There was much earnest discussion of an excellent article* in The Telegraph by Roger Bootle (which was about supply and demand in the housing market) over at Housepricecrash, which revolved around whether the supply curve has shifted (or indeed can or will shift). For posterity (feel free to prove me wrong), my last comment was as follows:
... the supply curve for housing** is nigh vertical/price inelastic (let alone the supply curve for land) [and does not and can not change or move].
The key is to look at owner-occupiers [the bulk of UK housing being owner-occupied] as if they were simultaneously landlord/supplier and tenant/consumer. If they are willing to sell for a lower price than last year, this is not so much an increase in supply (by the landlord) as a fall in demand (by the tenant/occupier) or a preference for e.g. cash in the bank over housing.
So if the D's kick in (death, debt, divorce, disability, dole, drug addiction etc), this does not increase supply one iota - what it does is reduce demand.
* Highlight: "Doubtless I shall soon be told that there is no such thing as "the" housing market but rather umpteen micro markets, or that I have forgotten about supply and demand. (A pretty bruising criticism to an economist.) Or that I have ignored the fact that we are a small island, that we don't build enough houses and that Aunt Mabel is set to remain in her three bedroomed semi, despite having a gammy leg etc."
** For the benefit of people like Adam C (in the comments), exactly the same logic applies to any other nigh permanent asset, which is in fixed supply, which cannot be easily replicated and from which the current owner derives benefits, be that housing, Vodafone shares, a taxi driver's permit, radio spectrum, cherished number plates, airport landing slots etc.
Two Birds, One Stone!
48 minutes ago
15 comments:
It's all the fault of speculators!!!
From your previous post "From everything I have ever observed (and going by what others say), the two cancel each other out, and housing is in fact pretty much the most normal of 'normal goods', in other words the fraction of a household's income that it devotes to housing expenditure (primarily mortgage repayments or rent) is fairly constant at all income levels"
Since us mortgage-free folk are a bit of a rarity these days, I would suggest that the bulk of homeowners are effectively tenants and, as such, subject to Ricardo's Law. Hence house prices are, by and large, independent of supply and demand and are entirely controlled by the ability to pay.
L, a lot of homeowners are speculators too.
B,: "Since us mortgage-free folk are a bit of a rarity these days" Not true actually. Only about half of privately owned homes have a mortgage on them, and half don't (and of the half who don't, in turn half are pensioners).
But the mortgage that these people took out at the onset will have been proportionate to their incomes at the time, and those whose income rose later in life will probably have traded up.
Well, come to think of it, there is an opportunity cost to be paid if you are a cash buyer, so even cash buyers are effectively "paying rent".
Ricardo Rules!
MW - I Know!
B, of course Ricardo rules. Greatest economist ever.
L, and I know that you know.
But the Home-Owner-Ists are keen to make scapegoats of the bankers or the BTL-ers or the estate agents or anybody, as long as the blame for the underlying lunacy of house price bubbles is constantly deflected elsewhere, so I wouldn't give them an inch.
The "supply of housing" is not the number of houses that exist. the "supply of housing" is the number of houses that are for sale at a particular time.
Imagine I bought all the houses in England, and refused to sell any of them. Would the supply of housing then not be zero?
Adam, what you say would be true if you were talking about cakes which are destroyed when they are used and must therefore be replaced by newly produced cakes every day. However it is not true of land which is not destroyed by use. It is quite possible for people to use housing without buying it whereas it is not possible to use a cake without buying it. It's a bit pointless renting a cake to satisfy your hunger!
When we talk about the supply of housing we are not just talking about what is being sold, we are talking about what is being used. In other words what is being sold plus what is being rented. If you bought all the houses in England, refused to sell any of them but still rented them all out, the supply of housing would be exactly the same as it is now. Even if you refused to rent any of them, you would still be getting (and wasting) the housing use yourself.
In essence what is being sold is not houses but house-weeks. So the supply of housing is not the number of houses for sale but the number of house-weeks for use.
And that is proportional to the number of houses that exist, not the number for sale.
So to sum up if you owned all the houses in England and refused to sell any of them, you would reduce the supply of houses to zero but not the supply of housing. In order to reduce the supply of housing to zero you would need to refuse to rent them too.
All economics is either (1) footnotes to Smith and Ricardo, or (2) error.
Adam: Imagine I bought all the houses in England, and refused to sell any of them. Would the supply of housing then not be zero?
IF (big if) you managed to achieve this, then the amount of houses available for purchase would indeed be zero, and the equilibrium selling price would go up (to infinity) but this would happen because of increased demand (by you) and not because of reduced supply.
But there is no way that you would be able to buy up all the houses, as you would constantly be bidding up the price (you would have to outbid every other potential buyer every single time etc) and you'd go the way of the Hunt Brothers.
Derek, that's another good way of explaining it.
D, as true now as ever.
My, what an eccentric way to look at the housing market. The housing market is no different from any other market (for assets). The price of shares in Vodafone, for example, is determined by supply and demand in the stock market. Supply DOES NOT EQUAL the total number of shares in issue. Supply equals the number available for sale. Demand equals the number of shares that people want to buy. If the price rises, people are encouraged to sell (i.e. supply rises) - the supply side of the price mechanism. It's the same with houses.
Sure, you could claim the market for Vodafone shares was all about demand because the people holding shares (and not selling them) were getting "share weeks". But it's a pretty unusual way to analyse markets.
This error on your part (sorry for that) is at the heart of all your confusion about housing and obsession with LVT!
AC, as Derek explained, there is one type of market for stuff that is created and consumed (cakes, cars) and one type of market for more-or-less permanent assets (like houses, Vodafone shares).
There is a fixed number of houses and a fixed number of Vodafone shares. The owner of a house or a Vodafone share derives benefits therefrom - but only as long as he OWNS them - and he values them using much the same yardstick as a potential purchaser.
Conversely, a baker or somebody on a car assembly line has no personal interest in eating all the cakes or driving all the cars. They only derive benefits therefrom if they SELL them.
They value the cake or the car purely on how much money it will earn them to make it and sell it. But the purchaser of a cake compares it with other consumption opportunities, and the purchaser of a car compares it with other cars or the cost of taking the train.
There is no confusion about this whatsoever, and, as a separate issue, could you please in turn explain your 'obsession' with income tax?
Mark, are there not two markets in housing, as there are in cars (but not cakes!), the new and the secondhand? He who makes the houses (the builder) only derives benefits from selling them, like the maker of cars, (or cakes). In this case a house owner is really no different to a car owner. Hence there is no more a fixed number of houses than there is a fixed number of cars. People don't like to think of houses as "secondhand", but the majority of them are (and "estate agents" are secondhand house dealers).
B, that's true, but with a stock of 25 million and less than 200,000 new builds a year, the new builds hardly count and developers are (unfortunately) sucked in to this whole land speculation thing - so even the builder can benefit by simply owning the plots when prices are rising.
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