Saturday, Oct 10, 2009
Blow for sellers
Telegraph: Housing market: blow for first-time buyers as Britannia withdraws 90pc mortgages
As a reminder, 20K deposit at 10% LTV represents 200K funding for a purchase. At 15% LTV for 20K deposit represents ~133K funding for a purchase. Either prices will drop or deposits must rise, if deposits rise to compensate then an additional 10K must be saved (30K deposit). For 50,000 transactions/month, 500million must come out of UK consumption, or 6 billion/year. This doesn't sound like much but of course the overall effect on the economy is many many times worse (Peter buys a beer from Paul, Paul uses the money to buy ciggies from Sam, Sam etc), because the initial transaction is lost. Higher deposit requirements are deflation in themselves. Although I was surprised because I thought all the 10% ltvs were already gone.
Posted by stillthinking @ 02:05 PM (1208 views) Add Comment
8 Comments
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1. stillthinking said...
For all the talk of aggregate demand levels and keynesian stimulus, trade deficits and devalued sterling, its noticeable that the media rarely if ever talk specifically about the mechanism by which high house prices relative to earnings act to destroy the real economy.
Also, it seems that the government have successfully managed to anchor inflationary beliefs within the population, when we in reality are going to get the biggest and possibly spiralling deflationary slap in the face during 2010, while the government foolishly persists in their dream that forcing asset prices upwards will avert deflation, when in fact you can reasonably expect the exact opposite to occur.
2. stillthinking said...
Sorry but one more thing.
When you channel money away from consumption to savings, you also channel revenue away from taxable transactions (VAT) to relatively untaxed transactions(stamp duty). Destruction of aggregate demand is much more important though, as Branchflower points out so often.
3. drewster said...
Brilliant analysis stillthinking, thanks.
On the deflation front, if the government racks up debt at the same rate as individuals pay back debt, then there'd be zero inflation. (Am I right?) That appears to be the current plan.
4. fallingbuzzard said...
Its the second black swan event.
5. mystie010 said...
Please tell me what is a black swan event?
6. inbreda said...
something you didn't think existed because you had never seen one because they are so rare - but eventually you will see one and feel foolish for thinking it could never happen. Much like a depression - the last one was in 1930 so realistically you'd have to be 100 to remember it, and tbh if you're 100 I doubt you give a chit any more.
I think
7. fallingbuzzard said...
the theory is that printing money always produces inflation and that this is the exit route from depression. lets see if the theory works
8. mark wadsworth said...
Re the original article, that is not a 'blow' for first time buyers, they are doing them a favour!