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Comment by nostrademons | Hacker News Reader

Curious what their reasoning is. The article mentions:

"With families building up savings during pandemic and increasingly working from home, demand for property is on the rise..."

"Construction cannot keep up with demand and the residential market is especially hot"

"Despite the recovery in residential construction, labour shortages, global supply chain bottlenecks and input price increases are weighing on the construction sector’s ability to expand housing supply, which is putting upward pressure on house prices"

All of those are indicative of a housing shortage, not a bubble. For the bubble to burst, a lot of underutilized housing would need to come onto the market at once, into an environment where demand is dropping. If supply is tightening and demand is expanding, that's a recipe for continued price increases, not drops.

I suspect people are saying "bubble will burst" because it's going up faster than it has in recent memory, but there's nothing special about today's prices. If supply is low and demand is high tomorrow, there's a new price equilibrium that's higher than today.

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Those quotes describe a taut rubber band that could easily be released in the next 1-2 years.

> With families building up savings during pandemic and increasingly working from home, demand for property is on the rise...

Return to office, taking deferred vacations, etc. winds down the savings.

> labour shortages, global supply chain bottlenecks

won't last forever.

So there's downside demand-side risk and upside supply-side risks, with identical underlying causal triggering conditions (end of pandemic). Oh, and how long can central banks hold off on rate increases?

The risk of a violent crash has less to do with the probability of a rapid post-pandemic renormalization and more to do with the tight causal links between the risks of upside supply and downside demand. Less like "crash will definitely happen" and more like "X_1, ..., X_n all have unknown but likely highly correlated probabilities, so if one happens they all happen and if you get X_1, ..., X_n all at once there'll definitely be a crash"

I think.

The last 20 years has taught me to be suspicious of renormalization arguments. History marches on; people have memories, but history itself seems to be a big Markov process where the future depends only on the present and the forces that drive it, not the past.

I could believe an argument based on causal links of supply & demand, but I'm skeptical that they'll operate in the direction you suggest. To my eye: remote work was a spring that's been ready to burst since about 2014 but needed the pandemic to catalyze it; we're not going back to offices; home offices are going to become very desirable; savings (in the form of financial assets, at least) are increasing because of inflation; and supply chain bottlenecks are not normalizing anytime soon.

> The last 20 years has taught me to be suspicious of renormalization arguments.

2021-2008 = 13 < 20.

I'm actually thinking of late-90s up through today:

There were a lot geopolitical papers written then about the unipolar world and how we'd reached the end of history and liberal democracy had won. To the extent that people imagined threats to U.S. dominance, they usually envisioned state actors like Russia or China. Few people predicted the rise of international terrorism, widespread state failures, mass migrations, and internal destabilization of states.

There were a fair number of commentators who said that the Internet was a fad and we'd go back to calling up businesses when we got tired of webpages. The dot-com boom was a bona-fide bubble - it burst, severely - and yet it also wasn't. I predicted the Amazon would go out of business in 2001 when their stock was down 90% in a year; it now owns retail, and is worth 50x that.

People wondered how the hell a website for throwing virtual sheep at one another was worth $15B in 2007. It's now worth $942B, and blamed for taking down governments.

We just had a page at the top of HN about someone's 2011 prediction that Bitcoin would fail. It did, for all the reasons they listed, and yet is still worth 20,000x what it was going for then. It's also had some 60-70% declines in that process.

The general lesson I take from these is that life is a whole lot more random and absurd than a lot of people think it is. A lot of people who lose everything in bubbles are right about the direction of the trend (oftentimes on a subconscious level), but wrong about magnitude and timing. I see a lot of people asking whether today's housing situation is like 2008, and to my eye the fundamental forces are nothing alike. But 2005-2008 might have been the bubble before the trend, which sets up the causal forces leading to a genuine housing shortage now.

I think the dot-com example is a good analogy for the current housing market.

Prices in certain regions will just. keep. going. up. Maybe with dips here or there.

But there's also a lot of speculation happening in down-market junk.

These are good insights, I get the sense maybe that you may be tracking your predictions or at least are revisiting them more than most people. The common behavior is to forget just how uncertain the past was.

Or summarized: first things seem impossible, then they seem obvious.

Think about how many years over-building went on before the collapse in 2008.

There's a good chance that, in the coming years, labor and materials prices will fall such that builders will start construction on too many homes. But that's a while away. material prices are falling, but they are still elevated. And houses take a while to build -- four months minimum, nine+ more typical. So even if overbuilding started today, there's still a good year or so before that stuff comes on the market.

