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iamnumerate

Is HPI wealth transfer or wealth destruction?

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I think destruction on the whole (but some transfer)

First part of my argument.

On Radio 4 Money box, Paul Lewis always says that a house is always worth one house.

Therefore if someone owns one house then if it goes up they are not really richer because if they sell they may have £2x instead of £x 5 years ago, they need to buy a house that costs £2x instead of £x 5 years ago.

So they are not richer so no wealth transfer.

Would you agree?

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Second part up, If a BTL sells up after 10 years and the price has gone up from £x to £3, then there is some wealth transfer. 

However if he does not sell up, he is in some ways poorer because it costs him a lot more to buy another asset giving similar rent than it would have done.

So there are not many winners, there are of course lots of losers, hence wealth destruction.

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1 minute ago, dougless said:

In general, yes.  However as some of those houses are liquidated, for whatever reason, then there is a money transfer.

True I do think there is some transfer but a lot of destruction.  If I had bought my dream home in 97 and were now sitting on £xxx gains, I would actually be poorer because of HPI because it would be harder for my daughter to buy the same house in a few years time.

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3 minutes ago, mathschoc said:

It allows for the large sum of cash as a deposit for the next bit of smack/house.

 

 

But doesn't it mean that you need more money to buy it?

If I have a house worth £100K, £10k equity and want to move up to a house worth £150K.

I need to save £5K to have a 10% deposit (ignoring transaction costs).

But if they all double I now have

£110K equity but so can easily get a deposit but need £190K mortgage instead of needing a £135 mortgage and £5k to save.

I am not 100% sure that is an improvement.  My new monthly payments have almost doubled (assuming HPI was not caused by low interest rates).

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45 minutes ago, iamnumerate said:

On Radio 4 Money box, Paul Lewis always says that a house is always worth one house.

Therefore if someone owns one house then if it goes up they are not really richer because if they sell they may have £2x instead of £x 5 years ago, they need to buy a house that costs £2x instead of £x 5 years ago.

So they are not richer so no wealth transfer.

Would you agree?

No, I don't think it's ever wealth destruction.   Sometimes it's a transfer.  Let's consider some scenarios:

1.  All house prices increase by 10%

If someone owns a house, and its value increases, they don't HAVE to upsize and buy another one at a higher price.  Indeed, it may give them the opportunity to downsize and have more money left over.  In total across all homeowners it will be neutral to beneficial.  They have gained at the expense of those who don't own a house.

2.  A new amenity is built, increasing all house prices in the area by 10%

Again, this may benefit those in the area at the expense of others, or just benefit those in the area full stop.  There's no destruction here.  Sure upsizing within that area is more expensive, but upsizing into other areas becomes cheaper.

3. Due to money printing etc the price of all real goods and assets (including houses) increases by 10%

This is actually a wealth transfer from those with nominal assets to those with real assets. 

---

If instead you want to go down the route of saying "one house is always worth one house" you then need to consider the impact of HPI on every other asset and measure them in houses too.  If you own a £100,000 house and your mate has £100,000 in the Bank, if your house price increases to £110,000 yes you still own 1 house but he now has a bank balance that was worth 1 house and is now worth 0.91 houses.  In other words, measured in "house currency" it's still a gain for you the homeowner.

Obviously if you want to upsize, and there's a lot of HPI around, that HPI is bad for you.  But it's not wealth destruction.  It's just that you've had less wealth transfer than the person who already owns the house you're looking to buy.

 

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8 minutes ago, scottbeard said:

No, I don't think it's ever wealth destruction.   Sometimes it's a transfer.  Let's consider some scenarios:

1.  All house prices increase by 10%

If someone owns a house, and its value increases, they don't HAVE to upsize and buy another one at a higher price.  Indeed, it may give them the opportunity to downsize and have more money left over.  In total across all homeowners it will be neutral to beneficial.

