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iamdamosuzuki

Income Inequality And House Prices

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Just a quick one.

I've been thinking about why house prices went mental. By and large it was the easy availabilty of credit (most on here seem to agree anyway). Then I started to think, what with the huge gulf in incomes, was easy debt a delibarate ploy to allow the sheep -me- to compete in the market.

IE without house prices going stratospheric in order that we could compete( to some extent), we would now be back to full scale feudal landlords.

Or am I talking rubbish.

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In the US the evidence is pretty clear that there was a government initiated programme to encourage home ownership amongst the less well off via easier credit. In the UK there was a similar campaign, but the relationships were more tenuous. Thatcher was clear, she wanted a property owning democracy, hence the sell off of council houses, plus one of the convenient effects of the financial big bang was wider credit availability.

So basically you're right.

In 1900 owner occupancy rates in Britain were 11%, this peaked at something over 70% in 2005. It's falling now, and I believe it'll keep falling despite cheaper house prices because of tighter credit. For most people in this country it doesn't really matter how cheap houses become, unless they can get a mortgage they're still unaffordable. Which is pretty much how it's been for most of history, in the mid 1800's for example houses in rural areas sold for just over 1x average earnings, in urban areas it was just shy of 1.5x average earnings. Didn't make any difference to 9 out of 10 households, without mortgage credit they were still doomed to rent.

Edited by silver surfer

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Or am I talking rubbish.

No, you are right.

If wages had risen along with credit housing would not seem so unaffordable - so its UK income inequality making house unaffordable for the masses, not the credit.

The other factor making it unaffordable is foreign buyers buying up our houses either directly or indirectly via MBS etc.

The only route back to affordable housing is rising real wages, and that is going to have to mean inflation.

Deflation makes prices cheaper but causes real wages to fall faster than prices, which fixes nothing.

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we have falling wages and rising prices of goods and assets. So deflation and inflation.

depends on your perspective. Globally, wages are not falling. Here are chinese real wages:

chart-small.png

Some words around that graph:

"Recent labor market developments in China have drawn media attention to the rising labor cost in China. More than 50 years ago, Arthur Lewis pointed out that with the expansion of the modern sector of a low-income country, the “unlimited labor supply” (from the rural sector’s labor surplus) would disappear and as a result the country will enter into a phase of faster real wage increase.

Many countries including South Korea and Japan have experienced such a change. What about China—is it already at the Lewis turning point? Is this the end of a cheap labor manufacturing era for China? If it’s true, what would be the impact of the new labor cost dynamics on the country’s economic growth pattern and on the world (for example, on global imbalances)?"

Graph and text from here:

http://blogs.worldbank.org/category/tags/inflation

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Then I started to think, what with the huge gulf in incomes, was easy debt a delibarate ploy to allow the sheep -me- to compete in the market.

Easy credit was the vehicle to allow the banks to continue getting paid. Look at it from their point of view, more churn, more fees, higher mortgage amounts then higher repayments, and all of this whilst packaging it up and selling the risk on to the greater institutional investment fool. Maybe it was the perfect scam, too perfect in fact, such that critical mass came a whole lot sooner than the bankers thought it would. They had to keep it going whilst prices were going to the moon, else the ponzi collapsed on their shift, so they kept it going kicking the can down the road.

So in answer to the question, easy credit was the mechanism the bankers used to avoid getting their hand caught in the coookie jar.

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There was too much money about. We were buying loads of stuff from the Chinese but we didn't have anything they wanted to buy. So the Chinese invested all the money we spent in the banking system over here, giving the banks vast amounts of credit to dish out to anyone who wanted it. This massive surplus of credit was the start of the credit boom. But it's really like living well by borrowing from your credit card and when you make a payment to the credit card company they just increase your credit limit by the amount you have paid back, giving you, what is in effect, an unlimited supply of credit. Which is fine while it lasts, but these things never go on for ever and when it stops... well..., we are finding out what happens once the party finishes.

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IE without house prices going stratospheric in order that we could compete( to some extent), we would now be back to full scale feudal landlords.

Disagree. Feudal landlords is what comes next. The boom was about getting people into as much debt as possible. You have to get people into eternal debt before you can call them serfs.

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Disagree. Feudal landlords is what comes next. The boom was about getting people into as much debt as possible. You have to get people into eternal debt before you can call them serfs.

IC...and yet, most landlords are in debt themselves.

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There was too much money about. We were buying loads of stuff from the Chinese but we didn't have anything they wanted to buy. So the Chinese invested all the money we spent in the banking system over here, giving the banks vast amounts of credit to dish out to anyone who wanted it. This massive surplus of credit was the start of the credit boom. But it's really like living well by borrowing from your credit card and when you make a payment to the credit card company they just increase your credit limit by the amount you have paid back, giving you, what is in effect, an unlimited supply of credit. Which is fine while it lasts, but these things never go on for ever and when it stops... well..., we are finding out what happens once the party finishes.

and we still don’t.

The ‘recovery’ for the UK at least is looking very tenuous at best. China is heavily invested in countries that have vast mineral wealth (African/South American countries) and they buy high end manufactured goods from countries that add value (U.S, Germany, Japan).

The U.K is comparatively feeble in both of these core areas. Not having something to trade with the guy who has the money is never a good place to be.

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and we still don’t.

The ‘recovery’ for the UK at least is looking very tenuous at best. China is heavily invested in countries that have vast mineral wealth (African/South American countries) and they buy high end manufactured goods from countries that add value (U.S, Germany, Japan).

The U.K is comparatively feeble in both of these core areas. Not having something to trade with the guy who has the money is never a good place to be.

Won't our masters of the universe in the City just manage the pensions of the new Chinese gazillionaires? Or design new financial products for them. Surely, that's good enough to base an economy on.

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On Question Time they were talking about increasing manufacturing because this was the only way we could create enough jobs. Vince Cable said to be competitive as a manufacturer we would have to pay Chinese wages and people over here would never accept that.

Which is exactly right, if we inflate our wages even more we will never have anything to sell to the world because our input costs are too high. When we lost our manufacturing from the 1980's it was partly as a result of the 1970's wage inflation.

We cannot have manufacturing for exporting unless we print our currency to oblivion so even if our wages are high in sterling, the prices don't look bad for anyone abroad without a toilet paper currency.

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  • 284 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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