In these situations, I'm a big believer in contrarian outcomes. Because if a large number of people think some event will occur, then they act in a way which gives them the best outcome should that event occur. The popular trend right now is to speculate a housing collapse. Thus, I think most people are going to put off buying at "elevated" prices for a few years, until it becomes crystal clear that they were wrong.

My prediction: House prices will be like the stock market circa 2016. Everyone will be predicting a collapse "any time now" while prices soar at a crazy pace and continue to do so for a decade.

> The popular trend right now is to speculate a housing collapse.

Price action is sentiment. Words are hot air. People are NOT speculating on a housing collapse. Exactly the opposite.

I disagree.

Prices demonstrate the attitudes of people who are buying houses. I'm concerned with the attitudes of people who are not buying houses. Why aren't they buying houses? Because they think the are going to fall in the near future. Why do I think that? Because this is a popular sentiment expressed by normal people on social media.

Yes, it's wholly unscientific of me to use Reddit and Facebook as a barometer of society, but I'm not a professional economist, just another rando on the internet making bad predictions.

> I'm concerned with the attitudes of people who are not buying houses.

That's fair.

> Why aren't they buying houses?

I think a lot of people are buying.

> Because they think the are going to fall in the near future.

One major reason people with massive hoards of cash aren't buy is uncertainty around WFH. "Where to buy? Depends. Let's see how this whole return to office thing goes..."

> Yes, it's wholly unscientific of me to use Reddit and Facebook as a barometer of society, but I'm not a professional economist, just another rando on the internet making bad predictions.

Aren't we all :)

It depends on the place, but as a random data point, in a very hot market, Romania, I have a few separate data points of people with means to buy that are holding off for exactly the reason you mention.

OK, but the number of people who are buying houses is high enough to drive the prices into the stratosphere. If the non-buyers were trying to buy, prices would be even higher. So I'm not sure that you can use the existence of non-buyers to say that there's fear of a collapse. There's less fear than normal right now, as measured by what the market is doing.

There's less fear than normal right now, as measured by what the market is doing.

How broad is the market relative to society? Could say 3% of people investing tons of money, while 97% are not, create the same result we are seeing today?

Yes, that's possible. I do not have the data to either confirm or disprove it.

> Why aren't they buying houses?

My experience is that there are a lot of people looking to buy a house, there's just no houses to buy. I bought a house earlier in the year and put an offer in the day it went on the market, and I was still only one of several offers they got that day. I also have a friend who's looking at houses right now and it seems to be basically the same, houses are getting multiple offers and selling within a few days of going on the market, and anything that doesn't sell that fast isn't worth buying.

The good question is probably "Why aren't people selling?", but I'm not sure that's actually the issue. Google suggests at least as many homes will sell this year as last year, which leads me to believe there must be more buyers than normal.

> there must be more buyers than normal.

Petite investors. I saw somewhere on another thread speculation that a crash could come from prospective land lords not being able to make their properties affordable. That seems possible.

> Petite investors

Is there a reason to assume there are more people attempting this than normal? I would think this is the worst time to attempt that since the prices are so high. You may very well be right, but it feels like we're going full circle since presumably those 'investors' think the prices are going to continue to go up or else they wouldn't be buying...

I wish there were better data. All I can offer is anecdote.

Oh, another important point: they aren't necessarily buying investment properties! They might be buying their padnemic/wfh home and then not selling their already paid off starter home/condo

Two Anecdotes: I have a friend who recently sold his house because he expects a collapse (sell high, buy low). I am waiting to buy a house because I also expect it to collapse.

One is active, the other passive

> And houses take a while to build -- four months minimum, nine+ more typical. So even if overbuilding started today, there's still a good year or so before that stuff comes on the market.

The ECB is talking about Germany, France and the Netherlands, where the average home is an apartment in a shared building. Going on anecdata from my surroundings, those take at least two years from project for sale to finished and ready for use.

That coupled with limited place and an already existing housing shortage and growing prices, it will IMHO take much longer than a year for the current shortage to be corrected.

I don't think you're wrong but I don't think you're right.

Housing starts aren't necessarily responding to demand, because yeah, nobody wants to over-build and contribute to a default. Plus there are other factors that impact housing starts in most high-cost areas (i.e. availability of land to build on.)

I don't see a pop, yet I'm not certain prices will soar. People will typically shop based on 'what they can afford' and that usually means monthly payment; as rates went low, it was easier to bump up the ask price; the best way to put it is, if rates drop from 4% to 3%, you can finance around 10% more money over 30y with the same overall monthly payment.

