Comment by a008t | Hacker News Reader

Comment by a008t | Hacker News Reader

So does social housing make the situation better or worse?

Looking at London, for example. There are surprisingly few nice areas in London to live in with a family, in close proximity to the City, even if you had loads and loads of money. That has always seemed very odd to me. As a result, the few reasonably nice houses that you do find, have prices that are "maxed-out" - that is, if you are in the "high-earning class" - e.g. working in finance in London - and buy them, all your "excess earnings" are sucked into mortgage or rent, and you are left no better off than if you were in a median job, except now you live in an ok neighbourhood close to work.

If you had no planning laws etc. and it was easy for property developers to develop how they like, you would think that the area around where the highest paying jobs are would be more uniformly nice, developed in such a way that the people working in those jobs would want to settle there. So the supply of houses for those workers would increase. At the same time, low-income workers would likely be pushed further out, with some finding that the extra commute makes working in the city centre not worth it. Thus the wages for the low-income workers will probably go up as the supply of labour goes down.

It seems like the overall utility would go up - London would become a nicer place to live in, crime rates would drop, etc.

Unfortunately for London property has become a massive asset. If you look at who owns most of the houses you'll see that it is foreign buyers, the wealthy with multiple houses, and extreme landlordism. This is artificially raising the price, even though there are plenty of empty lots sitting around, forcing crowd out without actually creating any better property.

Socialized/affordable housing might help, but typically once the market is so distorted not many people can afford to live there and thus even if their rent is cheap they're going to leave. This property is then bought by the wealthy and traded for an asset, repeating the cycle.

But is the price really disconnected from rents on comparable properties?

The way I think about it, is that if buying a house can yield you 2-3% - either through expected house price growth or through rental income or both - someone will be buying it at that price, because it makes economic sense in a low interest rate environment (i.e. you won't find any other assets with similar risk that will give you a higher yield). Who ends up being the buyer is not particularly relevant - as long as the yield is there, somebody will be buying at that price.

The question then is,

1. Are rents too high? Unlikely, rents are very much supply/demand driven. 2. Are yields too low than what is justified? Possibly. Rental yields in central London seem to be around 3.5%, which seems quite low if you take into account the costs and the risks. 3. Are investors pricing in too much price growth? Possibly - related to point 2 above.

But it doesn't seem like current buyers are paying completely irrational prices for the houses. So it does not seem like we are in a bubble. Of course, if interest rates go up, we will see housing drop, and as expectations of future price growth are reduced because of that, we should see a bigger decrease in house prices than is warranted by interest rate increase alone. Add to that the potential of some people not being able to pay their mortgage at higher interest and being forced to sell, and the prices should dip even more than "intrinsic value". If this effect propagates to the wider economy, people might lose their jobs, forcing more people to sell, resulting in a full-blown liquidity event where it becomes a buyers' market for a short while.

Now, whether interest rates will go up significantly and whether once there are signs of such a liquidity event they will stay high is anyone's guess.

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