Property prices have been rising sharply over the last decade in most of the industrialised world, as a result of falling interests rates that makes the mortgages cheaper and a general increase in the wealth of society.
How does this work? Why don’t real property prices follow normal supply-and-demand rules of capitalist economies?
The supply side has not decreased. There has not been a general decline in the number of homes and offices to create a shortage; indeed around here we’ve had a construction boom parallel with the hike in property prices. More homes and higher prices.
The demand side has not increased. The population has not risen to drive up prices, at least not in the same rate as the property prices.
Low rates and cheaper mortgages have not driven up prices of other goods, like clothes or food or even cars and yachts. And other products don’t automatically rise in prices because of a general wealth increase in society. What makes homes a special case? Maybe it’s the result of a further movement from country to city, creating a property shortage in the city, but then why haven’t property prices declined in the country at the same rate as they have increased in the city?
However, local areas suffer from a sort of ‘collusion’, as a few local realtors keep prices high and create a market segment where one must pay out the wazzoo for a home if one wants to live there. It creates an exclusivity - or perception of - that further increases the price, and creates and artificial demand.
If 5 homes are for sale in a sub-market, the buyer has limited choices. The few local realtors can actually artificially keep prices high.
No one is ‘colluding’ per se, and ultimately demand will justify the price. If the demand drops, the prices cannot stay high.
A big reason is that as the population grows, demand for housing increases. However, keep in mind that it’s not just a general demand for housing, the housing has to be near an area with an employment base so there’s a restriction on supply. There’s lots of land available for fairly cheap in Wyoming, but nobody wants to live there for lots of reasons (weather, small economy, not much to do, etc.). On the opposite spectrum, lots of people want to live in southern California or in NYC so there’s a big demand there. But more importantly, there’s also not much you can do to build lots of new housing in those areas because development is pretty much saturated. Then there’s a ripple effect to the suburbs, where, due to zoning you can’t build a lot of high-density furthering restricting supply.
Also remember that housing isn’t a simple commodity. It’s also seen as an investment so there’s an incentive for people to hold onto it. Plus the sentimental value may keep someone from selling their house and moving to somewhere cheaper, even though it would be in their economic best interest. As people age, there’s a sort of crunch where the older generation is holding onto their housing, and maybe even investing in additional properties, while the younger generation comes up and wants to own their own place - preferably in a desirable location (ie, not Wyoming).
Not to mention land speculators during a housing boom will buy multiple properties as an investment, even in other countries. The US has seen lots of Japanese and other Asian business men participating in the boom, even though they have no intention of living in those properties.
I have read many articles on this. It seems like no one has a great grasp on all the details.
In recent years, Eastern Massachusetts has seen a decline in population with a massive building boom and tremendous rise in prices that are among the 3 highest in the country.
Some of it is because of a lifestyle change and expectation in general. 1200 square foot ranch houses are unthinkable now in this area and most of them have been torn down. People really want 3000+ MacMansions with a large lot. This means that new housing takes up a lot of space and the available building land get stretched thin 40+ miles out of the city.
The lower interest rates helped people afford more house in absolute dollars than they could before while keeping the same monthly payment. The floundering stock market around 2000 also was a factor. People saw real estate as the next big investment opportunity. Many people were also just tarding one house for another so the rise in prices was all relative and didn’t impact them all that much.
Truth be told, it is a mystery to me how many people afford houses at all in the Boston area. I know how I did but it was a matter of dumb luck and extrodinary work that is still going on 5 years later.
There is a huge pool of wannabe home owners out there. Living in an apartment is a major pain for many people. Crappy neighbors, uncaring landlords, and not getting any investment return on your housing payments. It really, really sucks. So when conditions are right, these people look to buy homes.
So there really is a very flexible demand pool.
Supply is quite inflexible. Building a house is costly and ties up capital. Local restrictions on where you can build and such greatly reduces the ability to meet demand. A lot of areas just don’t want massive suburban sprawl that pops up overnight. Think in terms of building roads, services, schools and such. In some regions, basics like providing water is a major restriction.
So when flexible demand outstrips inflexible supply, prices go up. Econ 101.
Other things to note: When demand is high, a builder is going to build more expensive homes and not starter homes. There’s a lot more profit there. That drives the average price of home sales up since a higher percentage of sold homes are fancier.
