You believe (correct me if I am wrong) that easy access to credit in itself forces up house prices and is the major issue, whilst we believe that if demand is greater than supply, that forces up prices and is the major issue, and in the absence of that higher demand prices would be largely unaffected by a greater supply of credit.
I believe that easy access to credit and low interest rates resulted in people bidding more on property and pushing up prices. I believe that most of the time the average region will be in supply/demand equilibrium therefore any increase in credit will increase demand and therefore prices. There are, of course, many factors affecting both supply and demand and regions differ but I believe sustained pressure from easy credit and low interest rates has over, say, the past 15 years been the primary reason we have generally high house prices across most regions.
You believe (correct me if I am wrong) that demand must be greater than supply, which I agree with, but you don’t accept that easy cheap credit can provide that additional demand.
Yes, I think most on here have already worked that out.
The debate is about whether easy credit and low interest rates were a primary factor in enabling the demand that caused the housing bubble.
See my two charts - there is absolutely no correlation between the debt people took on relative to wages and house prices. None whatsoever.
If someone goes to the bank for a loan, the bank will give them credit only if they meet a certain number of criteria. As the number of doctors grew in Australia, the bank did not say "hey up we have too many loans to doctors on our books -we will not give any more doctors loans as this will lead to an increase the credit available and it will cause a big bubble and no-one will pay us back"
As banks were not silly billies and they continued to lend as they always did relative to income and wealth, more and more wealthy folk borrowed money and credit levels grew. Believe me this will continue, why on earth would the banks stop lending the way they always have. They did not stop in the 1980s nor the 1990s and credit levels grew just as quickly then too.
Definition of a doom and gloomer from 1993 The last camp is made up of the doom-and-gloomers. Their slogan is "it's the end of the world as we know it". Right now they are convinced that debt is the evil responsible for all our economic woes and must be eliminated at all cost. Many doom-and-gloomers believe that unprecedented debt levels mean that we are on the precipice of a worse crisis than the Great Depression. The doom-and-gloomers hang on the latest series of negative economic data.
You believe (correct me if I am wrong) that demand must be greater than supply, which I agree with, but you don’t accept that easy cheap credit can provide that additional demand.
but you don’t accept that easy cheap credit can provide that additional demand.
Almost - I believe that availability of credit enables people to pay more when otherwise they may not have been able to. I don't believe that it can create a demand for a house where there was no one wanting that house in the first place.
You might think that perhaps credit enabled someone who didn't want or need a house to buy one, but that would put a house into the rental pool. Vacancy rates for rental housing are not high in capital cities, so excess rental stock doesn't seem to be the issue that it would be if investors were buying houses that they didn't need.
All in all the difference in our views probably isn't worth coming to blows over.
No, demand only exceeds supply if demand exceeds supply.
For example, in Japan there is a declining population and therefore supply is always exceeding demand. It doesn't matter how much cheap credit you throw at Japanese people (and credit is very very cheap there). They aren't bidding up the price of homes because there are more homes than people need.
Yes, cheap credit will increase demand, but if it doesn't increase demand to a level that exceeds supply, then people are not going to bid up prices.
No need for all the abuse Wisebear... just slow down and think about it properly. Ask yourself why people are not bidding up the price of houses in places where there is ample supply and little demand, like Japan, or Detroit. Credit is very free and easy in Detroit. Are they bidding up the price of houses there? No. Because there is not enough demand regardless of how much credit you throw at people.
I'm keen to see Mr Wisebear's reply to this.
They are the eggmen. I am the BullHawk. Goo goo g'joob.
hey good onya Peter from Perth - fabulous thread glad you repeated it or we would have missed out on all this fun.
Definition of a doom and gloomer from 1993 The last camp is made up of the doom-and-gloomers. Their slogan is "it's the end of the world as we know it". Right now they are convinced that debt is the evil responsible for all our economic woes and must be eliminated at all cost. Many doom-and-gloomers believe that unprecedented debt levels mean that we are on the precipice of a worse crisis than the Great Depression. The doom-and-gloomers hang on the latest series of negative economic data.
Do you believe that most of the time the average region will be in supply/demand equilibrium?
You answered my question, with a question!!
Don't try your socratic method on me pal -- I asked you, do you think massive amounts of cheap credit always makes demand exceed supply??
You said -- "when you create massive amounts of cheap credit demand does exceed supply"
Always??
No,not always, but so what? In theory, irrespective of what you do on the demand side, supply will keep up if it can keep up.
It did and does in the case of the Australian hosing market.
That's the issue here. Shadow and Strindberg are just derailing the thread and trying to score "gotchas".
For those of you who still don't get this. Here is Luci Ellis from the RBA again:
Quote:
The combination of disinflation, deregulation and financial innovation can generate a substantial boost to the supply of housing loans, thereby stimulating the demand for housing. For example, the data presented in Figure 2 showed that a fall in inflation and interest margins similar to that experienced in Australia over the 1990s could increase individual homebuyers’ capacity to pay by as much as 60 per cent. While not everyone will increase their borrowings immediately, many first-home buyers and existing owners have availed themselves of their greater borrowing capacity over time.2 Thus demand for housing in dollar terms could increase by this order of magnitude within a few years.
Quote:
The supply of housing is inherently slow to adjust, and would certainly not be able to adjust quickly to a surge in demand of this size. The increase in demand is for the whole housing stock, because it affects (almost) the whole household sector. The available supply of housing is the existing stock, which is fixed, plus whatever building and renovating work is done over a given period. So the only increment to supply is the flow of new dwellings and renovations of existing dwellings, which represents just a few percentage points of the size of the stock (Table 2).3 Even the most flexible and least regulated construction sector would struggle to lift its output from something equal to a few percentage points of the dwelling stock to accommodate a surge in demand of 50 per cent or more.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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