Bloo Loo, on 17 March 2012 - 09:57 AM, said:
"Here's another interesting fact: the median loan-to-value ratio on a new mortgage didn't go up during the "boom" years - in fact, for most of the 1990s and noughties it was falling.
That's consistent with the idea that rising house prices caused bigger mortgages - not the other way around. According to Broadbent, there isn't even much evidence that "mortgage withdrawal" - loans taken out on the basis of rising property values, were used to fund extra consumption.
Not everyone will buy these arguments."
To be honest, I think the article is beyond parody if you read it as intended.
However, this part is interesting because it's really an argument that it was the housing market that caused the problems.
They are dead wrong that the rising value of houses somehow makes debts easier to pay.
At best rising house prices are a zero sum game. People at one end of the chain get money which has to be earned by the people going in.
In reality, the distorted incentives this creates penalise productive activity and reward unproductive activity, so you get less of the former and more of the latter, which destroys the economy. You also have other second round effects such as reduced labour mobility, higher prices for everything that uses land anywhere in it's supply chain (which is everything), and a reduction in foreign investment .
Rising house prices make it harder to pay off debts, not easier. They might make a few individuals richer, but that money is a transfer from other people in the economy and the second order effects make the economy as a whole and most people in it, poorer.
I have always been of the opinion that some of the national debt reflected these losses caused by the housing market, and some reflected losses due to the banking industry (which is another, less transparent form of rent-seeking).
However they claim that this debt was primarily created by the increases in house prices which might be true but is not mainstream opinion.
This post has been edited by (Blizzard): 17 March 2012 - 11:25 AM