Friday, 20 March 2009

Duncan: I'm Locked Out...

Duncan has an interesting post about the desirability of falling house prices. He's right, but I wouldn't want to argue the point on the doorstep if I was standing for election. But we do need to get more of the nation's wealth into productive enterprise and have less locked up in housing.

I posted a comment referring to the government's mortgage rescue scheme and he asked for more details. When I tried to post them I was denied entry to his comments for reasons I don't understand. So, just in case he comes by, the link to the basic details of the scheme are here, and the trade paper lays out its flaws here and here.


  1. Working now.

    Thanks for the links - will have a look,


  2. Charlie,

    I have to say I've never understood the general attitude to house prices. I remember some years ago writing a letter to the FT about it which they never printed. Why is it that people quite rightly complain about the fact that when the prices of every thing else they have to buy goes up they become worse off, whereas when the price of the most expensive thing they are ever likely to buy goes up, they think its a good thing????

    I wrote about this on my blog somewhere some time ago. The basic points are these.

    1) If you want to buy a house and the price goes up you are worse off. Just ask a first time buyer.

    2) If you already own a house and the price goes up you are no better off unless you sell it to realise the Capital Gain - its not a profit as the people who do all the TV Programmes ridiculously mis-label it. But, then what are you going to do, live in a tent?

    3) You could conceivably gain if you are lucky by selling at the top of the market, investing the proceeds, and renting until prices collapse. But, who is likely to be able to do that? Had you tried that over the last 10 years there are several times when you would, if you followed the advice in the papers have sold way below the peak, spent money on rent for several years, and probably have bought in again before the peak was reached - not to mention probably have lost a good chunk of your invested money as Stock markets tanked!

    4. Most people sell because they are going to move to a more expensive house. But, that puts you in little better posiiton than the first time buyer! If you buy a house for £100,000 and it doubles to £200,000 then the house you move to, which began at £200,000 is now £400,000. So where before you only needed £100,000 to move now you need £200,000!

    5. Older people may downsize. The you could benefit. But, if you have kids your benefit is their loss for all the reasons stated above.

    6. The worse one is the equity release scam. The fact that your house has gone up meaning you can remortgage or take out equity release is not a sign you have become richer!!! They don't GIVE you the money, it has to be paid back!!! All you have done is sell part or all your house to them in return for a temporary use of their money, which you have to pay back with interests. Just because you borrow against your house and thereby risk being homeless doesn't change the fact that the money you've borrowed isn't yours!!! Its usually the people who ledn money that are rich and get richer, not the people hwo borrow from them!

    There are only a few scenarios where rising house prices can make you better off. If you are a house builder. If you are a Landlord with houses to rent - rents will rise as well as the Capital Value of houses you own as assets not as long term consumer durables, if you are an Estate Agent or someone else whose fees increase as a result.

    There's one final possible case - thankfully for me. Where I live house prices have been fairly stable or even risen in the last year slightly - because house prices were lower than average to begin with - but, in Spain where I'm hoping to move to prices have collapsed. Its possible to arbitrage in that way, but again, how many people does that apply to?

  3. Well, I agree most of us have trouble spelling arbitrage let along exercising it...

    Rising house prices are of course a transfer of wealth between generations. Which is why they can't rise for ever - at a certain point the younger generation would have to wait to inherit in order to afford to buy if prices continued to rise above the general rate of inflation. (&, actually, I do occasionally hear of 20 somethings getting their first home using the inheritance from Granny's house...). The alternative, as we've seen, is getting mortgages based on dubiously high multiples of likely earnings.What could possibly go wrong with that scenario I wonder?

    Despite this, people commonly think rising house prices the most reliable way to self determination and wealth. It's going to be a huge task to convince them that self managing their own workplaces is a better bet...

  4. I see Alice Cook - a right-ish (I guess she'd say apolitical) blogger, with lots of Austrian/libertarian influenced comments on her blog - has some interesting numbers about latest housing bubble on her blog. She claims that only 35% of mortgages were used for home puchae. A quarter was for buty-to let and,
    "...home equity lending exploded. By 2007, it accounted for almost 40 percent of all mortgages. Of course, these loans fed straight into consumption. Homeowners, who are mostly middle aged, borrowed and spent, based on the illusion that they were rich because house prices were inflating. In the post-bubble world of 2009, this idea seems truly bizarre, but that is how things worked in early 2007."

  5. "Which is why they can't rise for ever - at a certain point the younger generation would have to wait to inherit in order to afford to buy if prices continued to rise above the general rate of inflation."

    Actually, the worse one I heard was the lenders trying to persuade kids to get their parents to remortgage their already paid for houses in order to raise money to give to the kids for a deposit. Thereby making debt slaves out of two generations at the same time.