Thursday 24 March 2011

People say the funniest things...

Here's one example of one of the cornerstones of Home-Owner-Ist propaganda which has entered popular consciousness over the last five or ten years:

The bigger problem is that, for good or ill, our economy now depends in significant part on the property market. Like our over-dependence on the financial sector, it's easy to see why this is a bad thing. Changing it is another matter.

To make homes really affordable would take such a price crash that, were it to happen, it would cripple the recovery and probably drive banks under. Nor are housebuilders going to build to increase supply while prices are static.

Meanwhile ordinary people have quite logically decided to invest in property — something Shapps tuts at —because of employers gutting their pension schemes. It might mean the end of Thatcher's “property-owning democracy” as we know it. But whether we like it or not, we need rising property prices.


That's just one example, but it is really quite extreme; he kicks off with a bald and entirely insubstantiated statement and then builds the rest of the article round it, cheerfully admitting that this is an unhealthy state of affairs but that somehow there is no alternative.

When challenged, Home-Owner-Ists will explain this Double-Think in a few main ways:

Version A

If prices fell, then lots of people would be in nequity. Banks would suffer such extreme losses on repo'd homes that the financial system would collapse.

That's not true. Half of homeowners are mortgage-free and LTV ratios on existing mortgages are spread fairly evenly (i.e. a tenth of mortgages are less than 10% of the current value of the home; a tenth are between 10% and 20%, and so on).

Even in an extreme (and highly unlikely) scenario where house prices fell by half; every borrower who was even one penny in nequity lost his job, defaulted and declared himself bankrupt; and the banks then repo'd and sold all those houses, the total losses to banks would be around one-sixth of their assets, which is an amount that can easily be covered by debt-for-equity swaps.

Version B

If prices fell, then lots of people would be in nequity. They wouldn't be able to trade up or down or move to where they can find a job.

For a start, the number of transactions is already at all-time low and very few people are selling, buying or moving anyway, so we already have all these negative effects.

And it's not true either. It would not be rocket science for the government to change the law so that nequity becomes 'portable', or that these debts are simply written off in 'deserving' cases (in which case see A above), or that the government assumes all or part of the liability and collects it from the borrower's future pay packets (like with Student Loans) etc.

And don't forget that for every 'forced' seller there is a willing buyer. This would get transaction numbers and hence mobility up enormously, which must be good for the economy, not to mention maximise people's happiness in terms of the size and type of home they live in.

Version C

If people's house price goes up (or stays up), they feel wealthier, so they spend more money.

This is quite obviously true, but is this a good thing in the long run? Nope.

By spending more now they are saving less, especially if they are doing mortgage-equity withdrawal, and this 'wealth effect' means that people aren't trying to go out and earn money, which is bad for the economy; even worse, the 'wealth effect' only works when prices are rising and not when they are flat.

And any decisions based on a complete illusion must lead to an unfavourable outcome:

What if, by a sheer coincidence, every single lottery ticket used the same numbers and these numbers came up on a Saturday, but Camelot's machines broke down so every single ticket holder thought he'd won a million pounds, rather than 47 pence? So millions of people would rush out on a mad spending spree for a few days or weeks before they found out the bad news?

Version D

When house prices are going down, there's a feel bad factor. Without optimism, nobody wants to invest or take risks.

This is quite probably true as well - but only as long as prices are falling.

The speed at which they are falling doesn't seem to matter, so if prices fell by ten per cent a month for six months, this would do far less such damage than if they fell at one per cent a month for five or six years (even though in either case, house prices would roughly halve). Does nobody remember the 1990s? Once house prices had bottomed out between 1993 and 1995, that's when things started to pick up again in terms of rising employment, lower government deficits etc.

14 comments:

Lola said...

Ah, now y'see, that's my problem. In regards to 'D' I really get quite cheerful when house prices are falling. No wonder normal people cross the street when they see me coming.

Mark Wadsworth said...

L, yes, I belong to the approx. twenty per cent of the population who want house prices to come down, crash if possible, but it's no fun waiting around, whichever side you're on.

Anonymous said...

