Notes on Housing Course

All below notes are from the provided blackboard lectures (with possibly some supplementary stuff)

Housing Course

Understanding markets

Goals of this lecture

• Outline what economics is
• Discuss different ways that resources can be allocated
• Describe factors affecting supply and demand
• Explain how the demand and supply curves illustrate market conditions

What is economics

• Science: testing hypotheses

• Social: Concerned with human decision outcomes (not as predictive)

• Studies how humans provide for themselves, interaction with environment.

• Testing hypotheses in these areas.

• How do humans allocate resources. Human multitude of needs and desires, typically regarded as infinite.

• Factors that can affect the allocation of resources : Luck, Time and Money

• Luck example, beatles tickets

• Time example, people can pay by wait time

• Money example, conversion of our own resources (skills) into our needs and wants.

https://voxeu.org/article/what-economists-study-guide-curious

• ”social science focusing on people’s material well-being, the ‘business side’ of life”
• Dips its toes into other social sciences as the often affect the material well being of people
• It seems to dip into psychology though. For instance, the jumping of 10million in an art auction is used as example, if they are asking why people do this, thats surely a psychological thing?
• “some core concepts underlie their thinking. Perhaps the most important is scarcity. Devoting resources to one project—say, preventing diabetes—means some other worthy project—curing cancer—goes unserved. So, in determining whether a choice should be undertaken, one of the functions of economics is to argue that its benefits should not be considered in isolation but weighed against its costs. "
• "Costs put a dollar value on what has to be given up when one choice is made over another”
• Interesting, how value is determined, In the middle ages philosphers viewed things as having ‘inherent’ value. That a diamond is inherently more valuable that water. Marx then posited the labour theory of value, that value is determined by the labour required to produce it.
• ”The labour theory has its own drawbacks, leading to the awkward conclusion that an hour-long tooth extraction would be sixty times more valuable than one that had taken a minute"
• "Today, economists generally believe that value … is the result of the interaction of several impersonal market forces”

Demand and Supply

• Demand: the set of people who want the good or service
  • Effects on demand
    • More expensive it is, the less people want to buy it.
    • Income increase more disposable money to buy
    • Other goods and services that are cheaper will be chosen instead
    • Price of complimentary goods (gin and tonic are dependent)
    • Fashions and tastes
• Supply: the set of producers that are selling the good or service
  • Effects on supply
    • If nothing changes but a price increase, the supplier will be willing to supply more.
    • The higher the price, the more supply, the higher the cost of production, the less supplied.
    • Price of substitutes (could producers make something else with their resources)
    • Expectations of future prices
    • Available technology
• Demand curve reflects the willingness to pay by consumers or households. Slopes down as consumers dont like high prices.
• Supply curve reflects the willingness to supply by producers or firms, slopes up as producers want high prices.
• All other factors are kept constant

Market equilibrium

• A state where there is no tendency to change

• Assume market clearing, that buyers and sellers can do so at the prevailing price (more on this maybe).

• Demand and supply shifts.

Demand for Property

Elasticity

• The degree to which a price or quantity adjusts to a change the supply or demand curve depends on the slope of there curve opposites curve. So, for example, a slope in the supply curve determines the elasticity of a shift in the demand curve.
• Slope is a measure of responsiveness (elasticity)
• What is the effect on the quantity demanded if changes in price.
• ”Because quantity demanded in inelastic, it is price that does most of the adjustment to the new equilibrium”
• The demand for shelter is inelastic. It is not possible to cut the expenditure out
• How does the quantity demanded and supplied change for the new price point or market clearing price?

Demand for property

• While the demand for property, in general, may be inelastic, the demand for specific types of property may be different

• If everyone has a home then an outward shift in supply causes a larger decrease in price for each new quantity supplied. In theory, not many people are looking for a home if they have one

• Real economy is different from the financial sector

• When new homes are build the deg to which the push down price or are eabsorbed at curr price are the real econom and labour market.

• Une avg incomes get at real resources avaible for all goods and services for households.

• Look at how demand increases for an increase in income

• Supply is generally fixed in the short term

• The decision to rent or buy is usually financial. In this respect, it involves credit. A key factor in housing demand.

Mortgage market

• With the mortgage market the price of the good is the rate of interest

• Its elastic, any change in rate results in large quantity demanded. An example is given of if everyone is borrowing lots, in order to keep up you would have to borrow lots even if you didn’t want to.

