High House Prices - Sucking Money Out Of The Economy

[munimula]

As I've mentioned here before I nearly bought in 1998, 3-bed terraced house in Bristol at £52K. To cut a long story short I didn't and haven't bought since.

Now if HPI had been 2.5% between 1998 and 2005 the house would now be valued at £60K. (2.5% is still higher than average inflation during that period).

Today I have a £30K deposit.

If I bought the house at £60K today my £30K mortgage would be £177 monthly (repayment based on 5%)

However, the house is today worth around £160K. If I use my £30K deposit today I still need a £130K mortgage, the mortgage costs £768 (repayment based on 5%)

So due to the excessive HPI of the last 8 years, today I would have to pay nearly £600 more monthly (£7200 yearly, approx £10000 of gross pay!!!!) for the same property. £600 which is not going into the economy, into savings, pension etc etc.

Add up all these £600s and it's clear to see that the future for the UK is not very bright, especially now that real average incomes are probably on the way down.

[bandylegs]

Great post munimula.

I'm never jealous of those who have mewed and own two of everything. Somebody paying £200 a month mortgage though...

[right_freds_dead]

yep. because a home has become so skewed against earnings. its deflated our earnings by a huge amount.

even rents are out of line with earnings. theres no escape. plus theres more poll tax coming.

whats the point of earning so much and working so hard, only to hand half over to some lucky stooge who happened to buy 3 years before.

ive never seen anything so crocked.

[zorn]

But for everyone who pays an over-the-top amount for a house they're buying, taking that money out of the economy, there's someone else who receives an over-the-top amount for a house they're selling, putting that money straight back into the economy. In fact, it probably has a net positive amount, as it's likely that the buyer's new mortgage will be larger than the seller's mortgage that is being redeemed.

[2005]

I hope they do put council tax up - honestly.

It would put a lot of downward pressure on houseprices and would shake those who have overstretched out of the market.

Ok I know there a lots of you who are going to scream - why should I pay higher taxes etc but the way I look at it is that nothing is for free.

Using some very rough figure as an examplar;

If my total monthly housing cost for owning a home are £800

Say £750 goes on a mortgage and £50 goes on council tax

I would rather pay £500 on a mortgage and £300 on council tax.

I am sure there are lots of macro and micro economic counter arguments for this.

It's just my personal opinion - I would rather pay my money for local services than in interest to a bank.

[bandylegs]

But for everyone who pays an over-the-top amount for a house they're buying, taking that money out of the economy, there's someone else who receives an over-the-top amount for a house they're selling, putting that money straight back into the economy. In fact, it probably has a net positive amount, as it's likely that the buyer's new mortgage will be larger than the seller's mortgage that is being redeemed.

Surely they are putting it into another property in general so compounding the problem?

Those who don't probally are spending the money... In Australia.

Edited November 4, 2005 by bandylegs

[munimula]

But for everyone who pays an over-the-top amount for a house they're buying, taking that money out of the economy, there's someone else who receives an over-the-top amount for a house they're selling, putting that money straight back into the economy. In fact, it probably has a net positive amount, as it's likely that the buyer's new mortgage will be larger than the seller's mortgage that is being redeemed.

I wouldn't agree. Everybody needs a home so majority of those selling will be upgrading, therefore borrowing more, less money for the economy or moving sideways. Anyone selling up completely is probably taking the money abroad and spending it there.

Where do you get the idea tha people are selling and putting this money into the economy from?

[since the beginning]

Someone always gains I hear the brothels are doing very well in wandsworth.

[underpressuretobuy]

So due to the excessive HPI of the last 8 years, today I would have to pay nearly £600 more monthly (£7200 yearly, approx £10000 of gross pay!!!!) for the same property. £600 which is not going into the economy, into savings, pension etc etc.

Add up all these £600s and it's clear to see that the future for the UK is not very bright, especially now that real average incomes are probably on the way down.

"Sucking money out of the economy" brought a real memory flashback for me.

I remember as a child my Dad and my Grandad having an argument where my Grandad was arguing that money should not be invested in property because it sucks money out of the economy.

He was arguing that investments should be made in the stock market, in business because that creates jobs, finds its way into research and development of new products etc.

I think my Dad was saying that most ordinary people were never going to invest in the stock market because it is too dangerous and I think he referred to the Wall Street Crash and all the ordinary people who had invested money in the stock market up to that point.

Grandad was saying that the Wall Street Crash was caused by people not investigating their investments a bit like buying a house without viewing it and that obviously people need to be careful with any investment.

