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eric pebble

Great Explanation Of House Price Idiocy In Letters Section

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Great explanation of house price idiocy in Letters section after Telegraph article.

It's very good.

At 7.36pm on 10th August: http://blogs.telegraph.co.uk/finance/edmun...r-yet/#comments

"The article says ‘The housing market is not like the equity market’. Sure isn’t. Shares are in companies that make stuff, create wealth. Houses do not create wealth, they just sit there. One is investment, the other speculation. It’s astonishing that anyone could think that house prices will rise again for a very long time. The fall is house prices is not a fault, it is a correction. As house prices fall we are, in effect, writing off a bad debt.

Wealth is things, stuff you can use, cash is just a representation of it, cash is not wealth, it is a method of exchange. For example; if you buy some land and build a house you have created wealth by enlarging the housing stock. If you then sell the house, the cash you walk away with represents the wealth you created.

If, on the other hand, you buy a house, rent it out at a rate that covers the mortgage, and then wait for the market to go up, you are not creating wealth, and the cash you walk away with has to be accounted for by the wealth created, one day, by the buyers.

Until cash is accounted for by wealth creation it is what we call debt. And that is the nub of it. The price of a house was the value of [1] the house [2] the location and [3] the debt embedded in it and the potential to raise even more debt. It is number [3] that took over. The bubble in the housing market had nothing to do with supply and demand for houses. It was supply and demand for debt.

House prices have been rising far beyond inflation for a very long time. Each generation has been selling houses to the next for ever greater amounts of cash. Far more cash than each generation earned through wealth creation. It works in a world of rapid growth, but house prices soared beyond even that. And each generation was willing to buy a house, along with the embedded debt, because they could raise an even bigger debt the next time round.

Of course, one day, there would come a generation who could not in a lifetime create enough wealth to account for the amount of cash needed to buy a house - the amount of cash their predecessors had spent. That day came around 2003-2004 when first time buyers went out of the market. That was the warning sign (and, incidentally, it was when I got out, I sold my house).

The housing market may go through a series of mini booms and crashes as people look back and think houses look cheap. They are not. We will have fair value when sufficient debt has been written off. We cannot earn a living by selling houses to each other for ever larger amounts. At the end of the day we have to create wealth. There is no such thing a free money"

Edited by eric pebble

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Eric as the Texting Generations would say, Simples.

The concepts dissembled in the letter should be taught, illustrated and understood before children are allowed to leave school.

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Eric as the Texting Generations would say, Simples.

The concepts dissembled in the letter should be taught, illustrated and understood before children are allowed to leave school.

they learn these very principles when they join a bank after school.

apart from the wealth creation but, as banks see more money in the current account as wealth creation. which it is for those that accumulate, but they dont see the poor sucker that pays for their privilege.

and the marketing machine behind the debt makes sure the poor suckers are in continual supply.

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Until cash is accounted for by wealth creation it is what we call debt.

This is more confusing than enlightening.

Cash always means [another person's] debt, whether or not it is used in transactions involving a transfer of wealth.

An increase in circulating cash always means an increase in debt, whether or not wealth has been created.

In increase in circulating cash without an increase in wealth is inflation [not debt, as the author states].

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Productive companies and enterprises create wealth.

Houses are some of that wealth.

You missed the point

The act of merely holding a house and waiting for the price of the location to rise does not add any wealth, when it is profitable, it is profitable because it inflicts costs on productive people.

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This is more confusing than enlightening.

Cash always means [another person's] debt, whether or not it is used in transactions involving a transfer of wealth.

When new wealth is created in response to a loan then the means to repay the loan is being created

One of the problems with the real estate market is that people who borrow to invest in real estate are borrowing to inflict increased costs on people rather than create wealth

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When new wealth is created in response to a loan then the means to repay the loan is being created

Not so.

Have you tried repaying your loan by walking into the bank to offer them the goods you have made? They don't consider that repayment (they may well call it default).

You can only repay the loan by persuading somebody else to give you the money to do so. This will be money that has been either borrowed by them, or given to them by someone else who borrowed it... etc etc. From the creation of your debt to its paying-off, it is not necessary for any actual wealth to have been created anywhere, only for money to have changed hands.

The only role wealth creation plays in the money-go-round is that it is by creating wealth that you can more easily persuade people to give you their money to repay your loan.

If you want to understand money, I strongly believe it is necessary to see that it has NO logical connection to wealth at all. Money debt (I have borrowed money) requires money repayment (I have now obtained money off someone else). Wealth creation is one way to persuade somebody to give you the money to repay your loan. Other ways include speculation, being nice to your parents, gambling or begging. The repayment of a loan does not require wealth creation.

Edit: I fully agree with the broader point - which is that money transactions which involve a creation of wealth are better for society than ones which don't. But it is wrong to consider money and wealth as interchangeable, as the author does: a cash debt cannot be paid with wealth.

Edited by Selling up

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I like that explanation. I also note that it doesn't suggest any sort of cataclysmic crash, just a correction to wipe out the last burst of debt-fuelled excess. I can get behind that theory.

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Not so.

Yes so

Have you tried repaying your loan by walking into the bank to offer them the goods you have made? They don't consider that repayment (they may well call it default).

You can do this in theory

Create the goods with the loan and sell them to the bank for its notes

This wont happen directly, the bank will simply ask you to sell them 'next door' or trade the goods for notes yourself

You can only repay the loan by persuading somebody else to give you the money to do so. This will be money that has been either borrowed by them, or given to them by someone else who borrowed it... etc etc. From the creation of your debt to its paying-off, it is not necessary for any actual wealth to have been created anywhere, only for money to have changed hands.

If no new wealth is created, then the debt can only be repaid by inflicting a higher cost on someone else, therefore making it harder for your victim to repay his debt. If new wealth is created in return, then this is not the case.

The only role wealth creation plays in the money-go-round is that it is by creating wealth that you can more easily persuade people to give you their money to repay your loan.

If you persuade them to give you money by increasing efficiency for them in return then you do not detrimentally effect their ability to pay their debts, If you 'persuade' them to pay you by coercively increasing their costs, then you do.

If you want to understand money.....

:rolleyes:

Edited by Stars

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