FACT 5: YES, IT IS EXTRA BANK LENDING PUSHING UP PRICES,

Not house prices rising with banks running after them with bigger mortgages

 

This is a technical point to do with Correlation and Causation which slick tricksters try to use to defend the banks’ immoral and incontinent behaviour. So this is a bit longer than previous Facts.

 It would seem clear-cut.  For decades now, mortgage credit 

has marched steadily upward with house prices, 

while other forms of bank credit have tailed off, 

as shown in this graph.

 For 60 years mortgages have followed every twist and turn upwards. 

Does that prove higher prices were caused by looser lending? Not necessarily!

 

Here’s what J R-C says

“One concern with the view that increases in mortgage debt drive up house prices

is that causation may run the other way: rising house prices (caused by some other

factor, for example, inelastic supply or rising incomes) lead to greater demand for

mortgage credit. However, there are reasons to be skeptical of this view.

 

First, a number of recent empirical studies using careful statistical identification

strategies, such as using financial deregulation as an instrument exogeneous

to demand, suggest that house price rises are more likely to be a response to

credit supply expansion rather than a cause. For example, in one US study (q.v.)

 the authors were able to isolate the extent to which credit liberalisation was

exogeneous to demand in impacting mortgage credit

expansion and associated house price increases. This study found that between

1994 and 2005, deregulation explained between one half and two-thirds of the

observed increase in mortgage loans, and between one third and one half of the

increase in house prices.

Second, other studies have found credit constraints 

to be the most important factor in explaining cross-country differences 

in house prices, which helps to explain different house price responses 

to the same shifts in interest rates.

Third, the UK was not alone in seeing rapid expansions in mortgage credit

correlated with rising house prices. For example, one study found that across 16

high-income economies, on average, mortgage credit rose from 40% of GDP in

the mid-1990s to 70% by 2007, with house prices doubling 

over the same period

Given significant differences in other potential explanatory variables in such 

a large sample of countries, such as the elasticity of housing supply or

changes in income, expansion in mortgage debt, which occurred nearly 

everywhere in the 1990s, is the most convincing intuitive explanation.

Indeed, recent cross-country empirical research shows 

liberalising mortgage credit has actually led to 

lower levels of home ownership 

as affordability has worsened across many advanced economies. 

Furthermore, rising mortgage debt and credit

liberalisation are not associated with increased construction of new homes, as is

often claimed.”

Fact 4. Liberalised, predatory finance is the main driver of consumer demand and hence hyper-inflated prices
 

See how prices track lending (mortgages) step by step 

Here’s what J R-C reminds us:

  

“First, a number of recent empirical studies  suggest that house price rises are more likely to be a response to credit supply expansion rather than a cause.  

 For example, a study found that between 1994 and 2005, US deregulation explained between one half and two-thirds of the observed increase in mortgage loans, and between one third and one half of the increase in house prices.

 
Second, other studies have found credit constraints to be the most important factor in explaining cross-country differences in house prices, which helps to explain different house price responses to the same shifts in interest rates.
 
Third, the UK was not alone in seeing rapid expansions in mortgage credit correlated with rising house prices.

For example, one study found that across 16 high-income economies, on average, mortgage credit rose from 40% of GDP in
the mid-1990s to 70% by 2007, with house prices doubling over the same period (see Figure 4 above).

Given all the differences in other potential explanatory variables
in such a large sample of countries, such as the elasticity of housing supply or changes in income, expansion in mortgage debt, which occurred nearly everywhere in the 1990s, is the most convincing intuitive explanation.

It gets worse! Research shows liberalising mortgage credit actually led to  lower levels of home ownership as affordability has worsened across many advanced economies.

Furthermore, rising mortgage debt and credit liberalisation are not associated with
 increased construction of new homes, as is often claimed.
 
Another explanation is that commercial home builders lack incentives to build out at a rate that would reduce house prices, even if more mortgage credit is being made available to theoretically support more construction.

 As a result, more credit flows into competition for existing homes,
 further inflating house prices and developer profits.

 

Fact 3. Buyers seek an asset (land with a house on) and some also want a house (a commodity, a structure, a thing) to live in
 

BTL, landlords, 2nd homers, o'seas buyers of bolt-holes are investors only. 

Those looking for a place to live are both investors and commodity buyers

Here’s what J R-C reminds us:

“Housing has two economic functions. It is both a consumption good – it provides

shelter – but also an investment good. In relation to the latter, residential property

can be:

• a financial asset providing realised and unrealised capital gains, and actual

and imputed rental returns;

• a source of collateral that can enable borrowing and increase purchasing

power, including to acquire additional property;

• a store, and means of passing on, wealth; and

• a hedge against rental risk.

It is important for housing policy makers to understand the impact of both types

of demand to ensure the efficacy of interventions aimed at enhancing housing

affordability. The demand for housing as a consumption good can be understood

as a universal need that the state has an obligation to provide for at a basic

minimum level.”

 

Put simply: the economics of assets is not the same as that for commodities — hence Fact 1: Build More won’t fix it.

 

Fact 2. 'House' prices are not rising.

