Understanding house prices

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quantropy
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Understanding house prices

Postby quantropy » Tue May 07, 2013 8:27 am UTC

I live in England, and I thought I understood why house prices were so high. The story I told myself was that England has a high population density, so there is a limit to how much new housing can be built. In particular, people are reluctant to allow much new housing, because they want to preserve the amount of green space in the country. Hence demand outstrips supply.

But now I find that the countries with the highest house prices are places like Australia and in particular Canada, which have very low population densities. It's hard to understand why new houses aren't built to meet the demand, thus stabilizing prices.

So now I have to invent a different story. It goes something like this. Whether population density is high or low, building of new houses has proceeded at a substantial rate. It drops a bit when house prices stagnate and increases a bit when they are shooting up, but it's hard to build lots of houses quickly. The thing is though, that the new housing is taken up by people wanting bigger and bigger houses. Despite the price, if people think that they can possibly afford that extra bedroom then they will go for it, even if it means taking on a huge mortgage.

What do people think?

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EvilDuckie
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Re: Understanding house prices

Postby EvilDuckie » Tue May 07, 2013 9:55 am UTC

It's my understanding that population density certainly plays a factor, but on a much more local scale and more as an effect than a cause. Take Australia for example, big country, very low population density. However, housing prices along Sydney Harbor are probably going to be insane, because everybody wants to live there, and hardly anybody will want to live in the remote outback. It's (again in my understanding) much more a matter of "push" and "pull" factors.
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Frimble
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Re: Understanding house prices

Postby Frimble » Tue May 07, 2013 12:33 pm UTC

Here in the UK we actually have a housing "bubble" where macroeconomic factors such as speculation and monopolization have caused the price to increase. At some point (in theory) "the bubble will burst" and house prices will drop significantly and very quickly. However the government is pretty scared of this happening because it will effect the whole economy negatively and so are making some rather ham-fisted attempts to lower the price gradually. I don't actually study economics so this is probably a simplified version of what's actually happening but I hope it helps:

1) People with money think that housing prices will increase so they buy houses in the hope of selling them at a profit. go to 2)

2) People with money see house prices increase and so think that they will continue to increase. go to 1)
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Re: Understanding house prices

Postby SecondTalon » Tue May 07, 2013 3:03 pm UTC

Not that I'm sayin the rest of it is uninhabitable, but settlements in Oz are mostly all coastal, and the population in Canada tends to congregate near the American border. So you have these huge countries of millions of square miles where the population is fighting over just a few thousand of them.

The farther you get from a population center, the cheaper housing gets. Or, more accurately, the closer you get, the more expensive it is. In the UK you can hardly swing a cat without hitting a population center. Not so in Canada or Australia - even small towns can be fifty miles apart. While this makes the in-between housin cheap - no one wants to spend two hours round trip to quickly pick up a gallon of milk.

I suppose what I'm getting at is that uniform density has as much to do with housing costs as overall density. If you can live mostly anywhere and not be far from shops and such, one place is as good as another. If you have to live in a few areas to be within striking distance of stores and such... Things get expensive.
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Re: Understanding house prices

Postby beojan » Tue May 07, 2013 3:19 pm UTC

Also, comparing house prices in the UK to those in Australia or Canada isn't really comparing like with like, because the UK has the smallest houses in Europe, certainly smaller than those in Australia or Canada, and UK estate agents have the horrible habit of selling houses based on number of bedrooms (that you may or may not be able to actually fit a bed in) rather than floor area.

If you were to compare houses in Australia or Canada or the US, with houses of a similar size in the UK, you would probably find that house prices in the UK are in fact the most expensive.

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Re: Understanding house prices

Postby quantropy » Wed May 08, 2013 9:54 am UTC

I can see that there are places people like to live, so that prices are higher there than elsewhere, and that there's limited opportunity to build extra houses there. My impression, however, is that when prices go up, they tend to go up 'across the board', so that it's isn't a case of prices in Sydney or Vancouver skyrocketing and prices elsewhere being stagnant.

Of course there's little point in building extra houses in remote places, far away from services, but you would think that there would be plenty of opportunity to build extra houses 50-100 miles away from population centres, and build them in sufficient numbers to make it worthwhile opening shops etc in the neighbourhood.

The only explanation I can think of is that there is already substantial building going on 50 - 100 miles from population centres. Obviously the builders aren't going to build lots more if it means a drop in the prices they will get for all of them. In theory competitors should enter the market, but starting a business to build thousands of new houses isn't something that can be done quickly. (I've also been reading Steve Keen's 'Debunking economics, which argues that a group of businesses are likely to act more like a monopoly than show perfect competition). So new houses become available, but the extra tends to be translated into people having bigger houses, rather than extra houses on the market.

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Re: Understanding house prices

Postby kiklion » Wed May 08, 2013 12:28 pm UTC

House prices also don't follow supply/demand as much because they aren't 'used up' in a sense. With goods that expire, they need to be sold or they are a waste to the person who has them. So if demand is low and supply high, price comes down as they try to make sales. Supply for non-perishables like homes don't function the same. If demand is low, people may not offer as much for a home and the person wanting to sell it realizes they don't need to sell and supply goes down as well.

This doesn't apply to businesses that own multiple properties trying to flip them, but I don't know what the ratio of individually owned vs business is for homes on the market. However once the price goes down below a certain point, it may be more beneficial to rent out the homes.

Personally, unless companies with cash come in and buy homes, hoping to rent them out to families, I think home prices will fall again in my area. I just don't see my generation willing to put themselves on the line for $350k minimum (in my area) when they may have $100,000 in student loans and jobs that pay less than $50k a year.

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EvilDuckie
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Re: Understanding house prices

Postby EvilDuckie » Wed May 08, 2013 1:15 pm UTC

quantropy wrote:I can see that there are places people like to live, so that prices are higher there than elsewhere, and that there's limited opportunity to build extra houses there. My impression, however, is that when prices go up, they tend to go up 'across the board', so that it's isn't a case of prices in Sydney or Vancouver skyrocketing and prices elsewhere being stagnant.


Not quite...

And even then, by state is still woefully inaccurate in a country like Canada.

Your plan of building new cities 50-100 miles away is not impossible, but it is very hard. Not only would you have to build enough houses to reach critical mass so that shops become viable, but you also have to make sure the people living there have jobs. A 50 mile one-way commute is doable, 100 miles is too much for most people. It's been done in the past though, e.g. Almere and Milton Keynes (although Almere is much closer to Amsterdam)
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Re: Understanding house prices

Postby Adacore » Mon May 13, 2013 11:47 pm UTC

Prices increasing 'across the board' is certainly not the case in the UK, where prices have generally been rising in London but remained stagnant or declined in other areas of the country over the last few years. The artificially high price of housing is, I would say, based on two things - the fact that property is seen as an investment rather than just a place to live, and the fact that owning property is seen as 'aspirational', which allows the price to be significantly inflated, since people attach so much personal value to owning a property.

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Bloopy
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Re: Understanding house prices

Postby Bloopy » Wed May 15, 2013 2:38 am UTC

In cities such as Sydney and here in Auckland, not enough land is being allocated for development, and builders/tradespeople struggle to keep up with demand too. The governments want more high density living (apartment blocks and townhouses), while a lot of people don't just want bigger houses, they want a decent yard in a better neighbourhood, in the zone of a reputable school, etc.

I think it all depends on where the jobs are and where the economic growth is.


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