[msvan]

It is true that housing prices in urban areas have risen astronomically in many regions of the world, and while we may well see a correction, I wonder if these these areas have simply become way more valuable than they used to be.

People thought that the internet would make location irrelevant, but it seems that the opposite has happened. I can think of many armchair theories as to why, but it's not a simple question to answer.

[AnthonyMouse]

> It is true that housing prices in urban areas have risen astronomically in many regions of the world, and while we may well see a correction, I wonder if these these areas have simply become way more valuable than they used to be.

They are, in the short-term. The problem is that high housing costs have a slow, long-term corrosive effect on a city. Companies have to pay higher wages for workers to achieve the same standard of living, which makes them less competitive. So, for example, you see a lot of tech companies springing up in Austin now. It doesn't happen overnight, but it happens.

It also creates a large net transfer of wealth out of the city whenever someone moves. Someone who moves in with half a million dollars in net assets would normally be a boon because they would go use that money to patronize local businesses, but now they have to spend that and a good chunk of their salary going forward on housing, which goes to the seller who is moving out of the city and taking the money with them.

The housing ratchet is also completely unsustainable. The people who already own real estate want prices to increase rather than decrease to justify the high price they already paid and generate a competitive return on that huge amount of money, but when housing is already the majority expenditure for city residents, costs long-term can't increase faster than wages, and the higher wages get for the same standard of living the less competitive local companies are.

Eventually you reach a limit on how high housing costs can sustainably go, but once you hit it, nobody wants to put down a million dollars for a house that won't appreciate at all when they could be getting some ROI on the same money in the stock market. Then prices finally start to decline, but people definitely don't want to pay $950K for a house that will lose value, so the decline is rapid. This is, of course, catastrophic.

It's almost impossible to avoid this once the values are already ridiculous, but what the article suggests can mitigate it somewhat: Sustained moderate inflation combined with a large increase in the housing supply, so that real values come down even though nominal values are stable. Then the crash is in real value rather than nominal value, so people don't end up with underwater mortgages, and it can ideally happen over a period of a decade or so rather than instantaneously in a way that causes a local economic crisis.

[timcederman]

I think for most folks actually living in these high cost areas, capital appreciation is not the primary motivation.

Also I disagree that they are universally destructive - how else do you explain the long term success of high price cities such as London, New York City, Hong Kong, etc.

[AnthonyMouse]

> I think for most folks actually living in these high cost areas, capital appreciation is not the primary motivation.

Sure, they want a house so they can live in it. But who wants to pay a million dollars, which you either have to pay interest on (if borrowed) or can't collect interest on (if not), when it's only going to be worth the same amount of money in 30 years? At 5% interest, the lack of equivalent appreciation more than quadruples the opportunity cost of buying the house over the course of 30 years. It changes what they're willing to pay.

> Also I disagree that they are universally destructive - how else do you explain the long term success of high price cities such as London, New York City, Hong Kong, etc.

It has always been the case that some cities are more expensive than others, but that's not what we're talking about. Nor are we talking about small affluent sections like Manhattan. If you look at, say, Brooklyn, it was historically affordable to ordinary people (and 20 minutes from Manhattan). That's what's changed.

And there's no way housing in San Francisco isn't a massive bubble. It's hard to predict how long it will be before the crash, but it's obvious that it's not sustainable.

[isostatic]

> But who wants to pay a million dollars, which you either have to pay interest on (if borrowed) or can't collect interest on (if not), when it's only going to be worth the same amount of money in 30 years?

People who want to live somewhere?

House prices tend to be what people can afford to live. People tend to budget x% of their household income on housing. With lower interest rates, it means houses are more expensive. With two full time workers it means houses are more expensive. With higher wages it means houses are more expensive.

Since 1990 house prices (in real terms) in the US have increased about 15%, but disposable household income has increased nearer 80%. Even in SF from 1990 to 2016 house prices only increased about 80% in real terms, and I suspect that average household income has increased far more

[nly]

Are you comparing inflation adjusted house prices against unadjusted income?

The % of take home pay people are putting, on average, in to housing here in the UK (ok, different economy) has gone from something like 20-25% in the 1950s to something like 40-50% now.

