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.

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