Podcast Summary
The impact of COVID-19 on rental demand and Scottish short-term rental regulations: The pandemic has led to a decrease in demand for shared rental accommodation in London and proposed stricter regulations on short-term rentals in Scotland.
The dynamics of property prices are influenced by more than just supply and demand. The discussion on the property podcast this week delved into the specific example of the demand for rental accommodation in London, particularly in shared housing, which has seen a significant decrease due to the COVID-19 pandemic and the resulting shift towards remote work and preference for individual living spaces. This trend is not surprising given the economic and social circumstances, but the magnitude of the drop is noteworthy. Another relevant news story discussed the proposed stricter regulations on short-term rentals in Scotland, which were recently halted in a victory for Airbnb. These events serve as reminders of the complex factors that impact property prices and the importance of staying informed about the latest developments in the market. Stay tuned for upcoming episodes where we will further explore the London market and its future prospects.
Housing market influenced by more than just supply and demand: The housing market consists of two parts: housing services market and housing assets market, affecting property prices beyond just supply and demand
The housing market is influenced by more than just supply and demand. While these factors play a role, they are not the sole determinants of property prices. The housing market can be understood as having two distinct parts: the housing services market and the housing assets market. The housing services market refers to the demand for the use of a property, while the housing assets market refers to the demand for ownership of a property as an investment. This perspective challenges the simplistic view that property prices are solely determined by supply and demand. The UK Collaborative Centre For Housing Evidence paper "Tackling the UK Housing Crisis is Supply, the Answer," which Jonathan referenced, delves deeper into this concept. Stay tuned for next week's market update for further analysis on the budget's impact on the housing market.
Understanding the dual functions of a house: living space and investment asset: The housing market can be divided into two distinct functions: a place to live (influenced by rents and population) and an investment asset (influenced by demand from investors). These markets can move independently, and understanding this distinction can provide valuable insights into real estate trends.
A house or property serves two distinct functions: it is a place to live (a service) and an investment asset. These two markets operate independently and are influenced by different factors. The supply and demand for a house as a place to live (rents) are determined by the number of people looking for housing and the availability of properties. On the other hand, the supply and demand for a house as an investment asset (prices) are influenced by the number of investors looking to buy property. Understanding this distinction is crucial because these markets can move in opposite directions. For instance, in London, the population is falling, leading to lower demand for housing as a place to live and falling rents. However, demand for London property as an investment asset remains strong, causing house prices to continue rising. This concept may be new to some, but once grasped, it can provide valuable insights into real estate markets. Another important factor to consider is the relationship between rents, earnings, and the supply of houses as a place to live. While rents should ideally rise when there is a shortage of housing relative to demand, they have grown slower than incomes over the last 15 years, suggesting that the supply of houses as a place to live has been adequate to reduce their cost relative to incomes. This concept applies not only to the rental market but also to the broader housing market.
Demand for houses as an asset drives rising house prices: Despite stable demand for houses as living spaces, house prices rise due to increased demand for houses as assets. Factors like low bond yields, QE, and global city safety perception fuel this demand.
The rising house prices aren't solely due to the demand for houses as a place to live. Instead, it's also driven by the demand for houses as an asset. Economists refer to this as the imputed rent, which is the rent you pay to yourself if you own the house. If enough houses are being built to meet the demand for places to live, then why are house prices increasing? The answer lies in the market for houses as an asset. The price of property as an asset is influenced by various factors, including supply and demand, cost of capital, taxes, future price expectations, and sentiments. Emotion plays a significant role in property markets, leading to bubbles and busts. With bond yields close to zero, the relatively low yield from property makes it an attractive investment, leading to increased demand. Quantitative easing (QE) also impacts property prices by keeping bond yields low. Additionally, property is seen as a safe haven in certain areas, such as global cities, driving international demand and rapid price growth. Therefore, the demand for property as an asset could be a significant reason for the rising house prices, even if the demand for houses as a place to live isn't increasing.
The cost of borrowing money impacts house prices: The cost of borrowing money is a significant factor in determining how much people can afford to pay for property, influencing demand and house prices.
The cost of borrowing money significantly influences how much people can afford to pay for property, whether they're buying for personal use or as an investment. This is because lower borrowing costs allow individuals to afford larger mortgages, increasing demand and pushing up prices. The Bank of England has even suggested that the fall in interest rates since 1985 is the primary reason for the increase in house prices relative to income. However, it's important to note that while the cost of capital is a crucial factor, it doesn't operate in a vacuum. Mortgage availability is also essential, as cheap credit alone won't drive up prices if it's not accessible to potential buyers. Thus, the housing market as an asset is far more complex than a simple supply and demand model.
Factors beyond supply and demand impact property prices: Understanding factors like cost of credit, availability of credit, sentiment, and the long-term impact of supply and demand can help investors make informed decisions in the property market.
While supply and demand play a role in determining property prices, they don't have as much impact on short-term movements as other factors like the cost of credit, availability of credit, and sentiment. Increasing supply may reduce rents more effectively than prices, and building more homes in high-demand areas like London might not significantly impact prices due to international demand for assets. The most likely cause for prices falling is a rise in the cost of capital, which central banks have kept low for years. The services market reacts more quickly to supply and demand, while property prices are more affected by these factors over the long term. Understanding these complexities as a property investor can help you make informed decisions and navigate market fluctuations. The book recommendation for further reading is "Alchemy: The Surprising Power of Ideas That Don't Make Sense" by Rory Sutherland.
Exploring the role of emotions in decision-making: While logic is important, emotional factors often influence buying decisions, making it crucial for businesses to understand the psychology behind consumer behavior.
While logic plays a role in decision-making, especially in business, most buying decisions are not solely based on logic. Rory Sutherland, in his book "Alchemy: The Surprising Power of Ideas That Don't Make Sense," argues that often, simpler and cheaper solutions exist that logic alone may not reveal. This book, which explores the intersection of business, marketing, and psychology, is a must-read for those interested in these subjects. The audio version, read by the author himself, is particularly recommended for its engaging and humorous delivery. If you haven't yet, I also highly recommend "A Bit of a Stretch" by Rob Bell, which I mentioned in a previous episode. It's a fantastic book that I've enjoyed immensely. And if you're looking for more from Rob and Rob, don't forget about Ask Rob and Rob on Tuesdays and Any Other Business dropping into your podcast feeds on Mondays. You can even catch it a day early on YouTube on Sundays. Tune in next week for another insightful episode of the property podcast.
