How a local housing market actually works
Why does housing behave so differently from the other markets you deal with?
Most markets you deal with are thick, fast and standardised. A litre of petrol is a litre of petrol, thousands of them change hands every hour, and the price adjusts constantly and visibly. A housing market is the opposite on all three counts, and almost everything that seems irrational about it follows from that.
Every unit is different
No two houses are the same good. Two homes with identical floor area on the same street can differ in orientation, condition, the year the roof was last replaced, whether the basement takes water in a heavy autumn, whether the extension was ever permitted, and what the neighbour intends to build. There is no such thing as the price of a house in a town, only a cloud of prices for particular buildings on particular days. This is why a single reported sale figure tells you much less than it appears to.
The market is thin
In a given month, a given neighbourhood might see a handful of homes offered and a handful of committed buyers looking at them. Small numbers make outcomes lumpy. If two determined buyers happen to want the same house in the same fortnight, the sale price records something about those two people as much as about the building. If neither had appeared, the same house might have sat for two months and sold lower. Neither number is wrong; both are single draws from a small sample.
Transactions are slow and expensive
Buying or selling a home takes weeks or months and consumes real money in fees, moving, time off work and the friction of changing schools, commutes and habits. That cost of moving is the reason housing markets do not clear the way share markets do. When demand falls, owners do not usually cut the price until it sells. They withdraw the property and wait, because they can live in the asset while they wait. Volumes fall long before prices do. A quiet market and a falling market look identical for many months, and only one of them is.
Supply cannot answer quickly
If demand for a manufactured good rises, factories add shifts. If demand for housing in a town rises, nothing much can happen for years. Land has to be available, a change of use or a permit has to be granted, and a building has to be constructed. The amount of new housing a place allows is a decision made slowly by people, not a quantity that appears in response to price. Where that decision is restrictive and demand is rising, the adjustment comes out almost entirely in price. Where it is permissive, more of it comes out in new building. The difference between those two regimes explains more about long-run price differences between places than anything about the buildings themselves.
Most of the value is location, and location is other people's decisions
Strip a house down and much of its price is not the structure at all. It is access: to work, to a train, to a road that is not congested at the hour you actually travel, to a school catchment, to shops, to a coastline. None of those are produced by the owner. They are produced by everyone else's decisions and by public investment, and they can change. A new service pattern on a rail line, a road improvement, a re-drawn catchment or a revised flood map moves the value of buildings that were not touched.
What follows for a reader
- Treat any single sale figure as one observation, not as a measurement of a market.
- Watch how long homes sit and how many are for sale, not only asking prices. Volume and time-on-market turn before price does.
- Ask what is fixed for years (permitting, transport, geography) and what changes monthly (how many neighbours happen to be moving).
- Expect the market to be quiet rather than cheap when demand weakens.
The unit of analysis is smaller than you think
National housing commentary is nearly useless at the level of a decision, because it averages across places whose supply rules, job markets and geographies have nothing in common. Even a county average can hide two neighbourhoods moving in opposite directions. The useful unit is roughly the area within which a buyer would genuinely accept a substitute: a few adjacent neighbourhoods with similar access and similar housing stock. That is the market. Everything larger is a statistical convenience.