I myself live in London and put 47% of my take home pay in to rent. That's without property related tax. I'm in the top 5% of earners in the land and can only afford a modest ~45sqm apartment. If my rent goes up next year and my income stays the same, I will have to consider a longer commute.

[isostatic]

Nope. But these are averages, London is extreme. My mortgage in Cheshire costs 25% of my takehome pay (not the household takehome pay) - and half of that is paying off the capital. That's on a 4 bed semi.

Two earners on median £27k take home about £44k. 25% would be £900 a month, which is more than enough to rent a house.

This house is half an hour out of Manchester, 40 minutes out of Leeds: https://www.rightmove.co.uk/property-to-rent/property-372566...

£625pcm rent.

[TheOtherHobbes]

How is that disposable income distributed?

[isostatic]

That's the median income. At the top 10% incomes have increased dramatically more.

[timcederman]

They said that about Australia 15 years ago and the heat in the market is only just coming off.

Housing prices aren't just going up in San Francisco. It's the entire Bay Area. In the last collapse, houses in "good" locations didn't lose any value. There was a pause for a couple of years (or in cities like Palo Alto, none at all) and then they started going back up again. Other cities, e.g. Alameda (http://rereport.com/alc/charts/a_all_sfr.png), suffered losses of over 50%.

I expect to see something similar if there is a collapse of the overall bubble, but there will still be extremely expensive housing. We've been through it all before. https://www.nytimes.com/1990/08/29/business/california-sees-...

edit: also I said they're not "universally" destructive, which I stand by, so long as some affordable housing options remain.

[AnthonyMouse]

> They said that about Australia 15 years ago and the heat in the market is only just coming off.

It is absolutely true that housing bubbles can span decades. But the longer they grow, the bigger the pop. Unless you deflate them first by increasing supply.

> In the last collapse, houses in "good" locations didn't lose any value.

The last collapse wasn't caused by the same things. What happened then is that banks loaned money to people who couldn't pay it back, which inflated housing prices until they started to default. The people who live in Palo Alto had better credit, didn't default, and could still get a loan even after the crisis (or didn't need one), so the houses in that area didn't lose value.

What's happening in this case is that housing in some areas is getting so expensive that even people making six figures can barely afford it. When it gets to the point that they actually can't afford it, the high end status of the neighborhood won't save them.

And a crash doesn't have to result in cheap housing. It can be a move from preposterously expensive housing to "only" very expensive housing. But if that's a 50% reduction in value, people are going to be unhappy.

> also I said they're not "universally" destructive, which I stand by, so long as some affordable housing options remain.

You may be right that if you consider only the most expensive houses, they may not lose as much value, because they're the ones that are actually worth ten million dollars. But non-universality is a small consolation if the effect still hits 85% of the local housing stock.

[timcederman]

I think we can agree to disagree given the subjectiveness of what we're evaluating. But I will completely disagree that I'm only considering "the most expensive houses". Relatively expensive houses, sure, but in the average (or median), not absurd.

Also, I want to point out that it was an anecdotal article asserting broad outcomes. I don't think you can be so reductive about the current housing market.

[MrKristopher]

> I think for most folks actually living in these high cost areas, capital appreciation is not the primary motivation.

It's somewhat subconscious. Why pay $3000 rent when you can pay a $5000 mortgage when you and all your friends agree that the house purchase is a great thing? The average buyer isn't seeking capital appreciation, but they are confident that the house is a good purchase.

[timcederman]

Just curious, are you in the area? It's anecdotal, but the folks I know here who are buying tend to do it because they are either sick of the landlord/tenant dynamic, or because of their family. In addition (also very anecdotal, but N of >10) the ones I know who are buying for investment are usually more focused on solid rental cashflow rather than capital appreciation (although it of course still factors into the purchase decision).

[MrKristopher]

Hi, yes, in the area. I hear from friends who buy (also very anecdotal). It seemed to me that people generally saved heavily toward a downpayment, then bought when they could (i.e. not worrying about how leveraged they were or what the rent/buy calculators said).

Interesting that the investment buyers are looking for cash flow; I didn't like the numbers (4 cap!?). But maybe if you have enough $$ that rate is fine.

