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It’s all about supply and demand

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Throughout the course of the UK’s insane ten year long property boom, the market cheerleaders have patiently explained that these massive increases in the cost of property are a natural result of the laws of supply and demand – the UK’s population is growing and there simply aren’t enough homes to go round. This, of course, is complete bullshit. Yes the population is growing, but that’s nothing new and taken in isolation it simply cannot explain a trebbling of house prices over the space of a decade.

The truth is that the easy availability of low-interest mortgages at higher than normal salary multiples meant that people were increasingly able to outbid each other to secure their ideal homes, and when this phenomenon started pushing up values thw widespread belief that ‘house prices only ever go up‘ took hold (in spite of the recent evidence of the early nineties market crash) and a speculative bubble was created, a situation where the only thing driving up property prices was the market’s confidence that whatever price you paid today, the value would be higher tomorrow. Supply and demand really had very little to do with it.

On the other hand, the laws of supply and demand do provide a very clear explanation of why property prices are likely to fall a very long way. As the Independent reports, the latest Hometrack figures show that the number of homes for sale has increased by 7% over the past two months, while the number of buyers registering with estate agents fell by almost 7% in May alone. More sellers, less buyers – supply and demand – there’s really only one way prices can go. And with the banks continuing to push up mortgage rates and tighten their lending criteria (regardless of goverment efforts to convince them to do the opposite) it’s hard to see how demand is going to rise any time soon.

Obviously this sucks for anybody who’s been unlucky/stupid enough to buy at the top of the market, but for society as a whole (especially the entire generation of adults who have been completely priced out of the opportunity to own their own home) it marks a long overdue return to some level of sanity in the propery market.

 

  1. Agree entirely, bsupnik, which is why I included the unlucky as well as the stupid. To be fair, in the UK there’s been a large element of greed and stupity involved in the situation – people have been brainwashed to believe that they absolutely have to claw their way onto the property market at any cost because “prices always go up” and “renting is dead money”.

    But I’ll concede that a lot of people have just been unlucky enough to find themselves caught in the market at the wrong time.

  2. bsupnik says:

    “Obviously this sucks for anybody who’s been unlucky/stupid enough to buy at the top of the market”

    It is easy to point to any now-busted speculative bubble and say “man were they stupid to point at the top”…perhaps it is different in the UK, but speaking of the US housing market, I think there is an element of legitimate surprise.

    The US “dream of home-ownership” is heavily built into our culture, with a lot of incentives toward home ownership, and a notion that owning your own home is a form of financial security.

    In the meantime, quietly, over the last 30 years, the housing market has been wired up to (via mortgage financing) more and more of wall street.

    The result is that housing changed from an asset expected to have boring price changes to an asset that has “exciting” price changes.

    Where we were all stupid was: we didn’t want to see that the nature of the beast had changed when the change worked in our favor (prices rising), only when they crashed.