• From the report in the prepare section

  • Its interesting to note that credit conditions seems to describe the demand and associated price trends for the year, how do we know this is not correlation without causation?
  • An interesting point “What is unhealthy is trying to impose a non-urbanised housing market on an urbanised labour market” in regards to the rise in the urban population. I don’t really know what this means. How do urbanised and non-urbanised housing models differ?

Office space

• Analysis of foreign direct investment IBM https://www.ibm.com/downloads/cas/R9VW3VO5
  • ”Hospitality and Tourism is now the number-one sector for job creation through foreign direct investment”
  • They use the measure of “expected jobs” whats this?
  • “investment focused on domestic-market opportunities in China grew significantly, which highlights the continued shift in investment patterns into China toward more market-seeking investment” with less focus on domestic industrial investment?
  • Ireland in the top 3 jobs created per million people 2018
  • ”IBM-Plant Location International has developed a Foreign Direct Investment (FDI) Value Indicator that assigns a value to each investment project, depending on sector and type of business activity. This value indicator assesses the added value and knowledge intensity of the jobs created by the investment project”
  • Netherlands saw a reduction in investments but an increase in value of investments (by this measure)
  • Ireland ranks third globally

Supply of Property

• If supply is elastic a lower deposits for lending (causing a rise in demand) would be an increase in a no. of dwellings and not their price
• The extent to which supply is inelastic determines the extent to which an outward shift in demand causes higher prices.
• ”One of the main goals of housing policy should be to ensure housing supply is as elastic as possible”
• Supply comprises two elements
  • New homes
  • Existing homes
• Existing dwellings form the bulk of the quantity supplied
• A change in prices is a move along the supply curve. At change in costs is a shift in the supply curve

Costs

• Construction: P* the break even price for a new home.
  • Technology, efficiency of construction. Cheaper methods of production (innovation in construction). This shifts the supply curve to the right with a lower equilibrium price and break even price.
  • Property is a domestic sector
  • Contraction in demand between 2006 and 2016 dropping the equilibrium price below the break even price. Costs which had inflated during a time of loose credit conditions did not subsequently reduce.
  • Long run supply then would be completely inelastic until demand goes back up.
  • The efficiency of the construction sector is a key determinant of the elasticity of supply of property
• Land
  • Land in aggregate is largely fixed in supply (except in some cases e.g. Boston)
  • Patterns of land use. Arises from the competition of how land would be used (offices, houses etc.)
    • ”Activities with the greatest opportunity cost of distance will pay most to be close to the city centre”
    • Reveals the perceived economic opportunities at that location
    • price of land
    • ”the use with the highest rental or sale price is typically the one with the greatest level of need, relative to other uses” uses in this sense something like residential property, offices, retail or parkland
  • Existing land supply is far greater than new or zoned land
  • Land does not depreciate, it has a low holding cost
  • It takes advantage of the nearby amenities, not the structure. Incentiveses holding of land in expectation of price change
• An Externality is a side-effect (not reflected in the transaction between the buyer and seller) of producing or consuming a good or service
  • Value of land is a sum of externalities. Value of a sight does not reflect the effort of its owner, rather it reflects the efforts of the society build around it.
  • What would be needed for a causal study?
• Review of the possible reasons why property prices have increased globally. Land value has increased. Regulatory constraints have increased land costs.
  • Land use Restrictions estimated to have lowered US growth by 50% since the 60’s.
  • The reason credit conditions would not be considered the long term cause is because it doesn’t necessarily say anything about the elasticity of supply. Its a outward shift in demand which could increase prices in the short term but it doesn’t remove the fact that supply could eventually catch up
  • Rise in pop. relies on scarce land, fixed size. If you can build up though this doesn’t hold.
  • Interesting study mentioned that says definitively that land use restrictions are the cause of rising property prices.
  • ”High property prices are the avoidable result of regulations, not the inevitable consequence of strong demand”

