Thursday, 30 March 2017

Supply and demand in the housing market

From City AM:

Developers have put the brakes on house building in central London as house prices in the capital dropped at the end of last year.

In the fourth quarter of 2016, construction started on 1,270 housing units in the centre of the city, a drop of 75 per cent as compared to the same quarter the year before, according to a report from JLL.

And home sales fell 24 per cent in the final quarter of 2016, with just 1,880 transactions taking place. Prices in London have fallen 5.7 per cent year-on-year.

Hooray for free markets and allowing supply and demand to allocate resources most efficiently, but this is no such thing, is it? In a truly free market, super-profits would be competed away - what the oligopolistic land bankers are doing is carefully drip feeding bits of land onto the market so as not to allow prices to fall and thereby maintain their super-profits (as easily measured by the value of land).

And it must be clear to all but the most rabid Faux Libertarian that some areas will always be more desirable than others, for whatever reason, so while land prices at the very margin (low wage, high unemployment areas without nice scenery) are pretty close to zero, anything above that represents a monopoly/rationing position.
My other thought for the day is that the idea that "building more homes will cause prices to fall - it's supply and demand, innit?" is clearly nonsense if you remember that rents (and hence prices) are largely dictated by local average earnings (putting holiday areas aside). Wages go up, rents and prices go up and vice versa, it is that simple.

Would building more homes in high price areas (London, commutable parts of south east, M4 corridor, nicer parts of any large town or city) cause wages to fall?

No of course not. Why would it? Wages are higher in those areas largely because of agglomeration effects*, so more homes = more people = more agglomeration effects and the two effects (more supply and more demand) will always more or less cancel out. Rents and prices will only fall in areas which younger/more ambitious people are abandoning.

* All those people making a handsome living in London in financial and legal services would struggle to earn a fraction of that anywhere else in the country. They can only earn that because they are in London. This applies to me in spades.


Bayard said...

"My other thought for the day is that the idea that "building more homes will cause prices to fall - it's supply and demand, innit?" is clearly nonsense.."

for another reason, which is increased supply will only cause prices to fall if the demand is not already excessive. For example you can't get a quart into a pint pot - the demand for space in the pot is much greater than the supply. This is still true if you try to get a quart into a litre pot. The supply of space has gone up by 75%, but there is still not enough for all the water you want to put in it.

Mark Wadsworth said...

B, yes, that's another analogy. As long as there are people willing to move into the new homes, it will have little impact on prices.

Ralph Musgrave said...

"...what the oligopolistic land bankers are doing is carefully drip feeding bits of land onto the market so as not to allow prices to fall.." That's certainly a popular theory. Trouble with it is that cartels and oligopolies are easy to organise when there are up to roughly five or six people in the market. It becomes progressively more difficult as the numbers rise. For example OPEC is cartel that works most of the time, but from time to time some country breaks ranks and helps itself to above normal profits.

Same goes for house building: there are so many builders, I don't see how any cartel can be made to work. Is there any actual evidence that London builders meet at some pub to rig the market?

Mark Wadsworth said...

RM, they all have the same decision making process and are not in competition with each other, each landowner has his own little local monopoly.

How else do you explain the one to nine ratio, which dates back decades to a time when there were many more "home builders"?

Not sowith OPEC, drivers couldn't care less where the oil was extracted.

Bayard said...

RM, the supply and demand effect in land is very limited geographically. If you have two housing developments next to each other, they will be competing for the same customers and so, if supply exceeds demand (see my point above), they will be in competition. However two developments spaced further apart will not necessarily be in competition because what they are offering locationwise is necessarily different. Thus you don't need many developers to get together to form an effective, if temporary, cartel.

Ralph Musgrave said...

Mark and Bayard,

I agree there's bound to be an element of "local monopoly". On the other hand house buyers are normally flexible as to where they buy: if houses are significantly cheaper 15 miles away, they'll buy there instead. Also if builders can exploit cartel type profits, they don't seem to be very good at doing so: this article describes builders profits as being "close to zero":

Bayard said...

RM, I think you are confusing builders with land speculators, aka "developers". The former buy land with PP at its market price and try to make a profit on the houses they build on it. They make nothing on the land. The latter buy land without PP and indulge in all sorts of shenanigans to get that PP, which nets them a huge profit. The latter are the oligopolists, the former aren't.

Mark Wadsworth said...

RM, houses will only be cheaper 15 miles away if the area 15 miles away is less attractive.

The profit figures for house builders are meaningless. We know that you can sell new homes for about £140,000 even in the cheaper areas of the country. It costs £80,000 for materials and labour, so the rest must be profit.

Who gets the profit? The building company, the landowner, the bank, the senior directors as bonuses, maybe the local council gets in in planning fees and CIL. But there is a massive profit overall.