I do think there might be some 'bumps' in the road, but ironically, many of the people 'waiting' will probably end up pulling us out of the bumps (or, maybe, causing another surge.) I think overall the most likely scenario is we'll see some periods of paused growth or slight decline.

Worth throwing out there, at least in US the housing market typically cools down a bit over the winter, so take any news of decreases in volume with a grain of salt.

> And houses take a while to build -- four months minimum, nine+ more typical. So even if overbuilding started today, there's still a good year or so before that stuff comes on the market.

Tract builders target 100 days to complete a home from ground up. The permitting, zoning, and land acquisition is the slowest part, but once all of the paperwork is done, they can pump out entire neighborhoods in a couple years max.

Yep, that's the short term bear case. The long term bear case is: demographic pyramid inversion, interest rates bottoming out, and asset owners becoming a minority of the electorate.

The long term really-bear case is: asset owners becoming a minority of the electorate, revolution, war, and then everybody dying and most of the housing stock being destroyed.

I'd rather be an asset owner than a revolutionary in that case, though, because it's always easier to play defense than offense. The vast majority of non-billionaires can sit tight and not be explicitly targeted, but starving revolutionaries have to fight for survival. Assets can be rebuilt, but death is permanent.

> asset owners becoming a minority of the electorate.

I wouldn't hold my breath on that one - something like 95% of governors are also property investors.

The only reason the bubble burst was due to overleverage.

Houses were only sold en masse due to a prescribed flowchart: borrower couldnt pay, bank takes house, bank doesnt want actual houses so bank sells house, bank already earned enough on interest to sell house at a loss, bank can also take losses and list property for lower to sell faster, bank found out it couldn't take losses.

This isnt happening right now. The overleverage isnt in real estate. Everyone is looking in the wrong direction just because price go up.

Where is the overleverage, though?

Where is the overleveraging now?

My theory for a possible price correction is that those buying places with the intent of becoming landlords will be unable to find tenants that can make the house purchase profitable.

Or now there's 6 people living in 3 bedroom home because rent is so so sooo high...

What's not being spoken about in the article is interest rate increases. They're as low as they can go, the only way is up at some point. If rates increase, servicing current debts maybe impossible forcing people to sell and financing new purchases at current prices is out of reach for new buyers.

Given current inflation expectations (and reality) the ECB will probably come under a lot of pressure to start raising rates.

The French are already trying to play down inflation to try and avoid the above scenario I'm guessing

https://www.bloomberg.com/news/articles/2021-11-18/don-t-pan...

Although true in Europe, the US is less susceptible to this because of our 30 year fixed rate mortgages. In fact, here, it's the opposite: interest rate increases -> decreased housing prices -> decreased tax assessments -> lower total cost of ownership for already-issued loans -> less risk of default for current home owners.

In a vacuum.

I think the risk in the US is if house valuations fall too much and you're severely underwater, people will just walk away from mortgages. I believe we saw this in 08. Not as direct a risk in non-fixed mortgage countries, but still an issue.

Plenty of fixed rate mortgages in Europe. 30 year fixed is about 2% here at the moment.

Really? WherE? I thought it was exclusively US thing, with UK having some fixed mortgages that were otherwise too expensive to justify choosing them.

Luxembourg, probably other places, too.

Netherlands, Italy, Poland, probably many others.

France too.

The first part of your statement would only apply if most mortgages were adjustable rate. They are not (at least in the US). ARM loans were under 10% of all loans in 2019 [1]. Everyone who locked in a fixed rate loan is fine until they need a new home. I would expect rising interest rates to stabilize or maybe slightly decrease market prices, not cause a massive decrease.

[1] https://www.washingtonpost.com/business/2019/02/14/adjustabl...

Article is about ECB not Fed. The 30 year fixed rate mortgage is a pretty American thing.

In France fixed rate mortgage rate is the vast majority. Only 2% of mortgage have variable rates: https://www.immobilier-danger.com/taux-immobilier.html

It would however affect people with HELOCs, which I believe is tied to prime + 2%. I have no idea how many people took out a HELOC during the pandemic though.

Fixed rates have been close to 1% in Italy for a long time. I don't think anybody went adjustable rates in the last years, it could get negative (I think it happened somewhere in northern Europe) but it can easily grow and bankrupt people in the 10 - 20 years lifespan of a mortgage.

Lots of people go variable interest rate.

