Chris Johns and Jim Power were discussing the relationship between house prices and bond yields on a recent episode of their podcast, The Other Hand. Johns was making the point that house prices will continue to rise - or at least not fall - until such time as bond yields begin to rise, and that this will be the case regardless of what policies the government pursue in increasing housing supply.
I dont think this statement is correct. An individuals borrowing is contrained based on affordibility which comes down to savings and income including stability of that income.When I'm buying a house, assuming I'm not a cash buyer, the constraint on how much I can pay for a house is what my monthly mortgage payments will be
Jim,I dont think this statement is correct. An individuals borrowing is contrained based on affordibility which comes down to savings and income including stability of that income.
Given the amount of cash floating around internationally and the low returns on bonds there is really very little point in trying to block investment funds from bulk buying homes as the cash will just find the investment another way. Any amount of supply side stimulus will just be swamped by that investor demand. Therefore State funded schemes won't solve the problem.I haven't listened to the podcast, but there's a fairly simple concept behind it.
Take private buyers;
When I'm buying a house, assuming I'm not a cash buyer, the constraint on how much I can pay for a house is what my monthly mortgage payments will be. Lower interest rates mean lower repayments. Therefore for the same monthly repayment amount, I can borrow more.
When it gets to investments, in theory the value of any asset is the present value of its future cash flows. I discount the future rent income based on interest rates - the lower the interest rate, the more valuable rental income in 10 years is today. Investors are currently happy with a 7% gross yield because interest rates (either borrowing costs or opportunity cost of money) are so low. If interest rates increase, but rent stays stable, then the present value of investment property falls to reflect the higher yields required.
There's definitely sone international research on it, particularly on commercial property prices. I'll see if I can find it later.
There is such a shortage of supply here that it would take a material increase in supply to change the dial.
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