> do Canada, Australia, New Zealand, the US, Britain, Ireland, etc, all have the same inability to build …?
Sort of? See eg https://www.ft.com/content/dca3f034-bfe8-4f21-bcdc-2b274053f... for some graphs that show Europe vs anglophone countries in an obvious way. Obviously there are lots of differences between the countries, eg the specifics of their planning systems and economies. The US is different because of the big diversity of local governments – housing is more affordable lots of people outside of desirable cities, and places like Austin and Houston do build lots of homes and that seems to be a possible reason they haven’t grown like prices in California.
Credit costs have followed similar trends everywhere (obviously there are differences, especially in the US) and yet house prices have not followed similar trends but rather behaved differently in different places. I agree that when interest rates are lower you should expect to see higher prices, but that’s because interest rates change the price that a given income can afford. I don’t think interest rates are good at explaining the changes to affordability over time, or why affordability is different in different places.
Also, in your linked chart, you see something like 20% more dwellings per person in developed EU countries vs English-speaking countries, which doesn’t feel like no difference at all.
The issue in the article of affordability becoming worse across the US recently is probably interest rate related – prices change more slowly than interest rates, 30-year fixed rate mortgages mean rates change more slowly, and the higher rates mean existing mortgage-payers don’t want to move as they’ll lose their low rate, which reduces supply. I don’t know why prices are still up though – if interest rates being high was making housing unaffordable, one would expect prices to be down.
> for some graphs that show Europe vs anglophone countries in an obvious way
Housing is still extremely expensive in most major European cities relative to income. e.g. Milan, Lisbon, London, Rome, Munich are significantly more expensive than San Francisco or San Jose (e.g. Milan is more than 2x more expansive) if you're earning the median income.
It's not like most people in some European countries chose to live in rented cramped apartments they simple have no choice because they can't afford anything else.
> you see something like 20% more dwellings per person in developed EU countries vs
It's not clear how much of that is because of lower (or negative) population growth. e.g. Italy has one of the highest dwellings per person ratios and there are towns/villages which are basically giving away houses for free Milan is still relatively the most(?) expensive city in Europe and housing in other major cities is still less affordable than pretty much anywhere in the US.
Housing affordability is qualitatively different between Europe and the US. When a European city is expensive, it's usually only the central part that's expensive. Prices drop steeply as you get to the suburbs and satellite towns. In the US, suburbs and satellite towns are more likely to remain expensive, as long as you are within a semi-reasonable commuting distance. I guess that's because the US city is more likely expensive due to the job market and the European city due to the desirability of the city itself.
I think you are close but slightly off. EU has historically better public transit and lower sprawl allowing more price points of housing while still a "reasonable" commute.
US cities are vastly larger by land size, because America is larger allowing it, added with fewer public transit options.
Look at Houston, massive sprawl and some of the cheapest housing in the country.
The transit part is key for Tokyo, everyone talks about how housing supply is robust, zoning is loose, density is high and unit sizes are small; but few talk about how having 130 rail lines with pervasive express service means that there’s an enormous amount of land within commute distance.
Set this charting tool to Density, plug in Tokyo with a number of other major world cities, you’ll see the effect in the data.
Or you could just upzone. The nine-county Bay Area is larger in size than the Keihanshin area containing Osaka, Kyoto and Kobe and has 12 million less people.
Yeah. Bay Area denizens also would be wise to note that if they hate towers so much, part of how Japan stays low rise with higher density is by having smaller roads and more transit. So you still should be building those trains (and downsizing those roads!)
I am biased in that I live in Tokyo and am used to "a ton" meaning 150+ rail lines in this metropolis [1], constructed in a lattice that makes it hard to be very far from any train line within a large radius of the city center. What most Americans think is "a ton" is, in my view, closer to "bare minimum", but that's probably since I live in a city with an order of magnitude more transit than the most built out city in the USA.
I agree that the local land use is a total disaster, but even if they made it better, SF has a few skinny tendrils of transit which creates a few skinny corridors of transit-accessible area.
The constant excuse I kept hearing when I was living there was that there isn't enough space!! But that's only true if you won't do anything to increase the viable space to live in (and optimize the space that is present, through better land use). Even densifying the transit along these corridors, San Franciscans will still whine and complain about how there's no space, ignoring the obvious solution.
The answer to me is to do it both, yesterday. But I'm not a San Franciscan anymore and I understand that my values differ from theirs.
Aside, it's also worth mentioning that in Tokyo as well, single family homes near train stations abound. The difference is that they're smaller and denser, and mixed in with apartments. There aren't that many towers here! But the roads are mini-sized and they pack units tightly to better use land. If San Franciscans hate towers that cast shade, they have alternatives.
Prices can drop quite steeply in suburbs in US as well. It's just that when the rent is that high in most desirable areas to begin with, it's still too expensive for many after that drop.
> if interest rates being high was making housing unaffordable, one would expect prices to be down.
I think you have to be careful with the definition of "unaffordable".
Housing, at this moment, is unaffordable in the sense that the cost of housing squeezes many people's discretionary budget, savings, and even sometimes the budget for necessities. It is not unaffordable in the sense that (most) people do have enough money that they can pay for it, even though paying for it might cause them hardship elsewhere.