I completely forgot about this whole argument until I saw your quote and suddenly realised that what they were talking about way back then is exactly the sort of speculative property investment that we are experiencing now.

I think its true all these years any money people had was not put into savings and business investments but just in paying increasingly high levels of property prices taking real investment money out of the British Economy.

Without MEWing we would probably have reached the crunch point ages ago.

[zorn]

I wouldn't agree. Everybody needs a home so majority of those selling will be upgrading, therefore borrowing more, less money for the economy or moving sideways. Anyone selling up completely is probably taking the money abroad and spending it there.

Where do you get the idea tha people are selling and putting this money into the economy from?

Apart from new houses, the amount of money going in and out has to be the same. Yes, people are upgrading, but somewhere at the top of the chain is generally someone dying and leaving lots of money from the same of their house to their heirs. Emigrants will suck a bit out of the conomy, much of which is counterbalanced by immigrants.

Just follow the money. You pay someone £100,000 for a FTB property. The person you're buying from has a £50,000 mortgage, so they have £50,000 to put towards the £200,000 property they're buying. That vendor only has a £80,000 mortgage and is trading up to a £400,000 house, so they have £120,000 to put down. And the £400,000 house they're buying is being sold by the estate of someone who has died. So you have a new £100,000 mortgage, your vendor has added £100,000 to their mortgage, their vendor has added £200,000 to their mortgage, and the heirs of the final vendor have made £400,000 in cash. Total net effect is nil.

[AteMoose]

"Sucking money out of the economy" brought a real memory flashback for me.

I remember as a child my Dad and my Grandad having an argument where my Grandad was arguing that money should not be invested in property because it sucks money out of the economy.

He was arguing that investments should be made in the stock market, in business because that creates jobs, finds its way into research and development of new products etc.

I think my Dad was saying that most ordinary people were never going to invest in the stock market because it is too dangerous and I think he referred to the Wall Street Crash and all the ordinary people who had invested money in the stock market up to that point.

Grandad was saying that the Wall Street Crash was caused by people not investigating their investments a bit like buying a house without viewing it and that obviously people need to be careful with any investment.

I completely forgot about this whole argument until I saw your quote and suddenly realised that what they were talking about way back then is exactly the sort of speculative property investment that we are experiencing now.

I think its true all these years any money people had was not put into savings and business investments but just in paying increasingly high levels of property prices taking real investment money out of the British Economy.

Without MEWing we would probably have reached the crunch point ages ago.

Wow

although your grandad was slightly incorrect, in the short term it appears there is more money in the economy because of rising prices and MEW... In the long term it sucks money out the economy... Perhaps this has been in the back of your mind and influencing you all along?

[MarkG]

But for everyone who pays an over-the-top amount for a house they're buying, taking that money out of the economy, there's someone else who receives an over-the-top amount for a house they're selling, putting that money straight back into the economy.

You've fallen for the broken window fallacy.

If you have a thousand pounds and pay it in rent or on your mortgage, that does nothing immediately to improve the British economy... sure, eventually it may end up being invested in something other than bricks and mortar, but that takes time. On the other hand, if you invest that money in a new business or buy a product that fills an real need from a useful company, you've just provided an immediate benefit to the economy as a whole.

Otherwise we could create a thriving economy by smashing our windows and then replacing them... it's not the movement of money that matters in the long term, it's what you do with it.

[bandylegs]

Apart from new houses, the amount of money going in and out has to be the same. Yes, people are upgrading, but somewhere at the top of the chain is generally someone dying and leaving lots of money from the same of their house to their heirs. Emigrants will suck a bit out of the conomy, much of which is counterbalanced by immigrants.

Just follow the money. You pay someone £100,000 for a FTB property. The person you're buying from has a £50,000 mortgage, so they have £50,000 to put towards the £200,000 property they're buying. That vendor only has a £80,000 mortgage and is trading up to a £400,000 house, so they have £120,000 to put down. And the £400,000 house they're buying is being sold by the estate of someone who has died. So you have a new £100,000 mortgage, your vendor has added £100,000 to their mortgage, their vendor has added £200,000 to their mortgage, and the heirs of the final vendor have made £400,000 in cash. Total net effect is nil.

Ok Zorn; you have a point but...

Immigrants don't bring in as much money as those who emigate take out.

(Fair play to immigrants though they do come and do the jobs that the average welfare abusing chav can't be bothered to break their asbo for.)

The heirs don't get £400k because of inheritance tax etx. Also they are not so likely to be spending the cash in the same way as the extra money which could have been in the FTB's pocket.

[munimula]

"Sucking money out of the economy" brought a real memory flashback for me.

