Article In Cityam

[spoon]

A nice article in the free business newspaper today if anyone can reproduce it.

The writer rips into broadsheet headlines such as 'homeowners' hopes for new year house price revival receives boost'. Why on earth would homeowners want prices to rise he asks. If you build an extension your property goes up in price. Conversely if your property goes up in price it does not sprout a kitchen extension. There's no actual benefit from seeing your house go up in price. The only people who benefit from a boom are those that are trading down. The rest - and by far the majority - benefit from prices decreasing.

That's the general thrust of the article. I would add that those in negative equity would also like to see prices go up. Whichever way you cut it, these headlines as the writer correctly points out are at best misleading and at worst vested propaganda.

[karhu]

It's a shame most people don't/are incapable of reading/understanding this.

[CriticalEye]

Everyone with a mortage on their home would benefit from house prices booming. As the equity share increases they pay less interest and finaly they can take some of the value rise in to consumption.

However, rising house prices does not increase welfare. The number of people owning homes are fixed while the number of future house buyers are infinite. Society as a whole is certainly better off in the long run, the lower the prices.

Thats why the government should ensure that the construction market is efficient, -and e.g. letting Polish construction workers on polish pay will actually increase wellfare (unless unemployment in costruction is severe)!!

[Mr_Nice]

As the equity share increases they pay less interest

err. Would you like to rethink this?

[Smarter than the average bear!]

err. Would you like to rethink this?

That would certainly make an interesting reply! Just another indication of the stupidy that is prevalent amongst the general public

[El_Pirata]

Thats why the government should ensure that the construction market is efficient, -and e.g. letting Polish construction workers on polish pay will actually increase wellfare (unless unemployment in costruction is severe)!!

Errr...letting in Polish builders on Polish pay puts British builders on welfare, and also they have to live somewhere so it puts upwards pressure on rents ultimately.

[Wuluf]

err. Would you like to rethink this?

That wasnt very nice

[CriticalEye]

That might be a problem, at least at some point in time. For sure we don't want to push British builders into unemployment. But I cannot see that is a problem yet. Nowdays the margins in construction are so good that the entrepreneurs certainly does not want to lay anyone off. However there is not much capacity for expanding the number of construction projects unless foreign workers are put on the job. And we do have the common market, you know..

[Jason]

That might be a problem, at least at some point in time. For sure we don't want to push British builders into unemployment. But I cannot see that is a problem yet. Nowdays the margins in construction are so good that the entrepreneurs certainly does not want to lay anyone off. However there is not much capacity for expanding the number of construction projects unless foreign workers are put on the job. And we do have the common market, you know..

I'm still waiting for you to explain this:

As the equity share increases they pay less interest...

Edited December 7, 2005 by Jason

[Casual Observer]

As the equity share increases they pay less interest and finaly they can take some of the value rise in to consumption.

Blimey, Warren Buffet needn't lose any sleep with you around.

[CriticalEye]

At least in my bank, if you top-finance your house investment using loans, with little or no private funding, you pay an estreemely unplesant interest rate on the loan. This is mainly because the bank thinks it is more likely that you default on your mortage when you have no equity. However, as equity is defined by the market price of hour house less the face value of your loan, when house prices increase, equity does too. Then the bank consider you a less risky debtor and offer you a better interest rate..

[Jason]

At least in my bank, if you top-finance your house investment using loans, with little or no private funding, you pay an estreemely unplesant interest rate on the loan. This is mainly because the bank thinks it is more likely that you default on your mortage when you have no equity. However, as equity is defined by the market price of hour house less the face value of your loan, when house prices increase, equity does too. Then the bank consider you a less risky debtor and offer you a better interest rate..

So your talking about higher lending charges and secured debt? Why didn't you just say that?

Unless you wriggling yourself out of a hole!

[CriticalEye]

Sorry, didn't mean to offend anyone. I'm a scandinavian and so my english spells bad and is not allways very accurate.

[Smarter than the average bear!]

At least in my bank, if you top-finance your house investment using loans, with little or no private funding, you pay an estreemely unplesant interest rate on the loan. This is mainly because the bank thinks it is more likely that you default on your mortage when you have no equity. However, as equity is defined by the market price of hour house less the face value of your loan, when house prices increase, equity does too. Then the bank consider you a less risky debtor and offer you a better interest rate..

I wasn't aware banks reduced the rate of interest as the value of a property increases! But I accept that lower LTV ratios attract a lower rate if interest.

As the equity share increases they pay less interest and finaly they can take some of the value rise in to consumption.

Surely if you borrow more against your property your repayments will increase. Hardly a benefit to the owner.

[Casual Observer]

I've been a houseowner for 30 years. If we had not had HPI I would be living in a fantastic house by now, instead of an over-priced nice one.

When prices rise the gap between the rungs on the ladder get wider apart. E.g, my house is probably worth about 700k, but the one I'd like to live in is worth 1. 2m. Now work out what I would need to find if all prices halved overnight. Now you know why I would like a HPC.

That and the fact that I'd rather like my 3 kids to be able to buy nice houses without crippling themselves.

[CriticalEye]

"Surely if you borrow more against your property your repayments will increase. Hardly a benefit to the owner."

Sure it's a benefit to the owner, which gets to enjoy increased consumption. Take old people for instance, they might want to eat of their house instead of passing the house value over to their children (which they expect will earn much more than thenselves anyway).

[frugalista]

A nice article in the free business newspaper today if anyone can reproduce it.

The writer rips into broadsheet headlines such as 'homeowners' hopes for new year house price revival receives boost'. Why on earth would homeowners want prices to rise he asks. If you build an extension your property goes up in price. Conversely if your property goes up in price it does not sprout a kitchen extension. There's no actual benefit from seeing your house go up in price. The only people who benefit from a boom are those that are trading down. The rest - and by far the majority - benefit from prices decreasing.