Housing is an inelastic good - particularly for demographics who have limited access to transportation and therefore need to live very close to where the jobs are. The price increases until it consumes all the money available to pay for it.
> Housing is an inelastic good - particularly for demographics who have limited access to transportation and therefore need to live very close to where the jobs are. The price increases until it consumes all the money available to pay for it.
Housing is not rising in price because it is an inelastic good. Housing is rising in price because the growth in the supply of housing is less than the growth in the demand for housing.
Indeed, the very fact that housing has inelastic demand means that it is particularly susceptible to price reductions when supply is higher than demand.
Anyway, supply and demand are murky concepts that don't map well to reality when trying to take them out of the supply/demand chart. You can't actually quantify potential "demand" because "someone wants a good or service" is not a data point for demand, only actual trades that happened do.
You are taking as an assumption the very thing we are currently questioning - does lack of supply actually account for the increase in housing prices?
Lack of supply would cause prices to rise - but so would cartel behavior on the part of those who control that supply. Housing of the type necessary for relatively low-income individuals, where the location must be close to jobs (see above), is typically controlled by a set of entities who exhibit cartel behavior in how they price the rent.
That’s a fair point. To be more precise, I mean that many people who buy houses need mortgages to do so. Higher interest rates mean that for a fixed deposit and budget for mortgage payments, the amount one can borrow decreases. All other things being equal, one would expect the demand for purchasing houses (I’m trying to be careful here to not talk about renting, which I guess the term ‘housing’ often includes) to decrease. Something that might not be equal is the available mortgage payment budget – it may be lower due to more money being spent on other things or it may be higher due to wage increases – so perhaps that’s part of it.
> you see something like 20% more dwellings per person in developed EU countries vs English-speaking countries, which doesn’t feel like no difference at all.
I was attempting to highlight the change in numbers for those countries I mentioned and how they are clearly inadequate when trying to explain the change in prices over the same time.
In NZ there was little change from 2011 to 2022 but median house price went from NZD350k to NZD900k.
I agree with regard to demand being different in various locations within a country, but those localised demand differences would have had to shift pretty dramatically over the same ten year period to explain much I imagine.
> Why would money printing increase housing prices but not wages?
Because most of the freshly printed money wasn't immediately used to increase the demand for consumer goods. Instead, it only kept consumer goods demand about neutral, until the summer of 2022.
Without inflation in consumer goods, most businesses don't have increased profits, and no incentive to try to hire more people, which kept wages down.
Instead, the extra money found it's way into assets, pumping up the stock market and housing market.
That started changing in 2022, as inflation hit (which SHOULD have surprised nobody). But the inflation was kept in check by increasing the interest rate.
The increase in the interest rate stopped the amount of money from continuing to grow and even fall slightly. But not nearly enough to reach pre-covid levels.
That means that there is still a lot of excess money in the system slushing around. As long as the real interest rate on bank deposits is still low, people are not tempted to keep them as deposits. So the money stays in assets, maintaining the high price.
> Why would money printing postpone its effect on prices until after interest rates increased?
I'm assuming you mean consumer prices here, not housing prices. Consumer prices stayed low during the pandemic, since people generally reduced their consumption, especially the consumption of services (restaurants, entertainment, etc). A lot of "regular" people paid down credit card debt or increased the size of their savings account.
In 2022, that changed. "Regular people" started to spend more of their savings again, and this caused inflation to rise. As inflation was going up, the fed (and other central banks) slowly increased the interest rate, but not quickly enough to stop the sharp rise in aggregate demand. (And war in Ukraine and continued lockdown in China didn't help either, nor did various initiatives to re-shore production of anything from microchips to ventilators, or for that matter the huge investments of capital currently going into AI infrastructure).
And as demand pushed inflation up, that lead to some increase in the demand for labor. So even if the salaries haven't kept up with inflation, inflation definitely has been increased by the increase in salaries.
Naively, one might expect that the inflationary pressure will cease once aggregate inflation reaches 25% relative to 2020.
And if you wonder why wages haven't kept up. I think this can be explained by a weakening of the demand side of consumer goods, driven by various inefficiencies in how capital allocation, due to the cost of building new and robust supply chains, due to the situation in Ukraine/Russia and China and AI investments etc (as listed above, too).
> I don’t know why prices are still up though – if interest rates being high was making housing unaffordable, one would expect prices to be down.
This is counterintuitive, but also persistent across high-interest rate environments. I asked my mom what the housing market was like in 1980, when rates went up to ~20%, and she said "Prices were basically stable, but nobody was selling houses." Similarly, if you look at historical data, you'll notice that home prices usually remain flat during recessions but don't really go down. Even in really bad recessions (eg. the Bay Area from 1989-1994, which got hit with the triple whammy of interest rates going up to 10%, a tech bubble bust in the workstation & AI market, and the crash in defense spending after the end of the cold war), you might see at most a 10% decline.