It's ONLY the Value of the PLOT 

-the land the house is built on -- 

that is rising, not the Value of the Building. 

Here’s how Josh explains this: 

“Rising house prices in the UK and other high-income economies have mainly

been driven by rising land values, with the cost of housing structures tracking

consumer price inflation. 

Land underlying dwellings in the UK has increased in nominal value almost eight-

fold since 1995, from £0.7 trillion in 1995 to £5.4 trillion. 

This is equivalent to an increase from 82% to 252% of GDP.

From an economic theory perspective, capital gains and rental income from

property are normally considered as economic rents – income derived from

control over a scarce asset (land) needed for production – rather than normal

profit derived from productive investment in a competitive market. 

Land has unique properties differentiating it from other commodities, 

including being inherently scarce, fixed and irreproducible, 

which means its owners are able to extract economic rents 

if permitted to do so. Increased financial flows into unproductive assets 

like land and property increase such rents and can be viewed as 

an inefficient allocation of capital, with negative consequences for economic

growth and wealth inequality.”

JR-C gets it! The conclusion that stopping land-price rises is the best fix. 

(Although ‘only’ holding building costs shows a tech failure by the industry)

 Fact 1: Building Lots More Houses 

                                will not fix it. 

JR-C explains why.

Here’s what he says

“In UK policy circles, explanations of the affordability crisis have focused more

on supply-side explanations. Multiple reviews of the UK’s housing market have

concluded the reason for high prices is due to inadequate provision of new

homes relative to rising demand driven by rising incomes, increasing household

formation (people living in smaller households) and rising immigration. Government

interventions have also focused on supply-side reforms.

However, since the 1980s, successive governments have been unable to

materially increase the rate of housebuilding, which has averaged around 150,000

new units per year.2 The UK housing development sector is dominated by private

sector developers, who may lack incentives to build out at a rate that would reduce

house prices in local areas where they operate.3–5

Moreover, evidence suggests that expansion of the housing stock may have a

limited effect on housing affordability in aggregate. Estimates of the sensitivity

of UK house prices to increases in housing stock consistently show that

a

1% increase in housing stock delivers a 1.5–2% reduction in house prices.6,7

[that’s quite impressive? Elastic demand. A bit cheaper and we’d want(buy) lots more.]

 

Taking into account the growing surplus of housing stock relative to number

of households, this implies that, all else equal, expanding the housing stock by

20% (approximately 5 million homes) over the next 20 years roughly in line with

government projections might bring down prices by around 10%.7 This contrasts

with a 306% increase in mean nominal English house prices since January 2000

(from £75,219 to £305,370).8

 

[That’s what he says: Actual prices rose 306% over the last 20 years.

So even if we could have built 400,000 homes p.a., it only would have reduced prices by 10%!

TEN per cent drop on a total rise of THREE HUNDRED AND SIX per cent! ]

  

Furthermore, new build makes up just 1% of the total of new housing supply that

comes onto the market each year, with the vast majority coming from existing

properties being sold or rented out.9 To achieve more material increases in

affordability in the short to medium term, policy makers also need to consider how

to reduce types of demand – specifically investment demand – that might free up

existing stock for those in housing need, as well as ensuring the most efficient use

of any new supply.”

 

[The clowns who advocate ‘Build More’ as the fix for the Housing Price Crisis haven’t a clue.]

 

Based on

Ryan-Collins, R. (2024). The demand for housing as an investment: Drivers, outcomes and policy interventions to enhance housing affordability in the UK. UCL Institute for Innovation and Public Purpose, Policy Report 2024/13.                                                                  Available at: https://www.ucl.ac.uk/bartlett/public-purpose/policyreport-2024-13. Filed at HML/HousingMarket/Invest 

JOSH RYAN-COLLINS* (JR-C) GETS THE FACTS RIGHT

On WHAT NEEDS TO BE DONE TO FIX THE HOUSING PRICE CRISIS

 Fact 1. Building Lots More Houses will not fix it. 

Fact 2. 'House' prices are not rising--

     It's ONLY the Value of the PLOT -the land the house is built on             that is rising, not the Value of the Building. 

JR-C gets it. The conclusion that stopping land-price rises is far and away the best fix. (Although ‘only’ holding building costs shows a tech failure by the industry)

Fact 3. Buyers seek an asset (land with a house on) and some also want a house (a commodity, a structure, a thing) to live in

BTL, landlords, 2nd homers, o'seas buyers of bolt-holes are investors only. Those looking for a place to live are both investors and commodity buyers

Fact 4. Liberalised, predatory finance is the main driver of consumer demand

In the main, buyers are looking for a good investment, as well as a nice place to live. For the BTL crowd investment is the only motive with capital gains a priority.

FACT 5: YES, IT IS EXTRA BANK LENDING PUSHING UP PRICES,

Not house prices rising with banks running after them with bigger mortgages

 This is a technical point to do with Correlation and Causation which slick tricksters try to use to defend the banks’ immoral and incontinent behaviour. So this is a bit longer than previous Facts.

I'll be elaborating each of these themes over the next few days and weeks.

