nicodemusboffin wrote:The price of houses in a market economy is determined (like the price of everything else) by supply and demand. So, all things being equal, building more houses will increase supply and have some influence on house prices. However, overwhelmingly the reason for the rise in house prices over the last decases is the rise in demand casued by the astonishing decline in the cost of money (interest rates). This actually means that the real fallacy is to assume that there is a house pricing crisis at all, when in fact arguably houses are no more unaffordable than in the recent past - affordability being measured as the cost of servicing the debt taken on to buy a house and/or the opportunity cost of lost interest from funding a purchase out of savings.
As an example, I bought my first house in 1991 for £53,000 - and the same/similar property would now sell for £300, 000. My mortgage was for 8% - so the house was costing me £4240 per year. If I bought the house now I guess I might get a mortgae at 2% (or less?) and so the house would be costing me £6000 a year. However in 1991 I was earning £11, 500 a year; someone doing the same job now would, i reckon, be on £25, 000 - £30, 000 - so in real terms the house is considerably cheaper! (Or rather 'more affordable'.)
(OK - I know this is simplistic, ignores the cost of paying back the principal, the impossibility of getting a mortgage for 10x salary and is a very 'OK Boomer' answer. However, I think the basic point is valid - that house prices are so high because interrest rates are so low, because it's low interest rates that have made houses affordable at such high prices. it follows that prices should cease to rise at a faster rate than the rise in earnings once interest rates stop falling (which - surely? - must be now) and will fall relative to earnings if and when interest rates rise. But building a few thousand extra houses a year won't make much difference when faced with the huge weight of 'free' money.)
Yes but the fundamental difference is that in my youth the cost of paying for the house declined in real terms hugely over the years because of inflation. So the 'pain' of affordability in year 1 was at least halved by year 10. With low inflation that does not happen. The market, and the buyers, only consider affordability in year 1, not the real burden over the life of the mortgage. That is the main reason it is so much more of an issue now.