 

Obviously for those who downsize there is wealth transfer but for many they don't want to do that.

10 minutes ago, scottbeard said:

They have gained at the expense of those who don't own a house.
 

 

I disagree with this.  If I have a house worth £100k and you have a deposit of £10k, if you lose £5k I am not richer but you are poorer.  I think those without houses are more in the situation of HPI destroying their wealth, than those with gaining.

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12 minutes ago, scottbeard said:

If instead you want to go down the route of saying "one house is always worth one house" you then need to consider the impact of HPI on every other asset and measure them in houses too.  If you own a £100,000 house and your mate has £100,000 in the Bank, if your house price increases to £110,000 yes you still own 1 house but he now has a bank balance that was worth 1 house and is now worth 0.91 houses.  In other words, measured in "house currency" it's still a gain for you the homeowner.

 

 

I personally don't feel richer because others lose money and I am pretty sure that I am not richer, my mate in this case is sadly poorer, does help me but harms him. 

No wealth has been transferred in this scenario just destroyed.

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24 minutes ago, iamnumerate said:

I personally don't feel richer because others lose money and I am pretty sure that I am not richer, my mate in this case is sadly poorer, does help me but harms him. 

No wealth has been transferred in this scenario just destroyed.

Wealth destruction only occurs if you add up all the wealth in the world and the number is lower than before.  In this case, the total amount of stuff in the world is unchanged, it's just the relative values of houses and cash that have changed.  It's a transfer, not destruction.

It doesn't matter whether you "feel" richer or not, the fact is if you have a house you could sell for £110k instead of £100k you are richer.  It doesn't matter that you don't WANT to sell it; the fact is that you COULD sell it that has increased your wealth.  You now have an asset you could sell and use the money to buy more "other stuff" than you could before.  Conversely, your friend has money in the bank that now can't buy him as much of a house as it used to. 

Looked at another way, in terms of the whole Earth full of stuff you now can access a bit more of it, and your friend a bit less.  You may not actually exercise your right to access it (by selling the house), you may not like it, and it may be a bad thing for society - but that transfer has factually happened.

As another way to consider it, suppose it's not a house but a family heirloom you got from your Grandma that has increased from £100 to £110 in value.  You might say "well I'm never selling that precious item, so that doesn't make me feel any wealthier, I still just have a gold ring in a drawer".  Yet clearly it does make you wealthier, because if times were hard and you changed your mind and sold it you would now get more money from it than before. 

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HPI values land higher, so it's wealth transfer from people who work to landowners.

If HPI was 0% workers would be have more disposable income every time they got a pay rise and could then reduce hours. Instead more people have to work more hours for more years for a shelter.

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18 minutes ago, Captain Kirk said:

I take it we are not entertaining the view that HPI creates wealth as the BoE would like us all to believe?

Absolutely not.  The only question is does it transfer wealth or destroy it.  In almost every case I think it just transfers wealth.  There's probably some corner cases where uneven HPI destroys a little bit of wealth eg the transitional costs of moving your HQ from London to a cheaper outlying place.

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Ultimately, hpi is the transfer of an ever-greater share of the national income from the productive economy to the rentier sector (bankers, landlords, property developers etc.)

Wealth is destroyed when prices correct.

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I tend to agree that it transfers wealth from renters and those that buy at inflated prices to those that already own and didn't. It also destroys wealth because either the inflation destroys the currency in the end or prices collapse. Both scenarios have knock on effects.

 

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1 hour ago, Captain Kirk said:

I tend to agree that it transfers wealth from renters and those that buy at inflated prices to those that already own and didn't. It also destroys wealth because either the inflation destroys the currency in the end or prices collapse. Both scenarios have knock on effects.

 

+1

 

2 hours ago, Captain Kirk said:

I take it we are not entertaining the view that HPI creates wealth as the BoE would like us all to believe?

No, ideally HPI would be a reflection of the economy growing and us all getting richer but it isn't otherwise affordability would be ok.