*Josh is the best, most clued up academic writing about the UK Housing Crisis. His latest paper lays out the facts: Ryan-Collins, R. (2024). The demand for housing as an investment: Drivers, outcomes and policy interventions to enhance housing affordability in the UK. UCL Institute for Innovation and Public Purpose, Policy Report 2024/13.                                                                  Available at: https://www.ucl.ac.uk/bartlett/public-purpose/policyreport-2024-13. Filed at HML/HousingMarket/Invest see NewStatesman p57 25-Oct-24

 How's this for an idiot economists view of the housing market?

Dean Baker tells us that paying out 34% of your income on housing in 2024 is OK because

--today's house are bigger than before (not in UK), and 

--they boast lots of extra goodies like double glazing and central heating (true, but that only accounts for a tiny amount of the huge price rises. I know, I've done the research 1984 J Valuation)

--Most ridiculous argument of all. Food used to be 24% of household spending, now less than 10%. So you've got all this spare cash, which can be diverted into buying your accommodation. Is Baker mad? Why isn't housing going down in cost like everything else? If it was then we could earn as much as we do today and  splurge out on luxuries, or BETTER STILL, keep our current lifestyles and get by on lower incomes.

 

BY DEAN BAKER

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I am not ordinarily a celebrant for the state of the economy, but the media have been so over the top in pushing the economic doom story during the Biden presidency, that I feel the need to put some reality into the picture.

One of the central lines among the doomsayers is that we are spending a larger share of income on housing and that for many it has become altogether unaffordable. I will agree that housing is a serious problem. In fact, I recently authored a piece in a new collection on the issue, which I would encourage everyone to read. We need to build more housing and especially more affordable housing.

But acknowledging that housing is a serious problem is not the same as saying it is an unprecedented crisis, and many of the things that have been asserted in the media are simply not true. For example, it is not true that homeownership is no longer part of the American dream for young people. In fact, homeownership rates for young people are above their pre-pandemic level.

It’s true that the run-up in mortgage interest rates since the Fed began hiking in March 2022, coupled with rising house prices, has made the cost of buying a home prohibitive for many new buyers, but few expect rates to stay this high for long.

Mortgage rates are highly cyclical, they go up when the Fed raises rates in an effort to slow the economy. The current rates of near 7.0 percent are high compared to the 3.0 percent rates we saw during the pandemic, but they are not high by historic standards. In 1981, they peaked at over 18.0 percent.

I don’t recall reporters at the time writing pieces as though 18.0 percent mortgage rates would persist for the indefinite future. I am not sure why they feel the need to write that way about the current 7.0 percent rates.

Another aspect of the manufactured housing crisis story is that we are spending higher shares of our income on housing, with a record number of people spending more than one-third of their income on housing. This share has been dubbed as a crisis point by some.

It is certainly true that we are spending a much larger share of our income on housing than in prior decades, but a big part of that story is that we are spending a much smaller share on other things. The graph below shows the share of disposable income going to food, clothes, and household furnishings since the late 1940s.

Source: National Income and Product Accounts, Table 2.3.5 and author’s calculations.

As can be seen, there has been a sharp reduction in the shares of all three. This is especially striking with food. In 1947 we spent 23.0 percent of our income on store-bought food. This had fallen to just 7.1 percent last year. The share of income going to buy clothes fell from 10.3 percent to 2.6 percent. The share for buying household furnishings dropped from 5.5 percent to 2.5 percent.

These declines freed up income to go to other areas, and one area that extra income went to was housing. The houses we live in today are on average much larger than the ones we lived in 75 years ago. They are also far more likely to have air conditioning and relatively clean sources of heat. (Coal furnaces were still common in the late 1940s.) They are much better protected against fires and less likely to have harmful chemicals like asbestos and lead.

As a result of reduced spending in other areas, and the higher quality of the housing we live in today, the share of our income going to housing now exceeds 34.0 percent, on average. (This figure includes “owner equivalent rent,” the money that a homeowner would be paying to rent the home they live in.)

Given the 34.0 percent figure is an average, it is hard to see the one-third level as a crisis. Rather, we probably need to recalculate what share of income going to housing costs presents an unmanageable burden.

None of this should be taken to mean that we don’t have to do things to make housing more affordable. We need to ease up restrictions that block both new construction and the conversion of empty office space to residential. And we should ensure that a substantial share of these new units are affordable.

We can also take short-term steps to improve affordability, like limiting vacation rentals and having moderate rent control. A vacant property tax is also a good way to get more units on the market. It will also be good when Jerome Powell and the Fed get over their inflation fears and start to ease up on interest rates.

We have a serious shortage of housing in the country due to a sharp plunge in construction in the decade following the collapse of the housing bubble. We were gradually getting back to more normal levels of construction when the pandemic broke out. If we can sustain higher levels of construction for several years and convert many of the offices that are currently vacant, due to the explosion in people working from home, we can lower housing costs.

But it is helpful to look at the issue with clear eyes. The biggest reason housing has grown as a share of our income is that we are spending so much less on other necessities. That is a good thing.

This first appeared on Dean Baker’s Beat the Press blog.  

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC.