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Comment by prasadjoglekar | Hacker News Reader

Inflation was there all along in asset prices - why else have home values gone up disproportionately relative to average Joe's income?

What the Fed is doing with this move is patching the balloon and preventing a deflation. That is, bank has a run on deposits because people want their money back; bank is out of liquid cash; bank sells bonds/MBS that have mark-to-market less than par thus realizing losses.

The downstream consequence that we didn't see with SVB was the bank starting to call unsecured loans, and pull back on lines of credit etc. Which should in turn have triggered the turning in of the leased Lambos and Audis....

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Housing prices were going up because of supply/demand and not necessarily because of systemic high inflation.

By the way just with regular <2% YoY inflation, a $1m home in 2005 was worth $1.3m+ in 2019 (before covid and the current inflation spike), and that is with regular inflation.

Because homes cost a lot of money to begin with, the compounding effects of “healthy” inflation is going to be noticeable, and that doesn’t even factor in the low supply in the market.

Demand was increasing because money was very easy to get.

Then why didn't it happen in Japan? Same easy money, no increase in house prices. It's not the interest rates, it's the zoning rules. [1, 2]

[1] https://fred.stlouisfed.org/series/JPNCPIHOUAINMEI

[2] https://fred.stlouisfed.org/series/INTDSRJPM193N

No, Japan has had massively crashing population, which offset the massive inflationary impact.

https://www.macrotrends.net/countries/JPN/japan/population-g...

Despite a massive decrease in population, Japan has been mostly flat, when they should be in a strong deflationary environment due to demand destruction - because, you know, people being dead.

So hey, if the US population would decrease .5% a year (doesn’t sound like a lot, but it adds up fast - 1.75 mln/yr if in the US), we could also tame some inflation!

That's a funny way of saying that 'supply and demand meet in Japan' which you can do but decreasing demand or increasing supply. It really is that simple. When supply and demand are allowed to meet, prices stabilize. Otherwise please explain to me why you think that this is the one asset on earth not affected by supply and demand. And you could really use a solid citation.

Thought exercise.

There are 140,000,000 houses in the US. What do you think would happen to the price of each house if there were 280,000,000? If you answered anything other than 'they would still go up for some reason despite many of them being empty and derelict' then we are in agreement that it is a supply and demand issue. Ergo a zoning issue.

Have you been to Japan?

There is massive excess supply of housing in Japan.

They literally demolish entire villages because no one lives there anymore.

Everyone who can moves to Tokyo, and prices there are insane.

In the US, if we had 288 million homes, the big question would be ‘where?’.

We already have millions of acres of land with literally no zoning rules at all. Even Greenlee County Arizona (1500 sq miles) is more than enough.

No one would want to though, because it’s not the place people want to live.

You’re fighting a straw man, nobody is arguing you need to do what Japan did verbatim. The only argument I’m making is when you allow supply and demand to meet prices stop going up. All the rest is narrative.

The answer to where is “up.”

Also the prices in Tokyo aren’t insane at all they’re super affordable by any standard.

That is not at all reflective of reality.

https://japanpropertycentral.com/tag/tokyo-apartment-prices/

Tokyo prices are running 908k yen/square meter, or $685 square foot. While manhattan real estate is $1.5k/sq Ft and San Francisco $1k/sq ft - median incomes are dramatically lower in Japan, as is purchasing power, with the median Tokyo income being only $66k/yr.

There is a reason the stereotypical apartment in Tokyo is tiny - on average 65 square meters (700 square feet), of which only 41 square meters (441 square feet) is livable space.

That’s often for more than one person.

Outside of Tokyo, property is nearly free. Inside Tokyo it’s expensive, crowded, and tiny.

Looking at the national stats, it roughly averages out.

But that isn’t this utopia you seem to think is occurring.

So at $685 (1/3 of Manhattan and 1/2-1/3 of SF) there are also units that are somewhat smaller. Just like in Europe. Sounds pretty darn affordable. Meanwhile in SF if you can’t afford the units that are larger by regulation you can live 2h outside of town. The whole point is folks can live in the metro, and live well. And despite that prices haven’t changed in nominal terms in 30 years - meaning slightly cheaper each year. Not everyone can afford the home of their dreams right now but it shouldn’t be between that and homelessness or a 2h commute.

You've skipped over the criticism.

Put a billion houses on Jupiter, and their value will be zero, while new york remains expensive

But if you put a billion houses on Manhattan their value will be zero. There's almost an unlimited amount you can build up. The problem is we're currently putting houses on Jupiter instead of Manhattan through arbitrary restrictions on density. There's single-family zoning in San Francisco! 94% of San Jose. 15% of NYC (25% if you include single and two-family zoning). It's wild. [1] And that's if you can even get the city to approve your development regardless of zoning, parking minimums, etc.

[1] https://www.nytimes.com/interactive/2019/06/18/upshot/cities...

If you put a billion houses on Manhattan, MOST of those billion houses would be worth nothing, and the ones where people wanted to be (which is probably not Manhattan if a billion houses were blocking out the light - but I digress) would still be expensive.

The price of a house in the middle of nowhere is labor + materials. The closer you get to a population center (where people want to be) it becomes labor + materials + property value, where property value increases non-linearly. At the center it becomes labor + materials + property value + zoning overhead. Zoning overhead grows as more people are involved in the process.

I don't think you'll ever get much cheap housing, unless you build a ton along the periphery of a population center (which people don't want). You'd have to build at least 20% more housing for the price to drop 10%, and most of that housing will be where people don't want to live.

It’s the freeway fallacy though.

Zoning ‘overhead’ is people trying to control perceived negative effects and assert boundaries on what they will and will not accept.

Building more freeways doesn’t result in lower traffic for any length of time, because traffic increases based on available capacity in high demand areas.

If we put a billion houses on Manhattan (somehow), there would still be ‘in’ and ‘out’ areas with high prices and restrictions, with those high prices driven by managed scarcity.

Because being selective is a large part of HOW an area becomes and stays desirable. It’s not possible for one to stay that way for long without some attempt to defend itself, in my experience.

Saying ‘prices wouldn’t be high and we could all have what we want if we just got rid of zoning’ doesn’t reflect what is really going on.

Now, busting the worst offenders with artificial scarcity, like monopoly/trust busting, could easily have a lot of value as it has gotten over the top in a lot of areas.

But frankly, remote work and increasing costs of funding should do a lot of that anyway here soon.

People being dead also means that people aren't working to provide those services and goods

Those people stopped providing those goods or services decades beforehand though (retirement), while still spending money.

Homes are not assets in Japan, they are liabilities.

They only depreciate

> Housing prices were going up because of supply/demand

I don't think that's the case. Development was occurring so quickly, supply exceeded demand, and new houses sat or became entangled in bad mortgages. Property values increase as a function of population, which sounds the same as supply and demand but isn't quite. Housing prices increased because labor, builder and materials rates increased.

All the people that only saw the city for work/employment now don't have to live there. That was huge. Now we wait what's going to happen to all these office real estate. The office doesn't need to go away but not everyone has to have one these days.

> Inflation was there all along in asset prices

“Inflation”, unqualified, means consumer price inflation. Asset price inflation is a completely different thing, with slightly overlapping potential causes, and completely different effects.

> What the Fed is doing with this move is patching the balloon and preventing a deflation. That is, bank has a run on deposits because people want their money back; bank is out of liquid cash; bank sells bonds/MBS that have mark-to-market less than par thus realizing losses.

Systemic firesales that drop asset prices aren’t “a deflation”, because, like inflation, unqualified “deflation” refers to consumer price deflation.

The distinction is dumb. People's main thing they have to pay on a regular basis is rent or mortgage, so the cost of housing should be included in the consumer inflation index.

A 10000x increase in rent makes carrots unaffordable even if the price of carrots hasn't changed

> The distinction is dumb.

You would be better positioned to make that argument if you could demonstrate a basic understanding of what the distinction is.

> People’s main thing they have to pay on a regular basis is rent or mortgage, so the cost of housing should be included in the consumer inflation index.

The cost of housing as a consumer good (rent, actual or, for homeowners, imputed) is included in inflation measures (consumer price index, PCE, etc.)

The asset price of residential real estate is not, but that’s a different thing.

We've got the same bullshit in Sweden with the housing market boom, free-ish loans have driven prices through the roof. This means we're stuck on low interest rates or everyone and their uncle will default, a better solution must exist!

This makes it very difficult to get into the market since our rules require 15% of your loan in up-front capital. For a 1 room apartment that means about one year of salary saved up. Yay boomer economy...!

Not sure why you were downvoted

https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an...

An increase in asset prices is not inflation, it's a good investment. AAPL isn't in the CPI basket, Apples are.

Homes are up in price because zoning rules preclude development of new houses sufficient to meet demand, creating an imbalance in supply vs. demand. Interest rates only shift that equilibrium. Concretely, Japan's monetary and interest rate policy has been almost the same as the US for decades however they haven't seen an increase in housing prices in nominal terms since 1990. They federalize zoning so councils can't preclude you from building safe and reasonable housing, and this allows supply to meet demand.

Housing is driving inflation in the US, not responding to it - remember, inflation is the measured drop in purchasing power calculated from prices. Zoning causes house prices to go up, which in turn means the purchasing power of the dollar is calculated to be lower.

Punitive zoning rules are inflationary.

[1] https://en.wikipedia.org/wiki/San_Francisco_housing_shortage

Lol so according to you the money supply can increase 10x but as long as the cost of apples (or things in the CPI basket) is same, there is no inflation. Am i right?

I think you are trying to say that CPI and Inflation are the same thing.

Money in a fractional reserve system operates not on a push model but on a pull model. You do not 'push' money into the system. Money is created when loans (and corresponding obligations to repay said loan) are created. The increase in supply was driven by an increase in demand. Your model is incomplete. You'll have to work a specific example - how would the supply suddenly triple? Who would get that money? What would they do with it?

> I think you are trying to say that CPI and Inflation are the same thing.

I think you are trying to say that money supply growth is inflation, it is not. Even the rejected Austrian school would agree.

We're not in a fractional reserve system. Banks can borrow arbitrarily from the fed, and routinely do so, and don't have reserve ratios. Many countries have moved to this model over the past few decades, including the US. The Fed has papers on this explaining the how and why of the newer system.

The increase in money supply was absolutely not driven by an increase in demand. Supply increases were used to grow demand. Why else would it be called “stimulus”?

The supply did grow and the money went to banks, to the US government, etc. You can look at the Federal Reserve’s balance sheet and see entries for US treasury bonds, mortgage backed securities, etc. The US government then went and spent that on things, and the value of mortgage-backed securities increased which decreases the return on the investment and thus encourages banks to take on higher-risk investments. These activities drive inflation. So, no, an increase in the amount of money isn’t inflation, but a higher quantity of money supply times velocity does, by definition.

Yep, if goods(not capital) don't change in value there is no inflation.

Zoning may have localised effects, but in general house prices are determined by incomes (módulo) interest rates. People pay as much as they can afford to get the best house they can afford. This amount is then translated into house prices by interest rates. 1K/month at 3% gives a wildly different price than at 6%. Compounding this has been the 'funny money' sloshing around the system looking for safe assets to park in - said funny money induced by the liquidity pumped in by low interest rates.

SF is pricey because of high engineers' earnings, foreign cash inflows, on a background of low rates.

A change in the CPI is a symptom of underlying inflation (devaluation of the currency) but it is not the only symptom which can occur. Capital asset prices rising due to changes in the supply and demand of capital assets can also be a symptom of inflation. Different prices may be earlier or later indicators of inflation. Because financial markets are highly liquid, and their participants are close to the underlying source of the devaluation of the currency (the central bank), they tend to be earlier indicators. So to say that an increase in asset prices is not inflation may technically be correct, but it is misleading. An increase in asset prices can be an indicator that inflation is already occurring (e.g. in 2020), and that inflation may take much longer to show up in the CPI.

The zoning effects are US specific, why then have house prices increased in pretty most all western countries, also they can't explain the huge jump in housing prices during covid.

The whole zoning discussion ignores the fact that investing in housing became hugely popular in the last decade, largely due to monetary policy as well as faverable tax policies.

While zoning is indeed a major problem in the US, ultimately the problem worldwide is that supply isn't meeting demand. If supply was able to meet demand, then prices would be stable and housing wouldn't become an investment vehicle.

who leases a lambo

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