors recover the market.

    Isn’t the supply inelastic when averaged over the long term? Or at least that’s the way I understand it, which could be complete b*llocks as it’s based on my hazy memory of GCSE economics from nearly two decades ago In most markets without constrictions in a perfect world, supply will increase as more manufacturers/providers offer product for sale. This means it’s ELASTIC (horizontal). But, with property and regulations that we have in the UK, it’s hard to generate real estate unless you build upwards – that’s why property supply in the UK is pretty vertical -> INELASTIC.

    But… there really is more than one market in property in the UK…

    I find it very interesting that the price of high-rise properties behaves differently from detached housing – and as such I’d argue that people in the market for a house will not want a flat. The availability of substitutes (and complements) is an economic concept and is a factor affecting supply. Since we in the UK like our plot of land, come what may, we will buy…. WHEN WE CAN…. being the operative point…

    unless something changes…

    I think that if supply of affordable and quality low level apartments were to rise and perceptions change regarding renting, the supply curve for single dwelling plots will become more elastic. That would be good for all concerned – except of course those who presently own one.

    It’s a hugely complex subject, and the reason so many people have an opinion and it’s so hard to forecast is because it’s so complex….

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  • mark wadsworth says:

    Uncle Tom 17, as ever, I hope you are right, but fear you are wrong.

    We know for a fact that Labour were pretty strict about the green belt (mainly Tory voting) and encouraged more construction in towns and cities (mainly Labour voting) – promptly misdescribed as “garden grabbing”.

    Even those arch NIMBYs the CPRE said that Labour had been ‘good for the green belt’ and we know that Tony B was keen to keep “Middle England” on side, there was no concept of p***ing off potential/wavering Tory voters.

    If you could be bothered to track down the figures, I think you’ll find that between 1997 – 2010 only about 0.001% of hitherto undeveloped land was built on.

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  • The demand for appartments (ie flats) was largely generated by investors who got swept up in the inflating price bubble without looking at end user demand (ie the willingness and ability of tenants to pay rents high enough to justify the price of purchase). This demand for flats has evaporated far more quickly than the demand for houses which is to a much larger extent made up of people who want a home to live in themselves.

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  • mark wadsworth says:

    Greenmind, to be fair here, Labour did have insane targets for building flats not houses, when this is exactly the sort of thing that we ought to leave to markets to decide.

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  • @growler
    “Supply for housing in the UK is really very vertical (inelastic) and is pretty much fixed. ”

    I’m going to carry on displaying my ignorance and dig a hole for myself, but doesn’t the supply of houses curve show the number of people willing and able (i.e. not in NE, able to find somewhere else to live, etc) to sell their houses at a given price. Ergo, are there not more people prepared to sell there house at a higher price (at any one time) than at a lower price, i.e. there’s some elasticity there (and the supply curve has shifted left because of low base rates, unwillingnes to sell when everyone knows that prices will recover soon!).

    Houses last, whereas people don’t, so isn’t supply of houses to the market at any one time determined by factors like the death rate and the ease of hoarding (determined by interest rates, taxes, cost of maintenance, inheritance, wage inflaton, employment, indebtedness, etc) and sentiment, rather than the total housing stock? I’m probably being really stupid, again, but if supply was perfectly elastic then wouldn’t there be as many people willing and able to sell there houses at £250 as at £250k ?

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  • There should be a couple of theirs in there rather than there. Senility’s starting to set in. And that last sentence should say ‘but if supply were perfectly inelastic’. It makes sense to me anyway.

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  • mark wadsworth says:

    PhD, the supply curve for housing is nigh vertical/price inelastic (let alone the supply curve for land).

    The key is to look at owner-occupiers as if they were simultaneously landlord/supplier and tenant/consumer. If they are willing to sell for a lower price than last year, this is not so much an increase in supply (by the landlord) as a fall in demand (by the tenant/occupier) or a preference for e.g. cash in the bank over housing.

    So if the D’s kick in (death, debt, divorce, disability, dole, drug addiction etc), this does not increase supply one iota – what it does is reduce demand.

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  • @mark, growler

    A wise man would know when to give in, so I’m going to keep digging.

    I’ve consulted the oracle of infinite knowledge and wisdom that is wikipedia and it states: “The graphical representation of supply and demand: The supply-demand model is a partial equilibrium model representing the determination of the price of a particular good and the quantity of that good which is traded.”

    The bit I’m clinging to is ‘which is traded’, which in the case of the housing market is a small percentage of the total stock. If I were to visit everyone in the UK who has their house on the market this week, armed with an expert valuer who could immediately tell me the current market price for every type of house in every location, then I could ask the seller the price they’re prepared to accept and compare it (work out the perentage relative to valuation) to the current market equilibrium value provided by the valuer. Some sellers would be happy to sell at the valuation price, a smaller proportion would be happy to sell for less and a larger proportion would be happy to sell for more. I could plot this data out on a price v quantity chart.

    If I then visited all the potential buyers and found out the type of house/location they want and the price they are willing and able to pay for that house and compare it to the valuers assesment then I would end up with another plot where quantity demanded increases with lower prices. Both of these plots would surely be elastic. If I kept repeating this process every week, I would find that the plots move position as would the price.

    I’m plotting the number of houses people are prepared to sell on the market at a given time along the bottom, with the equilibrium price at the transaction volumes, whereas you (and probably everyone else that knows anything about economics) are plotting the total housing stock, but I’m happy in my own little world.

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  • mark wadsworth says:

    PHD, sure, but what you would be plotting is the price that potential vendors are prepared to pay (in actual or notional costs) to remain in occupation of each house, i.e. the demand curve.

    This is why turnover has halved – there are two demand curves:

    1. The incumbents might not have a mortgage, or they might be in nequity, or they might be on an interest-only low interest rate deal. The cost to them (in cash terms) of staying put is very low.

    2. The potential FTBs have to scrape together huge deposits and would be paying much higher interest rates than incumbents.

    So the demand curve by incumbents is above (or to the right of) the demand curve by FTBs – this is what the Mailexpressgraph Home-Owner-Ists refer to as “the funding gap”.

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  • @MW
    Yes, you’re right 🙂

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