I deem myself to be normal and the thought of house prices crashing frightens me not.
For I sunk my money into a home not a house, it's the only home I have ever "owned" and when I leave via the basement and (probably) keep going down I will have profited not one jot.
It's just "somewhere" to live like an adobe hut or a dwelling with four corrugated iron walls or a shelter made from blocks of ice. Get over it.

Anonymous said...

I'd love house prices to crash; if only for the reason I would no longer have to log on to housepricecrash and keep reading realistbear's shit.

Steven_L said...

I don't care anymore, it's just a stupid pyramid scheme. The sheer number of people that think "the housing ladder" can magically make everyone super-rich is truly astonishing.

I'm seriously considering selling all my possessions bar a few things I definately want to keep (which i'll store at work FOC) and moving into a tenner night youth hostel long term.

I'll have loads of money in my pocket, no bills, meet loads of people and spend all summer partying and having BBQ's on the beach.

I might even go on a 9 day fortnight and put in for 'working at home' while I'm at it.

Robin Smith said...

Steven_L

*** DO NOT SELL YOUR HOUSE FOR CASH ***

Cash inflates faster than house prices. Keeping it in a box under the bed is a very bad investment indeed. Land is always the best investment because no wealth can be created without it.. And when things recover it will rise faster than anything else. This is a universal law.

MW - you forgot to mention that by abolishing taxes on work everyone could afford a home. Even though LVT will raise house prices the difference will converge instead of as today diverge.

Lola said...

In truth I have sympathy with Steve_l. If it were not for Mrs Lola I would have sold up and bought a factory unit, (going V cheap round here) put in a mezzanine floor and installed a bed, shower and kitchen. Ground floor for all the toys.

What more can a bloke want?

Mark Wadsworth said...

SL, L, I too remember when I lived in a bed-sit, I had everything I needed. Maybe a studio flat would be nice with a separate kitchen and bathroom and a balcony.

Anon's - agreed.

RS, land is not always the best investment, it goes in 18-year cycles. Agreed on LVT but sometimes I do "mainstream" economics which ignores this basic truth.

Steven_L said...

I'm a studio now, they are shite. They cost half your pay to live in little shoeboxes in nice central NIMBY 'conservation' areas.

It's funny, they have to paint the buildings white and keep the sash windows, supposedly to keep the residents happy.

But 80% of the houses have been knocked into little shoebox flats on the inside and I bet most of them are rented.

'Conservation areas' are another supply side ho-ist scam you should look into!

DNAse said...

I live in a conservation area. I have to get planning permission to cut down a diseased fir tree in the garden...

Mark Wadsworth said...

SL, sure. I stumbled across a great article a while back explaining how these various vested interests were battling each other - the landlords wanted it to be easier to convert into shoe boxes and the homeowners wanted it to be more difficult.

DNAse, you pays your money and takes your choice. All these restrictions are a negative sum game but nobody wants to give up a their bits because they fail to realise how much they will gain.

Bayard said...

RS, to really protect yourself against inflation, you need to buy something that will always be in demand, doesn't go off or out-of date and is not subject to speculative price changes. Not land, antiques, art, gold or shares, but bricks, blocks and building timber. Thousands of Polish peasants can't be wrong!

ahimsa said...

@ Mark

With regards Version A, while I am no apologist or defender of the banks, isn't version A exactly what has happened and but for governmental guarantees and massive cash injections temporarily propping up the financial system and forestalling collapse?

Banks are using mark-to-model (on both residential and commercial mortgages) evaluations instead of common-sensical mark-to-market evaluations and thus considerably overstating the health of their balance sheets.

Unfortunately what you assert would constitute a mere sixth of their assets, the financial world has leveraged to many multiples of that and therein lies the mess. Not so sure that can painlessly be solved with debt for equity swaps.

(p.s. I wouldn't rule out house prices falling by half!)

Mark Wadsworth said...

Ahimsa, that's what they want you to believe.

As a proper accountant who knows about this stuff, I actually look at bank balance sheets and so on and get out my calculator and the fact is, the banks (taking the financial system as a whole) would NOT have collapsed, it could have been sorted out with debt-for-equity swaps (even NR or B&B) and worst case, if things get so bad that savers lose money in one or the other institution, then the government should reimburse the savers DIRECTLY rather than hoying money at the banks and asking them to play nicely.