I think its true all these years any money people had was not put into savings and business investments but just in paying increasingly high levels of property prices taking real investment money out of the British Economy.

As I just investigated in the other thread I just started

http://www.housepricecrash.co.uk/forum/ind...showtopic=18530

At todays prices I will potentially have £450,000 less over 25 years to go into savings, buying things, pension etc. It is a staggering figure.

Edited November 4, 2005 by munimula

[RichM]

Surely the banks also take more money as well?

Stamp duties are greater, CGT is greater, council taxes might go up...

Oh, and you run the risk of HPC

[apom]

As I've mentioned here before I nearly bought in 1998, 3-bed terraced house in Bristol at £52K. To cut a long story short I didn't and haven't bought since.

Now if HPI had been 2.5% between 1998 and 2005 the house would now be valued at £60K. (2.5% is still higher than average inflation during that period).

Today I have a £30K deposit.

If I bought the house at £60K today my £30K mortgage would be £177 monthly (repayment based on 5%)

However, the house is today worth around £160K. If I use my £30K deposit today I still need a £130K mortgage, the mortgage costs £768 (repayment based on 5%)

So due to the excessive HPI of the last 8 years, today I would have to pay nearly £600 more monthly (£7200 yearly, approx £10000 of gross pay!!!!) for the same property. £600 which is not going into the economy, into savings, pension etc etc.

Add up all these £600s and it's clear to see that the future for the UK is not very bright, especially now that real average incomes are probably on the way down.

brilliant, spot on and accurate..

That is what is impacting the economy now..

But it seems a mystery to everyone who thinks high house prices are cool..

Older people wanting a few more years of comfortable mewing are still trying to persuade non home owners from commiting financial suicide..

To want someone to do that is abhorant..

To sacrifice the economy so you can get in more debt yourself..

Either you are blinkered.. or actually evil

[munimula]

brilliant, spot on and accurate..

That is what is impacting the economy now..

But it seems a mystery to everyone who thinks high house prices are cool..

Older people wanting a few more years of comfortable mewing are still trying to persuade non home owners from commiting financial suicide..

To want someone to do that is abhorant..

To sacrifice the economy so you can get in more debt yourself..

Either you are blinkered.. or actually evil

Considering all the MEWing and debt increase, record consumer spending growth and record low unemployment, UK growth of around 3% is actually pretty poor. It is easy to see why this growth figure has evaporated this year and easy to see how this figure could go negative and the UK economy in recession. 2006 is going to be payback time.

[Mr_Sminty]

Apart from new houses, the amount of money going in and out has to be the same. Yes, people are upgrading, but somewhere at the top of the chain is generally someone dying and leaving lots of money from the same of their house to their heirs. Emigrants will suck a bit out of the conomy, much of which is counterbalanced by immigrants.

Just follow the money. You pay someone £100,000 for a FTB property. The person you're buying from has a £50,000 mortgage, so they have £50,000 to put towards the £200,000 property they're buying. That vendor only has a £80,000 mortgage and is trading up to a £400,000 house, so they have £120,000 to put down. And the £400,000 house they're buying is being sold by the estate of someone who has died. So you have a new £100,000 mortgage, your vendor has added £100,000 to their mortgage, their vendor has added £200,000 to their mortgage, and the heirs of the final vendor have made £400,000 in cash. Total net effect is nil.

Your figures do not take into account interest on the mortgage. I may well pay MR A 100k for my house via a mortgage loan, but the total investment that I shall be making will be far in excess of that, say 140k. So the real cost in effect is 100k remaining in property the 40k interest charge flowing to Financial services. Who will then invest that as they see fit, either in investments or lending out. Any profit they make is obviously taxed, reducing flow through to business investment

As mentioned captial gains tax, and inheritance tax are also applicable, reducing the growth in the 100k from input through to output. As the investment is fixed for 20-25 years, and inflexible it might not be the most efficient use of economic resources, thus in effect taking out money from the economy, as the money can be empoyed somewhere else better.

All good for the government tax tax and financial services, who will then be able to spend or use money more recklessley due to apparent wealth/surplus' thus further increasing the risk of mis allocation of resources

I therefore think grandad has a good point

[brainclamp]

You are not sucking money out of the ecomony buy purchasing something with all your savings. House prices are due to rise further as far as I can see. On the thread about the coming land economy, I posted that the BOE is now printing £1 for every £10 you save, earn or have in your wallet this past year.

Doubling checking the figures, there has been a recent acceleration to £1.20 per £10 cash you own.

In many ways this gets right to the heart of the issue.