[bobthepanda]

Unless you're a foreign expat I would hardly consider Hong Kong a long term success for residents.

Extremely high housing prices, low wages, and no workweek legislation combine to create a terrible environment for middle and working class people.

[white-flame]

Capital appreciation is certainly a large motivation for those who already own homes there, and those who are involved in local legislation tend to be mostly from that group.

[kosei]

Can you give a couple examples of this happening? I've lived in NYC much of my life and housing prices have continued to rise for most of 30+ years, so your statement isn't something that I quite understand from experience.

[bobthepanda]

NYC suffers from two distinct factors that have allowed it to sustain such a long boom in real estate prices.

As a global financial and cultural center, it has enduring appeal for outsiders and foreigners to buy housing. Very few cities have this. And since these outsiders tend to pay cash, they're hard to outbid. This can distort the market a lot, because wealthy people get pushed down into upper middle class housing, upper middle class people get pushed down into middle class housing, and the shit rolls downhill until the poor can't afford to live anywhere.

The other thing is that New York had really bad lows in the housing market in the 70s, to the point where people were burning down buildings because the insurance money was worth more than the property value. It's hard to go anywhere from there except up.

[mistermann]

> It's almost impossible to avoid this once the values are already ridiculous, but what the article suggests can mitigate it somewhat: Sustained moderate inflation combined with a large increase in the housing supply, so that real values come down even though nominal values are stable.

I'm having trouble understanding what inflation means in this context.

From the article:

> There is a way out, but it’s not a pleasant one. The economically unpleasant period of the mid-1970s, when GDP fell sharply and inflation rose to 25%, was relatively short-lived, largely because the inflation bailed out the housing market, which had already become overblown in 1973. Only a similar but more prolonged period of inflation, which will depress real house prices even as nominal house prices decline less, bailing out the mortgage market, will enable the British economy to avoid the truly disastrous situation of mass mortgage default.

> Provided the inflation takes place as required, the young will manage to navigate this situation successfully. They will be able to negotiate salary increases, as we were in the 1970s, so that their living standards keep up, more or less, although they may feel pinched. The declining real value of homes will bring more and more possible house purchases into their view, although they may find the landscape very short of mortgage lenders. Since the period of price decline is only beginning, the luckiest will be those too young to have got themselves on the housing ladder at inflated prices, not the silly Millennials, but post-Millennials.

If we're speaking about price inflation, isn't that literally what a massive housing bubble is, the mother of all price inflation scenarios (setting aside the fact that government statisticians cook the books in various ways in order to show shelter costs are perfectly inline with other prices, completely regardless of what prices are really doing, because it's abnormal)?

And if we're speaking about monetary inflation,well, where did all the money come from in the first place to make housing so expensive? Yes I know, when one house sells in a neighborhood or city everything is revalued, but when you've been at it for 10++ years and have had significant turnover of the entire inventory, this excuse begins to run thin after a while. If GDP growth is more or less flat, and there isn't negative growth in other areas like consumer spending, where is all the money coming from to execute the transactions?

Is anyone aware of any articles that try to mathematically reconcile this on a macro basis, because it makes completely no sense to me. At least in Canada it appears to be almost pure magic that at most will only take a periodic breather before the relentless upward march resumes (see the slight dip during the 2008 global meltdown, the devastating crash in oil prices that only caused a flatline in oil-rich Calgary, or real estate capital gains in Vancouver being larger than earned income). As silly as it sounds, I am starting to believe that we're somehow mis-measuring something fundamental somewhere in the system, and that this time really is different. If it isn't, then how can this be quantitatively explained? Sure, it's easy to handwave it away with "the market can stay irrational longer than you can stay solvent", but can one reconcile that with the actual reported numbers? Does what's happening add up?

[bobthepanda]

The money has come, both directly and indirectly, from global capital markets. Countries like China, Russia, Germany, and Japan save a lot of money, and would like to put it somewhere where it'll be a productive investment earning interest. If Canadian property looks attractive for that purpose, some of that money will head in that direction.

