I feel like I should already know. In Britain, the price of a home has become a social bad (that’s the opposite of a social good) and it causes harm, but house prices, which were frankly unbelievable a few years ago, are stratospherically unbelievable now and yet they are still rising. Why?
Here’s one. If you own property and pay taxes on it ,you have to recoup taxes before you break even. If you pay 4000 for 5 years.,20 k more must be added to break even.
Also in Detroit the house properties are dropped steeply. The day of assured increase in property is over . At least in a poor economic state like this one.
It’s called supply and demand. There is an increased demand for houses and a limited supply. Therefore prices go up.
As well as supply and demand, there’s also the expectation that oprices will continue to rise just as they have in the past. So, if they have risen 20% each year over the last 5 years, investors think that will continue to happen, and so houses and land are exopected to be a good investment. It’s a self-fulfilling prophecy, but it often works in investment bubbles, until something happens to burst the bubble.
Interest rates are pretty low
People tend to look at monthly payments when working out what they can afford
There is a shortage of housing in many parts of the UK
Housing is regarded as an ‘investment’, and to be honest over the long term it has been one of the better ones when one compares it with fixed income and shares. If you live in it then you are receiving a form of ‘untaxed income’.
Buy to let has become popular, really as a form of saving, a couple of flats are a lot more reliable form of pension than handing money to institutions who charge you through the nose for ‘managing your money’.
Very little of the overall housing stock really changes hands each year, a thin market tends to be volatile - and we have seen some spectacular slumps in the past.
I’m not absolutely sure about the price/income multiples, I bought my place in 1987 and if I compare my then income to what I paid, and what I would be earning now in a similar job to the price of my flat, then it is not that far out - and my home town is a boom area.
Both would have quadrupled since 1987.
Of course the key thing is ‘expectations’.
Not sure how it’s been going in Britain, nor am I a pro on this subject, but many in the US say that demand is increasing due to “creative” financing making homes more affordable to a larger segment of the population.
Your standard amortization loan has now been joined by reverse amortization loans, adjustable rate mortgages, interest only loans, loans with a longer payback period, etc.
As I mentioned, this can make home ownership more affordable for an individual family. However this often leaves people under heaps of debt, especially when their houses don’t appreciate like expected.
A bit of context for folks not in the UK house market, I bought my house five years ago at £135,000 it is now “worth” about £240,000*****. Why house price inflation was ever thought of as a good thing baffles me. It is/was looked on as a sign of a healthy economy and everyone (well every one who’s on the ladder) is happy. I think the whole thing sucks, to think of how much of the nation’s wealth is tied up paying interest on loans for piles of bricks on increasingly smaller patches of dirt.
Something that must be making things worse is lender’s willingness to lend five times a couple’s joint annual salary. WTF? Here’s a scary graph from down the page. Madness.
The pricing model is simply the most the market can bear. Which means that any government subsidy - for “key workers” say - also pushes up prices.
Sorry I didn’t answer the question ywine. I think the whole situation is a joke and I’m as confused as you are.
*****I can be pretty sure about this as houses around here (check location) are often identical to each other and this is how much the local breeze-block-and-plasterboard 4-bedroom shoe boxes are currently going for.
- Homebuying as opposed to renting has always been popular in the UK (an Emglishman’s home is his castle and all that) - far more popular than, say, contental Europe - and increased demand will always push up prices on our squashed little island. Maggie Thatcher has a lot to answer for in this regard.
- As Cyberhwk said of the US market, the UK has also had an increasingly flexible and genrous finance market over the last few years which has allowed people to borrow more. When I first bought back in 1992, the mortgage companies were extremely strict on what they would lend (I wanted an extra £250, they wouldn’t let me have it!). Now it can be 5 or 6 times your salary, 100% mortgage, include your existing credit card debts and moving costs in your mortgage, property developers offering to pay your stamp duty, you name it. Anything to get people financing houses.
- People are less risk averse nowadays - whereas my parents would frett over a small loan, we’re quite blase about piling on extra debt.
- Interest rates are low - back when I first bought, they were 10%. They’ve been half that for years now. This has a huge impact on what people think they can afford month on month.
- Property has been viewed has a very stable and profitable source of investment for quite a few years now - my apartment is worth double what we paid for it in 2000. This isn’t much help if you need to move house, but has had a huge impact on the buy to let market - which in turns impacts supply and demand and keeps prices high.
- We’ve had the longest period of stable economy for donkey’s years, which breeds consumer confidence, and so the cycle goes on.
Property taxes are part of your cost of living. Why not say that you pay $2000 per year in electricity for your home and need to raise the price by $10,000 to break even?
Prices go up if more new people want homes than are being produced. If the economy tanks and fewer people can afford that starter home or to move up to a better house, then supply and demand is going to force the prices down.
The main cause for housing value price swings is that homes are mortgaged.
This leveraging means people are making decisions based not on the whole amount, but on the fraction of the value they are willing to risk between estimated purchase and resale.
This leveraging exaggerates swings both up and down.
Are there ad valorem taxes on residential property in the UK? I was under the impression that this is not the case.
Then you’ve heard the adage, Location, location, and location being the most important things in real estate, right? In places like the U.S., and, in particular, California, we have galloping population growth but the amount of land in the areas where people would truly like to live has not increased since, well, since forever. That accounts for much of the problem here, but I’m a little unclear as to why house prices should be skyrocketing in places that have a much better handle on population growth.
In the UK there is another factor that I find quite interesting.
Loosely put it is ‘consumer stupidity’
About 25 years ago my parents bought an inexpensive appartment in a small development in Menorca, it was about £19k and I reckoned that it was a fairly good move as it prevented my father from being nagged. They then traded it in for a much larger appartment in a better location for about £30k - bought off plan.
Still quite a smart move, for the same nag avoidance reason.
As a result I had the opportunity of seeing hordes of Brits moving into a rapidly expanding development and paying ridiculous sums like £12k for appartments and hundreds for villas.
Needless to say there was a slump.
What the thickos could not get into their heads, was that there is no logical relationship between the price of a house in the UK and the price of a holiday home on a funny little island.
The same thing happens regionally within the UK
Ahem - correction - £120,000 for appartments - in the mid 1980s that was the UK price level.
Land is the best investment because they ain’t makin any more of it.
New York is the same. You have this little island where millions of people work. Not everyone who works there can afford to live there and many don’t because they would rather have homes than appartments. So demand just keeps going up, driving up home prices in the parts of New York, New Jersey and Connecticut with convienient access to the city.
That truism works as long as population is increasing. When population begins to drop, real estate investment might not be as reliable.
Bubonic Plague ?
Now I know why I keep those old antibiotics - some sort of racial memory
Bubonic plague, declining birth rates, the passing of the Baby Boomers…whatever.
Very possible, but such things would lead to a ‘seismic shift’ so old problems would disappear.
A burst of inflation, adjustment of ‘real’ wages …
In the Netherlands another phenomenon explains housing prices: “woonverdunning” which translates roughly as housing dilution.
The number of individuals sharing an house or apartment had decreased over the last decades, so that more and more houses are needed even while the population does not increase that hard.