"If they fall to 5%, the value of that same stream of flowers doubles to £2,000."
How would that work? The idea is that people would sell assets that have below-market returns and buy assets that have above-market returns. Asset prices will adjust accordingly and so will the respective returns which are a function of price. And this will go on until return rates equalise across all assets.
This is the theory, but it's hard to imagine that in most circumstances a house can be traded for another asset. Why? Because having a place to live is a pre-requisite for being a functioning member of society. If tulips are under-performing sure I can sell my stock of tulips. If houses are under-performing I don't care. I'm not going to sell my house and buy something else, because I need a house. Thus I'm sceptical that the theory will work in the case of the housing market.
How does a house gain value? You can renovate it (real growth), or you can hold on to it and hope that someone will pay more for it. People don't think about it, but houses are relatively liquid assets. Let's pretend they are tulips, just for fun.
Imagine that you bought some tulips and just by hanging on to them for a while, you can realise a profit. This would be cool because everyone could put all their spare money into tulips and then turn around and sell them for a profit. Because the price of tulips keep going up (and people want to spend some of their gains on other things), eventually people will be able to buy less and less of them. However we might be able to raise salaries so that people can afford these tulips endlessly. In this way the inflation rate will exactly match the increase in price in tulips.
If we can't raise salaries to match the increase in the price of tulips, eventually people will be priced out of the tulip market and demand will dip. This will cause the price to fall. If people start to think, "Hey wait a minute. I'm not guaranteed to make a profit with these tulips after all", the price can fall a lot. If people start realising that they need to take a loss on their tulips so that they can afford to eat today, the price can tumble. How far can it fall? Mostly it depends on how clever people were for keeping the tulip bubble going. The more clever they were, the worse the potential fall. Essentially, it is likely to fall to the point at which the price of tulips escaped from inflation -- because it is a liquid asset and the need for tulips hasn't increased substantially over that time period.
Demand can influence the price of houses (and obviously did in Flint), but the degree to which the market dropped was a result of how overcooked the housing market was. Beware. Flint was never as overcooked as some markets are and people were never as clever about keeping the values high as some markets are.
Can a bubble last 10 years or more and then wipe out all of those gains? Absolutely. I only picked Flint because young people are likely to have heard of the problems there. You could also look at the housing market in London in 1991/1992.
Can the tech bubble burst and wipe out 10 years of gains? Sure. No problem. That's the only way I could interpret the person's question, "Can a bubble that has lasted 10 years still be called a bubble?" Definitely.
Yes but I imagine the argument would be that it leads to a reduction in supply & increased demand meaning fewer houses available to compete over which results in a higher over all price which can be applied to all houses, inflating the price beyond a houses intrinsic value.
> Rising prices seem good superficially because a lot of people own houses and that means everyone is getting rich!
But this only helps people who own multiple houses, or don't plan to live in one. If you need a house, the gain you get from selling your existing house after appreciation is necessarily offset by the loss you take buying an appreciated replacement house.
You can't get rich, or benefit at all, from a nominal appreciation in the "price" of something you can't sell.
That isn't an equilibrium. If the market formed the expectations that property values were going to stop increasing, then property values would drop - because the current price bakes in the assumption that they're going to keep increasing.
I've never understood how real returns on house prices could be believed to be sustainable. If the value of a house appreciates in terms of purchasing power for some other good at a constant rate, at some point in the far future just a single house would become valuable enough to purchase the entire global supply of the other good.
The illusion of house price appreciation is due to historical population growth creating scarcity, and cheaper money allowing for higher and higher leverage. At some point the music has to stop.
Sure. Don't deny that. I just question the wisdom that on the long run this is healthy or sustainable to believe that houses are always appreaciating assets when usually gains come from asset price inflation not inherent value increase.
OP is claiming that housing is a commodity. If treated as a commodity, all houses would be priced the same. Then the reality sets in and you have to deal with the fact that some houses are more desirable than others, so you need to distribute them somehow without changing the price.
Yes that would be a nice profit, but to hope that your house price wil double in 5 years is pure speculation. True, you'll have a nice leverage, but when speculating the leverage goes both ways; if your house price drops 50% you'll see the other side of the leverage.
The article is not about short term speculation, it is about long term expected returns. Which tend to follow the inflation and the interest rate.
I think the discussion so far, while interesting, is tangential to the point the article is trying to make. The point is that supply of housing isn’t the only thing affecting house prices. If you view houses as financial assets with varying value, it’s the supply of financial assets that matters, not just the supply of houses. Or am I missing the point?
I think the issue is that if housing prices hadn't gone up, they could buy a house of equal price without triggering capital gains.
So if your house is 1m and 10 years later stays at 1m, then you can swap for any other house in the neighborhood.
If your house was 1m but in 10 years becomes 2m, and all the other houses in the neighborhood are now 2m... you would hypothetically not be able to swap for another home. You now have 1.75m to buy with. A good problem to have, no doubt.
It’s a rather abstract view of making money. Other houses also go up in value. You only make money from the difference between how much houses in your area are going up, and how much houses in the area you want to move to are going up. And that difference may well be negative.
Sure, but that's not how they rationalize it to themselves. They really believe they're going to get every dollar back in resale value, and then some. With ever-increasing house prices until recently, it seemed to be true to them.
I think one takeaway from the article is that people misunderstand what market movements are good for them when they own a home exactly because they see it as a long investment, while they are actually often still short some proportion of their dream home...
If you want to one day trade down, like in your example, then increasing prices is good.
If you want, instead, to maximize the size of the the house you live in, within a similarly prized area, you should instead hope for a steadily deflating house market - the faster the better, down to a level where you have only just enough equity left to put down a deposit on a larger house.
People often see their house as an investment that will give them a lot of money, while forgetting that they likely dream of trading up, and forgetting that if their house appreciates, the price gap from their house to the their dream house is increasing too.
For most people other than the old, we tend to be perpetually in the situation where we would like to trade up. And so we should cheer on price drops, to a certain extent, rather than cheer on rises in equity.
But you can't just look at the rise in one good relative to the medium of exchange (money) and say that money is going down in value; people want a return, and stocks haven't provided it in the last 2.5 years or so, which about matches up with the author's timeline. If the buyers were actually _living_ in these houses as primary residences, it'd make a stronger case for genuine inflation. Commodifying them as value generators by flipping or renting them out may be the beginning of a speculative bubble - not a good thing, but a different phenomenon.
How would that work? The idea is that people would sell assets that have below-market returns and buy assets that have above-market returns. Asset prices will adjust accordingly and so will the respective returns which are a function of price. And this will go on until return rates equalise across all assets.
This is the theory, but it's hard to imagine that in most circumstances a house can be traded for another asset. Why? Because having a place to live is a pre-requisite for being a functioning member of society. If tulips are under-performing sure I can sell my stock of tulips. If houses are under-performing I don't care. I'm not going to sell my house and buy something else, because I need a house. Thus I'm sceptical that the theory will work in the case of the housing market.
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