[shkkmo]

> And if we're speaking about monetary inflation,well, where did all the money come from in the first place to make housing so expensive? Yes I know, when one house sells in a neighborhood or city everything is revalued, but when you've been at it for 10++ years and have had significant turnover of the entire inventory, this excuse begins to run thin after a while. If GDP growth is more or less flat, and there isn't negative growth in other areas like consumer spending, where is all the money coming from to execute the transactions?

I've struggled with a similar question. Where does the money come from? The US GDP has increased ~500x (unadjusted for inflation) in the last 100 years, this means each dollar has to be transacted 500x more frequently on average than it did 100 years ago (assuming a fixed supply). How does this work?

[mistermann]

This would be partially explained by: https://en.wikipedia.org/wiki/Velocity_of_money

I don't completely understand it either though, say you cut one blade of my grass and I pay you $20, then I cut one blade of your grass and you pay me $20, rinse repeat and you get massive GDP, but no increase in wealth. Now do something similar with housing, except this time print a whole bunch of money and pour it all into housing (including construction), and compare that to a country that instead invests into education and building manufacturing plants - who is going to be wealthier?

I think this is all far more complicated than governments let on, or maybe they actually don't even understand it all, from what I can tell a large number of economists don't, so perhaps it's no surprise we're in the situations we are.

[llamaman]

I believe the author is referring to high inflation as measured by things that reserve banks look at (in Australia this would be the consumer price index etc); while house prices either stay stagnant or rise slower than said rate of inflation.

Thus, the nominal price of housing is maintained, while the real value tanks.

How this might happened is something I do not have the economics to know - as you mentioned, an increase in the supply of money would probably simply flood into the existing housing market, overheating it further. Arguably, that's what's happened in Australia post 2008 and the US pre-2008.

[mistermann]

> I believe the author is referring to high inflation as measured by things that reserve banks look at (in Australia this would be the consumer price index etc); while house prices either stay stagnant or rise slower than said rate of inflation. Thus, the nominal price of housing is maintained, while the real value tanks.

Yes, this makes perfect sense in theory - housing inflation has dramatically outpaced everything else, so if the government causes a whole bunch of monetary inflation by printing money and that money doesn't go into housing but goes into other things (maybe even wages!), then it will let those prices catch up, while also devaluing the cost of the housing debt.

But I think printing money is what got us into this situation in the first place, it just mostly all went into housing, to stop that from continuing you'd need to change the collective beliefs of nearly the entire population. This is one thing that could genuinely be "different this time": the belief that real estate always goes up. And you can hardly blame people, because it's more or less true, and is virtually guaranteed by more than one government policy.

[AnimalMuppet]

I think the key is interest rates.

Most housing doesn't face the demand part of supply and demand in the purchase price. The demand curve is set by the monthly payment. The relation between monthly payment and total price is controlled by the interest rate.

So if interest rates rise, home prices have to drop (or at least not rise) until wages rise.

Unfortunately, this doesn't actually help, because it doesn't lower peoples' monthly payments...

[bobthepanda]

Housing markets are only overheated if supply is not keeping up. There are scenarios where an overheated market leads to oversupply of housing; but there is a few years' lag between investing in construction and the units coming online due to the time it takes to finance and construct housing.

[mistermann]

> Housing markets are only(!) overheated if supply is not keeping up.

Would this imply that there was a tulip shortage in Holland in the 1630's, or am I being excessively pedantic and should have assumed a prefix of "In the long run...."?

https://en.wikipedia.org/wiki/Tulip_mania

Or another way of putting it is: is there evidence that all markets are perfectly balanced at all times, always and everywhere? Is the market perfectly rational, or do various ratios sometimes vary for no mathematically obvious reason?

[bobthepanda]

If supply were able to keep up with demand, then the tulip price could've stayed the same. Of course, we live in the real world, where you can only ramp up production of good so quickly. But no one said the demand is rational.

There are places which manage to build housing without massive price appreciation, like Tokyo. But once the market's too overheated because of supply mismatch you basically can't cool it down only using construction, because construction time takes so long.

[claydavisss]

Exactly...housing, like stocks, are in bubbles due to unrestricted printing of money.

[Emma_Goldman]

I think it would be very wrong to think of increasing house prices as a direct reflection of intrinsic value.

