Housing

So Northern Rock have required some assistance from the Bank of England, investors shouldn't be concerned they say; gee that'll work.

Anyway this is yet more fall-out from the US sub-prime crunch, and perhaps have an effect on the housing market, certainly more so then the yet again proposed 'build new houses' strategy from the government.

You can see why they'd want to do this it makes logical sense, a large number of buyers chasing a small number of houses means the price goes up; increase the number of houses, decrease the price right - wrong!

The problem is they're equating the housing market with the product market and it don't work that way. Remember when DVD players started to first appear, weren't they expensive! Well imagine there was only one DVD player manufacturer, all the retailers have to buy off them. To an extent they can charge what they like (too much and nobody buys from them), they can also offer better deals to bulk buyers. So now put two retailers next to each other selling the same DVD player, they sell at the same price; if one of the retailers got a better deal they could sell it slightly cheaper - this is called competition. Except why should they sell it for a lot less, price it just under their competitors and they could still make more profit then them.

Add in another manufacturer and the retailers can play them off against each other and overall prices will drop; and this is what we saw happen.

So let's look at the assumption here, the manufacturers and retailers want to sell their products; well duh! Except they could do that by ruthless undercutting, the bulk buyers could kill the smaller competition with slashing cuts; so why don't we see that by and large the difference in price between two stores selling the same product is tiny. Ah that's because of efficency and competition, the prices are already as low as they can get. So if it's all selling explain clearance sales. Either the retailer is not making a profit or they're still making one.

So if they're still making a profit why don't they sell the product at that price in the first place, because they can get more for it and here they price is set by the competition. If they're not making a profit why are they selling it at that price, because they need the space for other more profitable products and it's in both these assumptions we see the flaw in using this model for housing.

The assumption again is that property developers want to sell houses - why? Unlike retailers, once they've sold the house they can't fill that space up with another - it's a one-time deal. So why should they be under any pressure at all to sell? Once they've covered building costs they in fact they have less pressure in selling now then in the future what with the overall trend of house prices going up. So what price do they offer, well that would be the one set by the competition i.e. the surrounding properties.

So more houses means more competition, means a drop in prices - again why? See if a house is for sale at £125k and I build and want to sell an identical house in the same area then why would I price it less then £125k - because I want to sell it over the sale of the other house; but do I? There's a lot of buyers out there and at least two are likely to be able to afford this price and that's all we need.

All we require is enough people out of the pool of buyers to be able to match the number of houses for sale at that price; so where's the incentive to drop the price? Only if the number of buyers at that price level is less then the number of houses does it become an issue and the price drops.

So where are they pushing for more houses? In the areas with the most demand. See it ain't going to work.