The reason comes from a fundamental asymmetry in the housing market: everybody needs a place to live, but most home sellers do not need money. If they fail to sell, they can take the place off the market and continue living in it, or rent it out, or just leave it vacant in hopes of better market conditions next year. So the negotiating leverage usually lies with sellers in the housing market.
When rates go up, affordability goes down, but sellers are usually unwilling to take a multi-hundred-K$ hit. So they don't. They rent it out, they live in it, or they hold onto it. It's usually worth taking a few thousand dollar hit in property taxes to avoid a $100K hit in home value. Liquidity dries up - instead of prices going down, inventory disappears. We're seeing that now, and the older generation saw it in 1980 and 1990.
To make prices actually go down substantively, you need those forced sales, where owners want/need to get out at any price. This could take the form of a foreclosure/bankruptcy crisis like in 2008, where the owners legally lose possession of the house, and the banks need to sell at any price to avoid bankruptcy themselves. Or it could be rising crime, like what happened to Detroit & the Rust Belt after the 1970s or SF in 2020. But many things that you would think would destroy home prices don't actually - New Orleans did not see a significant decline after Hurricane Katrina in 2005, and Silicon Valley did not see one after the dot-com bust in 2000.
One other thing to note is that when prices in a region decline, it's almost always because nobody wants to live there. This is actually rather intuitive - if rates and affordability go down but people still want to live there nobody will sell, while if people are forced to sell but others still want to live there you will still have competition among bidders and prices will go up. But it means that there's no magic bullet: "affordable" housing means that home prices stay stable while incomes rise, and if you can't get your income to rise, you are just screwed.
That is the shape of housing market corrections. Housing prices are sticky because of a range of financial and emotional reasons. Because of this prices hardly ever crash outright. What happens instead are periods of price stagnation while inflation does the work of reducing real prices. And a real collapse of prices indicates neither wages nor financial devices could support the market any longer.
Affordable is a different issue. Housing assets exhibit strong depreciation under normal circumstances and extreme depreciation under any kind of stress. Affordable houses are used houses in a way similar to how used cars are fundamentally more affordable than cheap new cars.
I guess I was surprised by the increase mentioned in the article. Rereading, it says:
“The median home sale price, external in the US has jumped by nearly 30% since the end of 2019”
So I guess you could have the increase due to Covid effects (or whatever else happened around then) and then seller hesitancy due to high interest rates, even though most potential sellers don’t stand to lose much.
Sellers do have much to lose. I think you're saying they have 30%+ in equity so why not sell and use it? Well they have 30%+ equity AND low interest rates.
If they sell, they need to buy again at a higher interest rate. So they can sell at a profit but then monthly payments will be higher.
Anyway, this is only 1 scenario. Urban areas are hit hard NYC/SF and sellers are sitting out waiting for recovery, so they rent them out.
My claim about ‘not losing much’ was more that many sellers would have had the property since before 2019 so in some sense they could feel like they didn’t lose anything if they just forget the 30% rise since 2019. But I guess you’re right about many not wanting to lose long mortgage terms at low rates (this does feel like a US-specific thing though hard to change in the short term as mortgages would have been priced based on the current rules)
But this is where it gets messy. Interest rates as they are now are already considered 'too high' by the WS crowd ( I have my own opinion, but it is just that -- an opinion ) and any indication that FED will lower rates is met with glee. There is, naturally, a solid reason for it. High rates will slow down the reckless flow funds sloshing around the economy ( and would help with the ridiculous prices ). However, this would come at a cost that no one wants to pay. I am not even talking about the political cost. No one wants to think of paying that high a price for serving US debt. I mean, I hold negligible amount of US bonds and I don't want to pay that..
But then US wants to 'invest' in current wars.. sorry, national security ... and money has to come from somewhere.
I feel like I should explictly state this is not an attempt at derailing this thread.. politics and rates are part of the reason we are in this mess. I agree that 20% rate would clean it all up really quick
Sort of? See eg https://www.ft.com/content/dca3f034-bfe8-4f21-bcdc-2b274053f... for some graphs that show Europe vs anglophone countries in an obvious way. Obviously there are lots of differences between the countries, eg the specifics of their planning systems and economies. The US is different because of the big diversity of local governments – housing is more affordable lots of people outside of desirable cities, and places like Austin and Houston do build lots of homes and that seems to be a possible reason they haven’t grown like prices in California.
Credit costs have followed similar trends everywhere (obviously there are differences, especially in the US) and yet house prices have not followed similar trends but rather behaved differently in different places. I agree that when interest rates are lower you should expect to see higher prices, but that’s because interest rates change the price that a given income can afford. I don’t think interest rates are good at explaining the changes to affordability over time, or why affordability is different in different places.
Also, in your linked chart, you see something like 20% more dwellings per person in developed EU countries vs English-speaking countries, which doesn’t feel like no difference at all.
The issue in the article of affordability becoming worse across the US recently is probably interest rate related – prices change more slowly than interest rates, 30-year fixed rate mortgages mean rates change more slowly, and the higher rates mean existing mortgage-payers don’t want to move as they’ll lose their low rate, which reduces supply. I don’t know why prices are still up though – if interest rates being high was making housing unaffordable, one would expect prices to be down.