That's the general thrust of the article. I would add that those in negative equity would also like to see prices go up. Whichever way you cut it, these headlines as the writer correctly points out are at best misleading and at worst vested propaganda.

Homeowners wishing to trade up benefit significantly from house price inflation if there is also matching wage inflation. Their debts melt away, their equity builds up, and they can continually trade up without overstretching themselves or even getting a better job.

This is what was happening throughout the 70s and 80s and it is the basis for the "property ladder" belief so prevalent amongst the baby boomer generation.

This time round there has been house price inflation far far in advance of wage inflation. So, the article is correct in pointing out that this time round HPI does not benefit homeowners wanting to trade up.

frugalista

[Casual Observer]

Homeowners wishing to trade up benefit significantly from house price inflation if there is also matching wage inflation. Their debts melt away, their equity builds up, and they can continually trade up without overstretching themselves or even getting a better job.

This is what was happening throughout the 70s and 80s and it is the basis for the "property ladder" belief so prevalent amongst the baby boomer generation.

This time round there has been house price inflation far far in advance of wage inflation. So, the article is correct in pointing out that this time round HPI does not benefit homeowners wanting to trade up.

frugalista

What would be better still is wage inflation and no/low hpi

[CriticalEye]

Sure, that's what's happening next. Inflation-> Wages will rise and/or houseprices bust. The wedge between income and house prices has never been larger. Historically it allways converges somewhat, one way or the other.

[frugalista]

What would be better still is wage inflation and no/low hpi

Hope springs eternal.

I believe it might even happen. What would give rise to this is if the "property ladder" belief is turned on its head. That is, the children of baby-boomers finally realize that you are going to be stuck with either the first or second house you buy, so you'd better like it.

frugalista

[urban_hymn]

Sorry, didn't mean to offend anyone. I'm a scandinavian and so my english spells bad and is not allways very accurate.

Don't worry CriticalEye. A large proportion of the native English posters on this forum can't spell and they don't have an excuse like you do.

[IP Newcomer]

I picked it up and copied it on the train:

Comment

Ben Laurance

A property 'boom' is a hollow noise

NEWSPAPERS seize gleefully on any suggestion that the housing market is recovering. Hence over the past few days we have seen oodles of coverage of the latest Halifax survey: it reckons prices rose 1.2 per cent in October alone. And if the figures are to be believed, the annual rate of house price inflation has virtually doubled to 4.5 percent from 2.3 per cent since July.

One can argue until the estate agents put away their tap measures about whether the figures are right. The Halifax numbers are certainly far higher than those from other recent surveys.

But consider a different point. Consider the fallacy at the heart of the following introductory paragraph, in a newspaper generally regarded as heavyweight and quite posh, of a story reporting the Halifax's bullish findings: "Homeowners' hopes for a new year revival in house prices after a year of property market doldrums were boosted yesterday."

Ignore the fact that three in every 10 British households now live in rented accomodation. Ignore, too, that the latest reported monthly rise is chicken feed compared with the figures we saw four or five years ago: then, monthly increases of 2 per cent plus were commonplace.

Instead, simply ask yourself why homeowners should harbour "hopes", to use the posh paper's terminology, of a house price revival.

When the price of a house goes up, it doesn't get bigger. Adding an extension to a house may add £50,000 to its value, but adding £50,000 to its value doesn't mean the house spouts an extension. The garden stays the same. The fitted kitchen that never quite fitted remains just as unsatisfactory as it always was.

Yet we - or at least those of us who own or are buying a house - are expected to rejoice every time we read of a housing market boom.

Ther are indeed some people for whom rising house prices can be rightly regarded as A GOOD THING. Folk planning to move, say, from Kensington to Kettering can justly feel pleased. Houses in Kensington are pricier than those in Kettering. Someone selling up in west London to move to that little-explored part of Northamptonshire would always expect to end up with a little money left over. If prices across the country were to double, the cash windfall from the move would be that much bigger than if the market had been stable. Rising house prices are good for traders-down.

At tje extreme, rising prices are great for people who plan to sell their house and move into a tent. A property boom is also wonderful for the children of householders who die. The inheritance will be that much bigger.

But for most of us - those who can resist Kettering, campsite living and death for a little while longer - the prospect of a housing market boom is to be dreaded, not welcomed. Any homeowner who aspires to trade up - move to a bigger house, something with a lovelier garden, something in a nicer neighbourhood, eventually - will have to spend money to do so. Imagine your current home is worth £200,000. The one you covet is £300,000. You need to find an extra £100,000.

But if prices double? Your house is sold for £400,000; the bigger, better one costs £600,000. The gap to be funded has grown to £200,000. It is emphatically not good news.

So let us yearn rather less for a property boom - unless and until Kettering beckons.

www.cityam.com

[spoon]

thanks IP.

the point is some people would like prices to go down and some would like them to go higher. the media consistently paint a picture of doom should prices fall thus ignoring the plight of thousands that cannot even get onto the property ladder.

unless you're threatened with negative equity the only group of people that benefit from higher prices are property speculators not homeowners.

[Mr_Sminty]

thanks IP.

the point is some people would like prices to go down and some would like them to go higher. the media consistently paint a picture of doom should prices fall thus ignoring the plight of thousands that cannot even get onto the property ladder.

unless you're threatened with negative equity the only group of people that benefit from higher prices are property speculators not homeowners.

I always try and get my copy of cityAM its always a good read, fairly critical of Brown in the past too, actually just a few days ago! I dont expect them to be too explicitly HPC-cheerleaders in future, just a smug grin in the corner, only last week they had a massive supplement on new builds/investment properties etc, but hey we all have a living to make!