In the UK the economic model of the past forty years has been based on a conscious policy of asset price inflation. Thatcher stripped away most of the social housing in this country and put it into the market. Few have been built since. The recentering of the economy in financial services has led to a massive expansion of easy credit, that reaches its fulcrum in the housing market. Together this has meant: (a) a dwindling housing stock; (b) progressively larger sums of credit chasing the same number of properties.

That is not to mention the fact the since the late 1960s London has been the main global waystation for offshore tax havens, much of which is attached to property sales in the capital. There are 100,000 properties in the UK which are held as investments, unoccupied.

[TheOtherHobbes]

There are actually two economies - one where everything is an investment to be sweated for returns, and one where everything is priced according to real world utility.

In a financialised system everything is priced according to the values of the first economy, which are completely divorced from conventional economic utility.

This makes everything unaffordable to those who don't have access to that economy. It also lowers the quality of goods and services within the second economy, because providing quality and value conflicts with fast high returns.

[zimablue]

Great post, worth noting that the marketing of the destruction of social housing as "right to buy" was a work of evil genius, and the citizens who know the most about it are people whose parents made a killing from it and are unsurprisingly very happy with the policy.

Catchment areas for schools are also a significant factor, mandatory ballots for school entry would make a massive difference but our government has been going in precisely the opposite direction, privatising the education system and leading to an expulsion crisis which is having knock on effects in crime.

Also London specifically is one of the lowest density major capital cities, the centre is often old and beautiful but we could stand to build a bit higher.

[olliej]

There's supply/demand - as some area becomes more popular more people want to move there. If you're not building new homes in the area at a rate that at the very least matches both the migration rate and the birth rate housing price is only going to increase. (People in SF fighting against tech folk also seem to fight new properties, ignoring that simply having children in SF means you necessarily must build more homes, maybe just a bit slower)

The thing that makes it worse is when taxable property values trail actual property values - it makes simply holding on to property a tax payer subsidized investment. CA for instance has capped taxable property valuations at 2%, which is a subsidy for empty properties, properties that increase rent/lease by more than 2% a year, and business (which never sell property) - the biggest component of civic services is fundamentally the cost of rent/mortgage, as that dictates how much all civic servants (emergency services, city/county administration, elected officials) need as there /base/ income. It also indirectly costs tax payers through the increased need for housing and other financial support for low income people (which can actually be a double tax, as it may result in tax payers paying rent on a property that is underpaying taxes anyway).

[dionidium]

> “I can think of many armchair theories as to why, but it's not a simple question to answer.”

My guess: tools that make it easier to live wherever you want disproportionately benefit the places people most want to live.

[analog31]

I think there's a lot of merit to this. The Internet has not made location irrelevant, because many other things still make location relevant. Drawing only from my own list of preferences, there are things like climate, proximity to family, access to outdoor activities, culture, social outlets, crime rate, the transportation system, and so forth.

[mc32]

One thing surprises me about this article: It prescribes Inflation as the antidote to land/RE prices... But that was not the case necessary for Japan.

And on the other hand they didn't highlight the role international investment in RE has had on local markets. It plays a significant role in many of the major international cities where foreign entities are allowed to buy RE as investment properties.

[_pmf_]

> I wonder if these these areas have simply become way more valuable than they used to be.

It will self correct once companies realize that by using middle managers with a modicum of domain expertise enables people to work remotely and not have to be at work for 8 hours just so their managers can visually check their presence for the contractually agreed amount of time.

Give it 500 years.

[scirocco]

A good start is to look at the interest rate curve (cost of borrowing money has gone down dramatically). Here is the US Fed Funds Rate since the early 80's:

https://tradingeconomics.com/united-states/interest-rate

[debacle]

For starters, there are a lot of places in the US I can't live because I need home access to good Internet.

[jeffbax]

That's going to change rapidly with 5G

[restalis]

I think you don't quite understand how things work. 5G may be efficient but the exploitable bandwidth is still limited. In cities the density of cellular mobile communications antennae is higher which leads to a reduced areas covered by a tower in which subscribers have to share the bandwidth with others. Also, in cities as opposed to rural areas, even when the bandwidth is shared, the users of a given area are often just transient. The conclusion is that the urban network quality is different from the rural one and that it (unfortunately) adds up as another reason to flock to a city.