Policy

• Aim of housing policy is access to affordable housing appropriate to needs
  • Access: Elastic supply of housing
  • Affordable: Reasonable relative to income
  • Appropriate: Housing types according to life cycle
• These objectives ensure that costs are related to real incomes. Supply must be viable (prices greater than cost) but that the market is elastic ?
• Safe Mortgage system
  • Housing credit should be conducted at levels consistent with the economic and financial stability of the country
  • Related to affordability, must not take up a disproportionate share of household income
  • Volatile credit conditions, for instance, a contraction in credit supply causes a large reduction in quantity supplied for every rate. This reduces housing demand and because housing supply is fixed in the short term there is a reduction prices. Why isn’t this a good thing?
  • Stopping credit fuelled bubbles does not mean an end to housing market cycles as these still happen with the real economy (boom bust cycles).
  • Look to minimise the effect of the financial sector on housing crises.
• Cost efficiency of construction sector
  • In theory, a well functioning credit system would cap housing demand prices to a price point relative the real economy and real household incomes. People will only have access to debt they can afford (in some cases with government subsidies for those without consistent income).
  • Can’t let the breakeven price be too great (greater than the demand price)
  • Important for the government to understand the costs associated with different types of construction but also to not just use break downs from large developers. Auditing costs allows for comparisons with other countries.
• Income based housing subsidy
  • The more inefficient the construction sector the smaller the fraction of people that can afford new housing
  • There will always be households unable to afford new housing
  • Only the richest 10% can afford a standard two bed apartment
  • Social housing should start with fraction of income distribution should be supported in meeting housing needs.
  • ”What fraction of the population needs help from the rest of the population, to meet their housing needs?”
  • Anyone above this percentage should be cable to afford newly built accommodation
  • 1/3 of income and shortfall is paid by housing subsidy from government.
  • A cost rental approach is a way of achieving elastic supply
  • Housing policy trilemma
• Functioning market for Land
  • Land use with be slow to change as the external costs associated with land use are not borne by the owner
  • Encourage land to be put towards its best or most valued use
  • Increasing the holding cost of land to reflect the costs to society of it not being used (land value tax).
• Towards a housing policy
  • ”Having stable cost of accommodation and adequate homes, regardless of market conditions, should be the barometer by which the housing sector is judged”
    • Interesting graph that details the breakdown of housing price increases in the last generation.
    • Residuals, “income left over after paying all personal debts and obligations.”
  • 2. An efficient construction industry
    • To evaluate construction costs “However, it is not clear at this stage that there is any unanimity on the causes of the higher construction costs. Therefore, the first priority must be to establish an evidence base, similar to the methodology underpinning the World Bank Doing Business report, where an overall score can be broken down into its constituent parts and, where necessary, challenged
    • Construction costs seem out of line with other countries
    • On developers dictating the construction costs “The best figures I can find suggest that the cost of building a two-bedroom apartment in Ireland currently is roughly €280,000. This figure excludes any land costs but does include a range of other soft costs, including VAT, local authority levies and the 12.5% profit margin. Assuming that the ultimate landlord would like a rental income of 5% a year, this up-front cost of €280,000 converts into a monthly rent of €1,400. Bearing in mind that this excludes land, a realistic actual monthly rent for a newly built two-bedroom apartment is probably closer to €1,800. The average rent for a two-bedroom apartment in Dublin currently is €1,300 and in only two parts of the city – Dublin 2 and Dublin 4 – is it above €1,600. Unsurprisingly, any apartment building that is taking place currently is concentrated in these areas.”
  • 3. An Income-based Housing Subsidy
    • ”The more expensive it is to build a home, the more of a top-up those on lower incomes are going to need to find somewhere to live.”
    • Social housing will not be fixed until construction costs are addressed (and by all accounts we don’t seem to know why construction costs are high)
    • The costs to society are greater when construction costs are high (through subsidising people). Also if subsidies aren’t provided, no one, not even not for profit developers can build.
    • Didn’t really understand point 3.11
  • ”we need to think not of land as a speculative asset but as a service with huge value. Land is valuable because of society’s efforts, not the efforts of the owner”

Questions

• Who are the main providers of housing supply in Ireland?

• What are the pros and cons of non profit bodies building housing?

• Whats a few examples of land use restrictions? Are they all useless obstacles?

• Approved Housing Bodies (AHBs) provide and manage social rented housing. They are not for profit organisations formed for the purpose of relieving housing need. Also include housing cooperatives. How do these work, what is their ‘business model’?

• ”The switch from a specialised banking system, which included building societies and commercial banks, to a system of universal banks led to increasingly generous terms for mortgages, as these new larger universal banks enjoyed an implicit state guarantee”?

• Does this necessarily mean that developers wont inflate construction costs? Nefarious actors

• Subsidies should be provided in the income market, for rent not for mortgages. Is this a fair assessment statement?

• Regardless of market conditions. So even if developers say that the cost of developing housing is too high we still have to be able to provide housing to those that need it. Is it an ebb and flow between the government and the market?

• The role of competition in the supply of property, how important is it?

• Expectations: People may have expectations about the price in the future (is this really a hard measurement, do we know people are thinking this way?)

• What are the benefits to markets? Could the government not just (provided the demand data) not just build what demand requires?

  • Funding