Many cities around the globe are facing unprecedented challenges in their property markets. The market has been priced out by the rising prices. These irrational values have been anchored by sellers. Prices don’t seem to be falling, so the result is that they are not going down. However, almost all transactions are occurring in the market at these prices. This is a common situation in many cities around the globe. This property bubble is evident in London, Sydney, and Auckland as well as Toronto and Shenzhen.
All these cities’ governments are under pressure to lower the prices of these homes. Nearly all experts on the subject agree that prices reflect supply and demand. High prices are a sign of high demand and low supply. In most cities, this is not true. The prices have risen faster than the fundamentals. Increasing the supply of homes is one way to reduce the price rise.
This article will discuss why more homes might not be the best option.
Future Expectations are the basis of property prices
Property prices are not commodities prices. They are instead asset prices. They are therefore not dependent on supply and demand. Property prices are driven largely by future expectations of value. Investors who believe that property prices will rise in the future will be right. The problem with property prices is the fact that until now, the government has allowed large sums of money to be poured into these markets. The result is that prices have risen. It is safe to assume that the price increase is not due to a shortage in supply. The speculative behavior and greed of many buyers are what is responsible for the price rise. This unprecedented price rise has been caused by easy access to private capital and bank credit that parents have passed to their children. Building more homes won’t solve the problem. Many of these cities don’t have a housing shortage problem at all.
Consider Ireland, which has a population of approximately five million. To ensure affordable prices, the government of Ireland constructed more than 90,000. However, prices rose more than 11% during that same time, proving that increasing supply will not solve the problem.
International Money flows into local property markets
The majority of housing price bubbles occur in developed countries. Because developed countries are attractive investment destinations for corrupt politicians from third world nations and their bureaucrats. These global cities eventually get the ill-gotten profits from these countries. These investors don’t seek a return on their investments. They simply need somewhere to store their money. Many of these houses remain empty. These investors don’t pay much attention to valuations or fundamentals and they fuel the speculative bubble. Germany and other countries have imposed a tax on those who buy second or third homes. Building more homes won’t solve the problem with land prices. International money flows and the associated price inflation will also need to be addressed.
Borrowing against Land
One of the biggest problems with houses is the willingness of banks to lend against them. Many investors have taken out mortgages on their homes and used the proceeds to invest in properties. It is common for landlords to borrow money based on rental income. For many years, people have used their homes as cash machines. Many investors have been taught that houses will never lose value. This is what fuels the speculative boom.
How to Solve the Problem
Now it is clear that more houses won’t solve the problem. We are left wondering what other options exist. These are some of the steps:
- A tax system must be designed to drive speculators out of the market. For buying more than one home, punitive actions must be taken. The rich must pay the price if they want to control real estate.
- It is necessary to limit foreign investments in local property markets. Tobin taxes for properties can be used to do this.
- Banks that lend money to real estate must be subject to restrictions. To ensure that the proceeds of any loan against real estate agents tulum mexico are not used for speculation, laws must be passed.
How to manage the downside
There will be casualties when you engineer a drop in property prices. People who borrowed large sums of money to purchase real estate at high prices will suffer. It is the government’s responsibility to ensure that property prices don’t plummet suddenly. The fall should be gradual and not cause panic within the investment community.
Building more houses will only result in more expensive houses. The problem lies in the flow of speculative capital. The flow of speculative money must be stopped or reduced for prices to rationalize.