But many people think that the recent runup in prices is too much. I.e., it is a classic bubble. People are buying houses for more than they are worth, going into debt big time to finance them, etc. (There are a lot of people with “interest only” and balloon payment loans out there!) Too many people are relying on “The Greater Fool” economics. So the economy takes a downturn. People lose jobs. The interest on ARMs skyrockets. People start dumping their houses onto the market. The market crashes. People can’t sell their houses for more than their mortgages. So they walk away from them. Banks foreclose. Foreclosed properties really drive prices down, the cycle continues.
Most regions of the country may not have to worry about this, but some do.
Uhm, how to realtors keep prices high? If nobody is willing to pay high prices, the houses stay on the market, the sellers get frustrated, the realtors don’t get paid, buyers don’t get a new home, and everyone ends up unhappy.
Besides, it seems to be in the realtor’s interest to just move as much property as possible, rather than haggle about a few thousand dollars in price. An agent gets about $9,000 of a $300,000 home sale, but only $600 more if he holds out for selling that same home at $320,000. I think real estate agents have much more incentive to concentrate on quickly selling two underpriced $250,000 homes than hold out for the sale of one overpriced home of even $400,000.
What I’m suggesting here is that there’s no way that real estate agents can actually inflate home prices over any appreciable amount of time unless buyers are willing to pay “inflated” prices, and the role of buyers doesn’t seem to be explained here. (I would also point out that the markets with the most rapidly rising home prices also seem to be the places where houses stay on the market the shortest amount of time, so something else really isn’t being explained here, either.)
My parents live on the beach- they are living in the house my dad grew up in. The prices have gone from $4500 in the mid-1940’s to $1M-5M last weekend. On the same houses…
Like my dad says- they aren’t making any more beach… If they put their little 3 bedroom, 3 bath, with a loft, 1200 SF and no garage house on the market tomorrow, they could get well over $1M for it from someone who would bulldoze it and rebuild, no question.
Funny thing- the increase in home prices is killing our school districts. The higher the prices go (and they have not stopped, only slowed a bit), the fewer young families with children can move into a neighborhood. With declining enrollments in some areas, districts are forced to close schools, which really pisses off parents. And in CA, your property taxes don’t directly benefit your local schools. All the money goes up to Sacramento, where lots of people get their grubby hands on it, then it is redistributed unevenly to the school districts (the “nifty 50” get more than everybody else).
It’s not just supply and demans, but other factors that are hard to quantify.
In the City of South Euclid, Ohio, a stable, mostly middle-class inner ring suburb of Cleveland. A 2,000 square foot house here will sell for about $150K to $170K. South of South Euclid is the City of Beachwood, where the same exact house – it could literally be located a block away – will sell for $300K.
Lots of houses on the market in South Euclid. Plenty in Beachwood, too. Why are Beachwood houses so much more expensive than those in just to the north, though? From what I’ve been told:
Schools. South Euclid has very good schools. Beachwood’s public schools, though, have been compared to exclusive private day schools; very small class sizes, leafy campuses, and so on. Thbe perception of school districts seem to take up far, far more importance in the Cleveland housing market than anyplace else I’ve lived. People here will pack up their bags and move if a local school bond issue fails, or if the district next door builds a new school building.
Taxes. South Euclid has a very small commercial tax base, while Beachwood has hundreds of acres filled with upscale office parks and shopping centers. As a result, residential property taxes in Beachwood are lower than South Euclid.
Cachet among Jews. Beachwood is the home for the Cleveland Jewish Community Center, several Jewish schools, a Jewish museum, and several very large synagogues. It is the address to have if you’re Jewish in the Cleveland metro region. (Surprisingly, the bulk of Beachwood residents are Reform and Conservative; they don’t need to be within walking distance of synagogues.) South Euclid has no such cachet; it’s a mix of Italian-Americans, Jews, Russian immigrants, African-Americans, and young single homebuyers that can afford the low prices.
Clovis, CA has almost the same scenario areas of the city and county of fresno that fall under the clovis unified school district are easily 20-30% higher property prices.
I watch Flip That House on HGTV. Some of the properties they flip in California are purchased in HIDEOUS condition for $500K! I simply don’t understand how they can get away with that. In the Chicago area, you could by a fixer-upper in equal condition for under $200. And there’s no way I’m paying $1M for the refurbished version of a ‘60s tract house. I ain’t doin’ it, I tell ya! I ain’t!
Ditto. When I first came to Boston prices were outrageous, and couples both employed (with high-paying jobs) often couldn’t afford a house. We were able to buy a house after that bubble burst but before the current rise, and lucked out with a low mortgage (which we refinanced as necessary). But i couldn’t afford my own home now if I had to buy it.