More on housing price inflation (2021)
recoveringtradfichad.substack.com
recoveringtradfichad.substack.com
Every other reason for why housing prices are climbing so much is at best a `yes-and`.
Housing starts per capital have been trending slightly downward since the 60's. Recessions have cut house construction harder, deeper, and for longer than in the past. The net result is an increase in prices, except after 2008. Housing construction was tanked to the lowest amount on record and has taken 10+ years to get back to historic levels. We're missing 10 years of housing construction at a national scale.
The is exacerbated in major cities which have severely restriction new housing construction both by imposing direct housing caps and onerous new construction taxes, and indirectly by changing the building code. California requires housing to have solar panels, that is a $15000 cost that new buyers must pay that older owners don't have to pay. LA wants to ban wood construction, the most accessible, carbon neutral housing construction option out there.
If you want housing to be affordable, you need to increase housing production by 50% and keep it there for years.
Consider the case of New Zealand.
According to Statistics New Zealand in 1991 there were 1,307,000 private dwellings and 1,252,600 households. A difference of 4.16%.
In 2017 there were 1,855,500 private dwellings and 1,734,800 households. A difference of 6.5%.
During this time household sizes decreased and house prices increased far in excess of inflation. In 1991 the average house was NZD173,000 (in 2016 dollars). In 2016 it was NZD495,000. Today it is over NZD1,000,000 (or about NZD900,000 in 2016 dollars).
In my opinion, what caused this was massive financial deregulation and easy credit.
As I said elsewhere in this thread, consider that a credit fueled speculative boom creates excessive demand. Not all of these excess purchases will become a primary home. When speculation is rampant houses will more likely be:
- Second homes or holiday homes
- Undergoing extensive renovation
- Listed as short term accommodation
- Kept empty while owners reside overseas
- Simply left empty or land banked
- etc
You also ignore that the rapid growth in housing is causing people to buy them. If housing prices were flat then people would buy them largely for the rental income. Instead since they are increasing in value people buy them as an investment.
Many people resist believing more supply will reduce prices. I'd like you to imagine a wizard waving his wand an creating 1000 nice new homes in a city near you where new houses cost $1 million dollars. These homes are all auctioned off. The wizard then create another 1,000 homes and the cycle keeps repeating. People who don't believe supply is a problem will tell you that these houses will keep being snapped up at $1 million each forever no matter how many are built.
Well yes, it was ever thus. Many people do this and would prefer to live alone, but during this time, average household size has continued to decline.
> If housing prices were flat then people would buy them largely for the rental income.
No investor is going to pay $1,000,000 for a rental return of $40,000/y (before expenses) if there is no expectation of capital gains. I recently signed a lease for $45,000/y on a property valued at $1,500,000. Prices are only this high because of the expectation of capital gains. Without that, prices won't remain flat, they will fall and those that want to buy a home but currently can't will have a better chance. Especially because the major stumbling block for most is saving for the deposit (20% required in most cases).
> Many people resist believing more supply will reduce prices.
I don't deny that it might help. There is obviously some magic number of surplus homes that would cause prices to fall but that number is going to be very high. Any reasonable amount won't have an effect as significant as addressing the demand side of the equation (i.e. making property less attractive than it currently is relative to other investment opportunities).
I once had a job that made me very familiar with the number of residences in certain parts of Wellington city. In a single year, in an area of just a few blocks, the number of residences went from about 800 to about 1300. Prices continued to rise. What did have some effect was the credit crunch following the GFC which kept prices subdued for a while.
I won't deny that making real estate a worse investment won't reduce prices. In the short term. Most of the mitigations I've heard will at best knock a few percent off the current price but do nothing to stop or even slow the even rising prices and poor availability. Basically it works as quick hand-out to people who able to buy today, but not fix anything for anyone else 5 years down the line.
Supply and demand is not the issue when dealing with something of inherently limited supply, such as location/land.
If you want rent to go down, absolutely build more houses. If you want land prices to go down, tax land value.
Interest rates are at historic lows https://wowa.ca/bank-of-canada-interest-rate
Interest Rates and House values are strongly correlated. https://investfourmore.com/interest-rates-housing-prices/
When rates go up, prices will come down.
The average house in my small town is $799,999. 2 hours from Toronto. A small 1 bedroom, 1 bath, built prewar with no basement, is going for $300,000 in a bad part of town with a tiny lot. The house across the street sold for $240,000 three years before the pandemic. Today, it's quite possibly would go for $600,000+. This all might make sense in a high density area but...
When looking at a satellite image, 95% of the land around my immediate area is farms/forests. The average price of that land is $10,000 per acre. That's a 100% increase since the beginning of the pandemic(Avg. 5k before).
"As you can see there are some points where it appears interest rates may have correlated with a price drop, like in the late 2000s. Those of us who were in real estate at the time know there were many other issues as well. Lending was horrible, there was record new building and tons of foreclosures, basically the opposite of what is happening now. I think most people in the industry would say increasing interest rates were not the main factor that caused the crash.
I think the more telling sign is from the 1980s and 1970s where interest rates rose to astronomical highs! The prime rates were more than 20% at one time. It is important to know that the first graph is not what mortgage rates were. Mortgage rates that people get on their houses are not directly tied to the prime rate. The chart below shows what mortgage rates were."
This has an obvious big impact on the price of houses.
The bank offered a surprisingly low rate, and I looked at my FIRE research and thought, "Eh I can probably beat that in the market" and so the money that would have been frozen in the house (if I had bought in cash) is growing in index funds, hopefully faster than the mortgage is consuming it.
It's fucking weird. I think all these are true at once:
- Renting is not inherently bad
- A force is slanting the market away from "rent" and towards "buy"
- Too many people have an emotional stake in home ownership as its own end, and they would be better off seeing it as a tradeoff made coldly.
- Because the market has been slanted so badly for so long, these people are correct, but for the wrong reasons. They'll say that renting is throwing money away, because you don't get equity, but they won't say that equity is also throwing money away because of opportunity cost. They have never lived in a market where renting was actually allowed to compete with buying.
- Part of the reason buying is favorable might simply be that it's a proxy for credit score and wealth, and anyone making a loan would give a cheaper rate to a wealthier person. Since renters tend to have less money, they have to pay more in case they default. It's not fair, but I don't expect markets to be fair.
I think it's all an extended effect of the "White Flight". Having forgotten its racist roots, it's still got a strong emotional core of "Cities are full of crime and poor people. Renting is for poor people who are too dumb to save their money, and so they have it chipped away by rent." Or a leftist would say "Rent is inherently exploitative because landlords make money doing nothing."
It's a weird horseshoe when my far-right Baby Boomer parents agree with 2020 Twitter communists that home ownership is its own end, whereas I only see it as a means to an end.
The only time I rented an apartment, it was a fabulous experience. The only flaw was that it cost too much per square foot. And the ambient noise was high, because it was closer to the city core. Other than that, I really miss my old apartment.
This assumes risk neutrality. If rents go up to where someone is priced out, their kid lose their school, and all sorts of other Bad Stuff happens. Home ownership with a mortgage is stable.
Home ownership once the mortgage is paid off means your life is stable even in a crisis, job loss, or economic downturn; you can rent out a room, and so long as you bring in enough for food and taxes, you stay alive and you're not homeless.
For most people, home ownership is a rational choice. It doesn't maximize expected future $$$, but it does maximize expected future outcomes.
I decided not to renew my lease and moved back in with my parents (who I'd seen maybe two dozen times since I started working) to accelerate saving the money for a down payment on a house. Now I'm pretty much there, but I still haven't convinced myself that I see myself still working in the same place in 5 years so I haven't been seriously looking for a house.
Meanwhile, the asking rent for most of the apartment complexes around where I work has gone up nearly 25% since I left a year ago. I was paying $2k/month, now they want $2.5k -> $2.8k for the same exact apartment. It's just bonkers to me. Great for whoever owns property, bad for whoever doesn't...
1. Inflation is very real and real yields on mortgages are negative. Basically free money is being printed by politicians.
2. Number of construction workers are in decline. Which means we are reducing our ability to construction homes. This is heavily due to politician decisions. In 2010 women only are 9% of those in construction and when women do work in construction they hold a sign.
3. Politicians are making decisions that also restrict or reduce housing construction. In way too many ways, many listed in article.
4. Politicians are allowing in very significant numbers of immigrants who need a place to sleep. telew
5. Politicians have done nothing to restrict things like airbnb and other investment strategies.
6. Politicians have under invested their generation expecting to indebt the next generation for their retirement. Which is actively not working because of inflation.
The entire housing situation has been crafted by politicians intentionally.
Perhaps, but what's different this time is:
1) There are more institutional buyers. 15 yrs ago, I would presume, less than today.
2) Mind you Zillow wasn't prepared, but others certainty are.
3) With that said, I'd imagine instutional buyer are drolling for an implosion. The small fish would have to bail and the big fish are there waiting to snatch up all they can
Last time it was negligence. The fact it's repeating so soon makes it feel far more intentional.
I'm not sure what the "split" among institutional investors is, but afaik most of them want the houses to rent them and create a revenue stream, not flip them for a one-time profit. So inflation doesn't really help them either; e.g. it means they pay more taxes, and requires more upfront capital for the same revenue stream unless the rent they can charge increases in lock-step % (which maybe it does). The fact that the underlying asset appreciates in value is more than just gravy, but don't think it's the point for them. I think they are doing it because it is almost an obvious investment from a risk-return profile compared to other options.
What if the people paying the prices now are also over extending themselves just like the others did in until 2008?
Considering how much low-interest money the banks are handing out to everyone now it certainly looks like it to me.
Given the amount of investors involved now (and since the mortgage crisis) buying up properties to rent, I could see one trigger being (some reason) that causes it to no longer be a good (or optimal) investment, and them dumping huge inventory onto the market. The government cracking down via regulation on investment ownership (or mass ownership) of single-family homes could be one route to that, although somehow that doesn't feel likely to happen.
It is not the same this time where people with a credit score of 450 were buying multiple homes. This time the people "over extending", in my experience, are on relatively solid financial ground. In my opinion almost anyone that is borrowing 500k+ (because they don't have it, not because it's financial strategy) are "over extending". They are in fact exposed to risk of default, but that doesn't at all correlate to the probability of default. The real risk, meaning probability of occurrence, is most likely pegged to the risk of them losing their source of income, which could (and seems for a while now) in reality to be quite low.
Anecdotally, many I know that are "over extending" could afford to be out of work for months and not lose their home. Either through their own savings, or safety nets in the form of their now retired baby-boomer parents sitting on substantial nest eggs. Very common since all it took for the boomers was to make some average stock investments and own a home to easily become relatively rich over the past 30 years.
I would be interested most to know the % of current homeowners that could make mortgage payments for 3-6 months if one or more jobs in the household were lost. I guess that would be a decent proxy for how likely any implosion of the housing market would be, if it would be triggered by owner-occupants defaulting.
I, too would welcome a correction. One of my kids has not bought a house yet. It would be nice if they had an easier time doing so. Small corrections might happen regionally, based on regional shifts in population. But it is unlikely to happen nationally. I also do not have much hope that remote workers moving to low cost locations will make enough of a dent in demand in high prices areas.
I don't think that a supply shortage gets to the crux of this problem. I think a more significant factor is availability of credit.
It's worth considering that a credit fueled speculative boom creates excessive demand.
That's basically political NIMBYISM and is in every government in Europe (And I guess in the US, Canada, Australia, etc.) and it makes sense they would do that as the politicians themselves plus the majority of the population (over 50%) in every country owns some form of real estate, so they have a vested interest to make themselves and over 50% of their electorate richer on paper since it's a good way to get votes and support for your policies. Those less than 50% who don't own anything can go screw themselves basically since being a minority in terms of votes, they don't have the democratic power to change anything in their favor, so the housing policies reflect their lack of leverage.
The ship will only change course when(if) the percentage of the owning class dips significantly below 50%, causing the democratic power to shift to those who don't own anything and we might start seeing things like larger taxes on your second homes or larger inheritance taxes.
Usually when I hear this stated, people seem to mean that over 50% live in an owner occupied residence.
I doubt that the commenter above who has moved back in with parents to save on rent considers themselves to own real estate (even if they may someday inherit it).