It's cheaper and has been for many years..

The argument is that when interest rates go up, you refinance at a fixed rate while you can afford it, or sell stocks to payoff a larger portion of you morgage.

That strategy certainly has issue, because stocks will probably crash a bit when interest rates go up.

On the flip side, interest rates will go up slowly, so you might be able to refinance to fixed rate -- the hard part is doing this before it's too expensive. As it'll always be more expensive than sticking with your variable rate.

Others have pointed out that this won't affect existing fixed-rate mortgages, and they're right. But it will affect new purchases. For most home buyers, their ability to pay is determined by the monthly payment, not by the total price.

"The only way is up" is a bad argument for trying to predict interest rates. There are other ways. First, no change. Second, negative. People have been making the "they have to go up eventually!" argument so long now that I'm starting to think that no, they don't have to.

> For the bubble to burst, a lot of underutilized housing would need to come onto the market at once...

It doesn't have to be a lot. It might only require a little underutilized housing to cause a price drop, depending on how inelastic the market is. If that is indeed the case, then the high-price situation would be fairly fragile, and worthy of being called a "bubble", even if it reflects a current shortage.

There certainly is underutilized housing - many cities will have examples of property being bought for investment and then maybe being an airbnb or totally unused.

What there isn't yet is unsold housing.

There is, but I'm curious just how big it is compared to latent demand.

On a random drive through a residential area, I'll see an occasional vacant lot or house with its lights perpetually off, but the vast majority of houses seem to be actively lived in. By contrast, I know lots of people that want houses but can't afford them. Either they're living with parents, or raising a family in a condo/apartment that's too small for them, or they've got roommates, or they're doubled/tripled up in a unit with extended family. If prices went down, they'd jump at a chance to buy, but they can't make it work right now.

For a bubble to burst, there'd need to be more vacant units being held as investment properties than there are persons/households that are bunking with people they'd rather not be with. I'm unconvinced this is the case; it certainly seems counter to my experience.

Doubt many investors keep their properties intentionally unused.

Totally agree with this notion, and also wonder if this article takes into account how much of a wildcard we're all in right now. Standard monetary scrutiny may not apply because we just lived through a global disaster and the world is changing before our eyes i.e. "new normal", "the great reset", etc.. My wife and I are working from home forever and they're just going to have to work with that.

But the problem is how much of the demand is artificially proped up by the extremely low borrowing rate?

What central banks and feds need to think about is, if they raise rates to combat high inflation, will the higher rates induce a coma in the borrowing market, thus overcorrecting the market into a high supply/low demand situation.

While your argument is logically sound, it's not the whole picture

Could be. Or the higher rates might dry up liquidity but not affect prices, as they did in the 81-82 recession. (In other words, nobody buys houses because they can't afford to, but nobody sells houses either because they don't want to take a loss and can just live in them.) Or the market correction makes central banks flinch and they reverse their interest rate hikes, as they did in 2019. Or they hike rates, but not enough to offset inflation, and so real interest rates remain negative and prices keep going up.

The whole picture is complex. Anyone who predicts it correctly stands to make a lot of money.

> they hike rates, but not enough to offset inflation, and so real interest rates remain negative and prices keep going up.

So stagflation, with the prices going up but down in real terms.

That seems to be the best case scenario, the way to reduce overinflated asset prices without causing a panic.

And I'm pretty sure central bankers are currently dreaming of pulling this off, but it seems the market is much more aware of inflation than it was in the 70s, so I'm not sure it's more than a dream.

All I hear from these threads is "more supply more supply increase the supply". What is the target here? Should everyone have a vacation home in every US city? Should everyone be allowed unlimited houses to rent out in addition to the one they own?

We already have enough housing to house everyone in the US (including the homeless) with ease. Where are we going to draw the line in the name of investment and speculation?

I used to think the issue was "Yes, there are houses you can buy, but not enough in the places where the jobs are.". Now I'm less convinced, just because near me, I hear about bidding wars in neighborhoods that have no good reason to be trendy.

The article is about the ECB, so the EU, not US. In any case, housing not where people want it isn't of much use. There are ongoing shortages of housing in many of the big cities in France, Germany, Netherlands. Semi-abandoned houses in the middle of nowhere don't help with that.

Strongly agree, and furthermore the phrase "a bubble" only works as a metaphor if we associate debt with empty air, and therefore the metaphor only works if we are talking about debt. But the article says that people's savings increased massively during the pandemic, which would be an ahistorical prelude to a bubble.

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