House prices

As promised, this is a second comment on supply, demand and prices. The one before was on fish and this is on housing. As you’d expect, houses are more price sensitive than fish: people are concerned about the price in a way they aren’t when they are in the supermarket. However, that doesn’t mean that supply, demand and prices are entirely based on ‘market fundamentals’ as the mortgage lenders and estate agents would have it.

According to them, prices have kept rising and now won’t fall because of ‘a structural housing supply shortage and pent-up demand from a large number of first-time buyers’ (BBC). Often this is combined with explanation such as an increase, or predicted increases, in the number of households, planning law, and low unemployment.

This just doesn’t stack up. First, these factors have been known about for years, and the market should have priced them in a long time ago. Why didn’t speculators drive up prices to current levels at the beginning of the boom, because we knew then what we know now? Second, the evidence shows some big exceptions. In Stoke-on-Trent, prices have been rising faster than many places, admittedly from a low base, despite high unemployment, a decreasing population, one of the biggest void rates (empty homes) in the country, and new houses being built everywhere. Which brings us to the third point, which is that people aren’t buying their first home or a bigger home because they are homeless or badly housed (i.e. need), but that they want to buy, but can choose not to. Almost all  of us would like to live in a bigger/nicer house, in a better area, but the question is ‘how much do people want to?’

If, therefore, someone living in a not-so-nice house is thinking about moving to a nicer house, they have to feel comfortable spending that money. If they don’t feel comfortable with this they can stay where they are; it’s a nice-enough house. It’s not like food or washing powder, where they have to buy more to replace the stuff used. Instead of ‘market fundamentals’, this demand then comes from ‘sentiment’, based on optimism and fear of risk, both for homebuyers and lenders, and themselves based on interest rates, money supply, inflation, house price movements, the weather and so on. This is how prices can rise, even where the population decreases, wages have fallen, and houses are empty. It’s a bubble.

Advertisement

Fish

This is the first of two posts on the topic of supply, demand and consumer behaviour (the next one on housing). Today, on Woman’s Hour, while driving through town, I heard a great article about fish.

The essence of it was the fact that cod and some other popular fish have massively increased in price (overfishing, more people wanting more fish). The question was asked why don’t people move to buying cheaper alternatives. ‘I only eat cod, Idon’t like anything else, I don’t like the look of it’ was one quote. Now the funny thing is that the reason why working class Brits ended up eating a lot of fish was because it was a cheap meal, compared to other sources of protein.

The best bit was when some old dear said, I don’t like pollock, I only eat cod, and an Oldham fishmonger presented a plate of pollock and a plate of cod and asked the lady to taste them. She liked one, said what a nice bit of cod it was, and then the fishmonger said it was pollock.

So although prices, supply, and demand are related, what makes up demand is complicated. In this case, some ‘tradition’ coming from post-war food policy makes people used to cod. What’s interesting is that it seems people are less price sensitive in this case than they used to be. We’ve got used to being able to buy what we want for food, due to our relative affluence. This, of course, isn’t the case for housing… my next topic.

Pay rises

Last month’s stories about police pay again show how journalists can’t do maths (also see this).  As a union should, the Police Federation has pointed out how delaying any pay rise penalises their members, and uses a nice simple figure. One which is repeated by all the journalists, but doesn’t really make any sense. Indeed, a better understanding of the use of pay figures is needed to get any justice for all workers.

 ‘The pay award will be backdated only to December 1, not September 1 as expected. The delay reduces the police award to a 1.9% pay increase.’ (http://www.guardian.co.uk/uk_news/story/0,,2226870,00.html)

Of course, they are being paid 2.5% more for the work done on Dec 1st, than that done on Nov 30th. That’s a 2.5% pay rise. But by delaying the rise, the total pay for a given time period (say April ’07 – April ’08) is lower. This seems to be a common trick in the public sector. If the negotiators get 2.5% each time they ask, but the implementation ends up being every 15 months, then they don’t get a yearly pay rise of 2.5%.

In my last job I lost out by far more than the police over a back pay issue (we’d been promised a year, and got none). There was also a delay to implementation of a new pay scale, so even though it was supposed to reflect the correct pay at a certain date, when it came in inflation had already eroded it, and because the pay negotiation timetable had to be followed any subsequent annual rises were on already out-of-date figures.

I don’t know how the police negotiation works and when, but if next year’s pay rise is brought forward then they might get something like inflation when it’s all added up. If not, then they are losing out. Good luck to ’em.

P.S. Another issue related is that of the relationship between the rise in the ‘total wage bill’ and individual pay packets. The wage effect on inflation seems to be something the treasury influences through increases in the public sector wage bill, which it wants to keep at 2%. Individuals can get more, as long as the total stays at this level, perhaps by making some redundant…