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