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2 hours ago, zugzwang said:

Ultimately, hpi is the transfer of an ever-greater share of the national income from the productive economy to the rentier sector (bankers, landlords, property developers etc.) 

Wealth is destroyed when prices correct.

I see it that way also.

If a rentier ends up going bankrupt, then the amount of previous money paid above what it would be if linked to the real economy, has come to nothing. That proportion of the rent money and the labor to accrue it is destroyed as part of someone else's failed gamble. Of course this is preferable to moving closer towards feudalism.

The amount of people's taxes going towards the property "market" such as HTB and HB for private BTL is another factor of course.

 

Quote

No, ideally HPI would be a reflection of the economy growing and us all getting richer but it isn't otherwise affordability would be ok. 

If only it was linked to the economy.

Edited by Arpeggio

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Net wealth destruction, no question.

Increasing prices just mean houses are harder to get, so we’re all a bit poorer on average.

The fact that some individuals gain from this is irrelevant.  People profit from war.  

Oil prices are another good analogy - rising prices are great for a few oil rich countries, but the human race can undoubtedly produce more if energy is cheap.

Rents are purely wealth destruction because they are a forced wealth transfer - a tax - without even tbe redeeming features of government spending.

If landlords didn’t exist, their land still would.  The money they extort would be spent, efficiently, on goods and services that were actually needed or wanted.

In simple terms, landlording is a massive drain on the econony because we’re paying people to do nothing. 

Edited by BorrowToLeech

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4 hours ago, iamnumerate said:

No, ideally HPI would be a reflection of the economy growing and us all getting richer

Even HPI is due to us getting richer, it still makes us poorer.

We’d always be better off, overall, if prices were falling.  It’s pretty much never better for a useful, desirable, or essential thing to become more expensive.

Arguably, the extractive nature of the land markets is why recessions happen.  

Rents increase to extract more money from the productive economy.  That’s fine when the economy is growing, but if it slows the rent rises outpace growth, and the whole thing collapses.

 

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36 minutes ago, BorrowToLeech said:

If landlords didn’t exist, their land still would.

Precisely. I'm fairly sure that can't be said for much else apart from other seekers of economic rents.

If any worker in an economy from low to high skilled didn't exist, the work wouldn't do itself, someone else would have to do it. If utility companies didn't exist we would still need the distribution network or some kind of means that gives access to  water etc.

Edited by Arpeggio

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HPI destroys wealth if having to work to pay rents that have increased in line with HPI at the same time as debt interest (the cost of servicing the debt to buy) has fallen to the floor.....😉

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It's both...

It is the transfer of ongoing earnings from young to old* and also the destruction of wealth as the spending power is transferred to the owners* from the renters, therefore destroying the renting individual/family's net worth (wealth) and affecting their local/macroeconomy. It's also the transfer of wealth to the owners of money, who love to destroy it

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I wonder how much of David Cameron's wealth has been 'destroyed'...?

The old guy at work with two BTLs - I wonder how much of his wealth has been 'destroyed' since his two surplus houses have doubled in value?

The old couple selling to retire in France - I wonder how much of their wealth has been destroyed now they are selling the house they bought for £60,000 for £900,000.

Wealth is transferred - that is the plan.  And where does this wealth come from - the young, the poor, the future.

The injustice of the transfer of wealth that arises from HPI is the strongest argument against it...I would question the motives of anyone calling into question whether transfer of wealth takes place at all.

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37 minutes ago, Wayward said:

.I would question the motives of anyone calling into question whether transfer of wealth takes place at all.

The original post did say

Quote

I think destruction on the whole (but some transfer)

So that is a false premise.

My motives for saying it makes us poorer as a society are because I think it is a bad thing that makes us poorer as society.   Don't play the man (in this case strawman as no one said that) play the ball.

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  • 301 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% +
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      • Even
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      • up 5%



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