Authoritarian Posted June 2, 2009 Share Posted June 2, 2009 (edited) Imagine two towns. Both are of a similar size have a similar number of inhabitants and their buildings are made identically using the same materials. The only difference between these two locations is the level of economic activity that takes place. Towns number 1 has a thriving market economy a well maintained infrastructure and useful public services which among other things keeps the area clean and the population healthy, town two on the other hand a poor infractructure in comparison coupled with a depressed economy. Depsite the fact that the buildings are identical the price of housing in town 1 is considerably higher that in town 2, this reflects the respective prosperity of both locations. Town number 1 has the ability to produce more and so on average their occupants are richer in a real material sense than their counterparts. House prices in both locations will be based on their rental values which in turn is based on how productive a plot is likely to be. So, if the average rental in the first town is £500pcm we can work out roughly what the house price is. £500 pcm = £6000 per annum. To get a return like this based on a 5% yield would require £120,000 and this is where the mortgage comes from, its little to do with banks playing games with credit and more to do with the hard economic reality of the property market itself. If the house were sold for anything less than this price it would mean the seller would be selling himself short. We can also say that: every £1 of extra rental value accrued per annum will transmit into a £20 capital gain for the home owner based on a 5% yield. And its possible to capture these increases simply by sitting back and letting others do the work. The rental prices in town two and the corresponding house prices will be lower but as wages are lower too the length of the time required to repay mortgage debt will the same, if this location were to suddenly experience large levels of investment (think Ireland and EU funding) then it would almost certainly result in house price speculation. Its also important make a distinction between the value of the location and the value of the building, in strict economic sense one is land and the other capital. If I were to put an extension onto my house which I then rented out technically speaking the return I recieve is interest and would be my earned reward for the capital improvement on the building. This is quite different from a general rise in propety values which is a result of the booming land market or the result of others' hard work and investment, i.e a new school or hospital which can be incorporated into the sale price due to convenient proximity. Edited June 2, 2009 by chefdave Quote Link to comment Share on other sites More sharing options...
AteMoose Posted June 2, 2009 Share Posted June 2, 2009 In a perfect market rental prices and mortgage costs are similar. Quote Link to comment Share on other sites More sharing options...
SarahBell Posted June 2, 2009 Share Posted June 2, 2009 Consider what rents should be if "real life no tax credit top ups" wages were the norm. The lower rents are the more flexible a workforce is. Quote Link to comment Share on other sites More sharing options...
Authoritarian Posted June 2, 2009 Author Share Posted June 2, 2009 In a perfect market rental prices and mortgage costs are similar. I'm assuming a perfect market, one where house prices are perfectly aligned with rent. The point is once you lay it out clearly like this it demonstrates just why 'housing' is so expensive. Once speculation enters then it makes a bad situation worse. Quote Link to comment Share on other sites More sharing options...
Son of Taeper Posted June 2, 2009 Share Posted June 2, 2009 In a perfect market rental prices and mortgage costs are similar. In a perfect market earning potential and schooling would also be similar (to a town 2 miles down the road) Fact is it isn't perfect. Up to 10 years of age, parents want their children 1 mile away from my house. When the children hit 11, the parents tear my door down to get into the area. A right money earner for rental if you're that way inclined but given so many on this site hate the word "landlord" until it suits them....... Quote Link to comment Share on other sites More sharing options...
HAMISH_MCTAVISH Posted June 2, 2009 Share Posted June 2, 2009 In a perfect market rental prices and mortgage costs are similar. I would generally agree with that. Aberdeen is a good example. Quote Link to comment Share on other sites More sharing options...
Harry Sacks Posted June 2, 2009 Share Posted June 2, 2009 > How You Calculate The True Value Of A 'house', General Rule of Thumb Whatever the banks will lend you to buy it. Quote Link to comment Share on other sites More sharing options...
Bloo Loo Posted June 2, 2009 Share Posted June 2, 2009 rents and prices....two elastic items....you clearly cant value one against the other...you need something solid, like average wage and average loan. Quote Link to comment Share on other sites More sharing options...
Authoritarian Posted June 2, 2009 Author Share Posted June 2, 2009 Whatever the banks will lend you to buy it. The banking system makes home ownership easier, not harder. If there were no banks then very few of us would have the means to purchase our piece of land. Quote Link to comment Share on other sites More sharing options...
Bloo Loo Posted June 2, 2009 Share Posted June 2, 2009 The banking system makes home ownership easier, not harder. If there were no banks then very few of us would have the means to purchase our piece of land. no-one owned any land before banking.. I see. Quote Link to comment Share on other sites More sharing options...
Son of Taeper Posted June 2, 2009 Share Posted June 2, 2009 no-one owned any land before banking.. I see. Good point but with undertones of Karl Marx and Pierre Proudhon. So how do you see it Bloo? Quote Link to comment Share on other sites More sharing options...
Stars Posted June 2, 2009 Share Posted June 2, 2009 (edited) Imagine two towns. Both are of a similar size have a similar number of inhabitants and their buildings are made identically using the same materials. The only difference between these two locations is that town number 1 has a bank.Town number 1 has a thriving market economy a well maintained infrastructure and useful public services which among other things keeps the area clean and the population healthy. Everybody has a job and works 50hrs a week to pay rent/mortgage/tax. They have everything they want, but no time to enjoy any of it because they are trying to get the upper hand over everbody else. If you want to buy a house it will cost 150,000 cash, but over 25 years will cost you 300,000. The bankers and government are very happy. Town number 2 on the other hand has no bank, poor infractructure in comparison coupled with a depressed economy. If you want to buy a house it will cost you £30,000 cash. The people who live here are very happy. They use the 270,000 saved to buy town number 1 when it goes broke. Town number 2 has lower wages - in fact the house prices and rent will (more or less) track this; so the lower economic opportunity means that workers in town 2 are just as 'under the thumb' as town 1 Edited June 2, 2009 by Stars Quote Link to comment Share on other sites More sharing options...
Sunderthine Posted June 2, 2009 Share Posted June 2, 2009 (edited) The banking system makes home ownership easier, not harder. If there were no banks then very few of us would have the means to purchase our piece of land. What a corker. Please, please do explain if you have the time Edited June 2, 2009 by Sunderthine Quote Link to comment Share on other sites More sharing options...
Authoritarian Posted June 2, 2009 Author Share Posted June 2, 2009 (edited) no-one owned any land before banking.. I see. It was owned but the ability to extract rent was a power that was concentrated in a small number of hands, think Monarchs, Lords, Churches etc. The banking system adds a fluidity to the housing market which helps make transactions easier, this includes speculation of course. But fundamentally the expensive nature of housing isn't a problem with lending, its an intrinsic feature of the housing market. Edited June 2, 2009 by chefdave Quote Link to comment Share on other sites More sharing options...
50%deposit Posted June 2, 2009 Share Posted June 2, 2009 to calculate the value of a house take current value and divide by 10. Quote Link to comment Share on other sites More sharing options...
Authoritarian Posted June 2, 2009 Author Share Posted June 2, 2009 (edited) Imagine two towns. Both are of a similar size have a similar number of inhabitants and their buildings are made identically using the same materials. The only difference between these two locations is that town number 1 has a bank.Town number 1 has a thriving market economy a well maintained infrastructure and useful public services which among other things keeps the area clean and the population healthy. Everybody has a job and works 50hrs a week to pay rent/mortgage/tax. They have everything they want, but no time to enjoy any of it because they are trying to get the upper hand over everbody else. If you want to buy a house it will cost 150,000 cash, but over 25 years will cost you 300,000. The bankers and government are very happy. Banks add value to towns and the landowners then pocket this value. Whenever ANY extra services are provided in a territory the net effect is an increase in land prices. Edited June 2, 2009 by chefdave Quote Link to comment Share on other sites More sharing options...
Stars Posted June 2, 2009 Share Posted June 2, 2009 (edited) You could be right, but town 1 works 10x as hard as town 2. Not necessarily, there is just less economic opportunity and less production The production that does take place still goes to the wrong people Edited June 2, 2009 by Stars Quote Link to comment Share on other sites More sharing options...
Authoritarian Posted June 2, 2009 Author Share Posted June 2, 2009 (edited) What a corker.Please, please do explain if you have the time No banking system = a lifetime of rental slavery. Most of the people seeking to purchase outright now are the ones that have played the market and made vast amounts of cash for free. Edited June 2, 2009 by chefdave Quote Link to comment Share on other sites More sharing options...
Sunderthine Posted June 2, 2009 Share Posted June 2, 2009 It was owned but the ability to extract rent was a power that was concentrated in a small number of hands, think Monarchs, Lords, Churches etc.The banking system adds a fluidity to the housing market which helps make transactions easier, this includes speculation of course. But fundamentally the expensive nature of housing isn't a problem with lending, its an intrinsic feature of the housing market. so not to say that we lack the means, but that we must play by the banking system / "housing market"s onerous rules. Quote Link to comment Share on other sites More sharing options...
ShedDweller Posted June 2, 2009 Share Posted June 2, 2009 It was owned but the ability to extract rent was a power that was concentrated in a small number of hands, think Monarchs, Lords, Churches etc.The banking system adds a fluidity to the housing market which helps make transactions easier, this includes speculation of course. But fundamentally the expensive nature of housing isn't a problem with lending, its an intrinsic feature of the housing market. No .. the only single thing that determines the price of property in the UK is how much you can borrow from the banks to buy it .. In 1948 the average house price was 1.6 times average earnings .. Interest Rates were 2% and there was a massive housing shortage (far worse than now) The only difference is that in 1948 mortgage finance was very very hard to come by .. Given that "demand" for property will always outstrip supply the only thing that regulates is how much you can borrow to buy it .. If interest rates were 0.1% and the bank would lend 40 times income on an interest only mortgage .. then people would pay £100,0000 for a starter home. You've GOT to get on the ladder whatever it costs .. Quote Link to comment Share on other sites More sharing options...
huw Posted June 2, 2009 Share Posted June 2, 2009 The services they provide are quite different. One is providing you with land and the other is providing you with credit. In terms of parastic activity the land owner wins hands down, it would be much cheaper for all concerned if they simply went away and stopped performing their work because their work consists of collecting the rental value for a fixed location. Their work should consist of providing capital, bearing risk (of voids, which are inevitable given the flexibility of renting), and provision of maintenance and related services. Recently the model changed to sitting back and waiting for leveraged speculative gains to materialise. Quote Link to comment Share on other sites More sharing options...
lowrentyieldmakessense(honest!) Posted June 2, 2009 Share Posted June 2, 2009 Banks add value to towns and the landowners then pocket this value. Whenever ANY extra services are provided in a territory the net effect is an increase in land prices. how do banks add value target the landowners Communism argues that only collective ownership of the means of production through a polity (though not necessarily a state) will assure the minimization of unequal or unjust outcomes and the maximization of benefits, and that therefore private property (which in communist theory is limited to capital) should be abolished. Quote Link to comment Share on other sites More sharing options...
ShedDweller Posted June 2, 2009 Share Posted June 2, 2009 No banking system = a lifetime of rental slavery. Most of the people seeking to purchase outright now are the ones that have played the market and made vast amounts of cash for free. I just saved for mine .. If there were no mortgage finance then houses would probably be priced at around a single years income. For young people this would mean a certain quantity of living with parents and not going out, but by no means unaffordable .. Quote Link to comment Share on other sites More sharing options...
Sunderthine Posted June 2, 2009 Share Posted June 2, 2009 No banking system = a lifetime of rental slavery. Most of the people seeking to purchase outright now are the ones that have played the market and made vast amounts of cash for free. or a lifetime of debt slavery? can't argue that banks are extremely useful if you need credit - but when you need credit because it's available? The bank ARE the landlords, and are providing a similarly insidious "service" Quote Link to comment Share on other sites More sharing options...
Injin Posted June 2, 2009 Share Posted June 2, 2009 Sell it. And that's all/ Quote Link to comment Share on other sites More sharing options...
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