Friday, June 7, 2013

Rather pathetic Home-Owner-Ist special pleading

The house price conundrum

We have just lived through a period of falling house prices in most of the UK as a result of the Credit Crunch and mortgage famine. Far from stimulating demand on other things, this just added to the lack of confidence in the economy, and removed income from the system as the housing market contracted. Whilst high home prices undoubtedly make families struggle to afford a home of their own, they can also stimulate the income of others in the housing market. For every new buyer suffering from the high price, there is a seller who may be trading down, taking a profit or benefitting from an inheritance, who should have more money to spend.

Posted by mark wadsworth @ 07:28 AM (3624 views)
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22 thoughts on “Rather pathetic Home-Owner-Ist special pleading

  • righttoleech says:

    Unconvincing half hearted hope from the Vulcan that the markets can be bucked a bit longer.

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  • There may be people out there who have never seen the following footage of John Redwood as Welsh Secretary.

    This is a man that knows what he’s doing and understands what is required, n’est ce pas?

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  • ‘For every new buyer suffering from the high price, there is a seller who may be trading down, taking a profit or benefitting from an inheritance, who should have more money to spend’
    Really grasping at straws to justify house price inflation. There will also be sellers who are trading up and paying extra for their bigger house and sellers who are trading down because they are broke and have other debts. Not to mention parents of the buyer who are feeling less wealthy after shelling out for a deposit for an offspring or two. Also rampant house price inflation pulls up the price of everything so most of us are poorer for it.

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  • mark wadsworth says:

    I have it on good authority that Mr Redwood’s father in law was a rabid Georgist, and Mr R knows perfectly well what the advantages of taxing the rental value of land instead of incomes is, he knows the advantages of having low land prices and correspondibly low household debts etc.

    But Mr R chooses to ignore all this because his voters won’t like it – he represents older people in expensive houses in the stockbroker belt. And in private conversations he has cheerfully admitted this.

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  • Thecountofnowhere says:

    “For every new buyer suffering from the high price, there is a seller who may be trading down, taking a profit or benefitting from an inheritance, who should have more money to spend'”

    THAT’S THE PROBLEM !!!!!

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  • In past years, a repayment mortgage monthly debit was mainly interest on the loan and a tiny amount of capital was paid off. Nowadays there will be much more capital paid each month and a smaller amount of interest. Affordability remains the same I would have thought. Monthly mortgage will end up being roughly the same amount as the going rent.

    In past years, first time buyers were paying huge amounts of interest to the ‘savers’ – many of whom are old. Now much of their mortgage goes to pay off the capital.

    Which is worse? Paying a lot of interest to the elderly so that they can buy a new car every three years, or paying off a large chunk of capital each month on your own house?

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  • @4 I do always wonder that with these people. They can’t all be attempting to speak with such authority whilst being fettered with such sheer economic illiteracy.

    The first chapter of the most popular Microeconomics textbook in the world (Hal Varian) is about apartment rentals. It spells out that landlords can’t pass on their costs to tenants. Increased costs may deter them from entering the market, but won’t allow them to increase rents.

    By the end of that chapter, you understand how rents are set and why the landowners really bear the cost of all land taxes, stamp duty etc. Yet the politicians and journalists trot out these nonsense arguments again and again, playing on the ignorance of the masses to justify subsidies and tax breaks that only benefit the asset-rich.

    Depressing to learn just how cynical they really are. There’s so much economic doublethink in that article, it’s like he’s overestimated the senility of his readership.

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  • mark wadsworth says:

    @ Cornishman, it is a big mistake to try and distinguish between payments of interest on principal and repayment of the principal itself.

    That is because the principal itself is merely the capitalised value of the rent you can save by owning a house. The selling price of the land is in effect the sum total of all the interest/rent payments you would have to make in order to live there, the selling price/the principal IS ALREADY capitalised interest.

    The rule of thumb is that selling prices are inversely proportional to interest rates; another rule is that the rental value of a home is fairly fixed (“rents are the Maypole around which house prices dance); and the last one is that interest, rent and Land Value Tax are more or less the same thing.

    So if you are currently paying £10,000 a year rent (i.e. privately collected LVT) then you are happy to pay £10,000 in mortgage repayments. In the short term, you couldn’t care less if that’s £1,000 interest and £9,000 principal or £8,000 interest and £2,000 principal. All that money that you pay over is ultimately interest, rent or privately collected LVT.

    In the longer term, a potential buyer vastly prefers high interest rates and cheap housing as that way he can pay off his mortgage quicker (and start enjoying the privately collected LVT himself all the sooner).

    @ Reticent – what’s the title of that book? I must buy myself one.

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  • mark wadsworth says:

    @ Cornishman, or we can look at the other side of the transaction.

    Let’s assume that somebody wants to cash in by selling his land and putting the money in the bank. He couldn’t care too much (in the short term) whether he sells is for £200,000 and gets 5% “interest” or if he sells it for £400,000 and gets 2.5% “interest”. It is the sum total of money which he will receive and can spend on new cars, holidays etc which matters.

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  • Redwood is my MP and he spouts this drivel regularly when I’ve emailed to hassle him on assorted issues. He saw no need for example for any restrictions on foreign ownership in London, because there were greedy sorry willing sellers eager to take the profit,. ergo no problem. No such thing as society, indeed.

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  • MW said:- “@ Cornishman, it is a big mistake to try and distinguish between payments of interest on principal and repayment of the principal itself”

    I don’t think most people would think the subject through that deeply. I think that ‘most’ people buying a house probably only really look at the monthly payments. If they are the same as the rent they can afford and the house is what they want, they will go buy it (so long as they are permitted to borrow the money).

    So ‘the market’ can work with high prices and low interest rates just as easily as it can with low prices and high interest rates – so long as people can borrow the money.

    Your comment at 11.26, makes the point that people will prefer to cash in on the high prices and low interest rates – buy more BMWs with £400,000 than £200,000.

    Once prices have got to the level they are at now, it is difficult to revert to low prices and high interest rates.

    So the answer is to make money available for people to borrow at low rates – and not think things through too much…

    “In the longer term, a potential buyer vastly prefers high interest rates and cheap housing as that way he can pay off his mortgage quicker (and start enjoying the privately collected LVT himself all the sooner).” That may well be true – but, as I say, I don’t think ‘most’ people think long term.

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  • montesquieu – have you completed on your house purchase now?

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  • mark wadsworth says:

    Cornishman: “I think that ‘most’ people buying a house probably only really look at the monthly payments. If they are the same as the rent they can afford and the house is what they want, they will go buy it”

    Absolutely correct. It is the sum total of mortgage repayments which matter, the would be purchaser is not too concerned with the split between “principal” and “interest” as ultimately it is the same thing, it is ALL rent (or an alternative to paying rent).

    So you are saying the same thing as I was trying to say.

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  • When I googled it, I found the whole thing as a PDF here:

    http://menaxhim.files.wordpress.com/2012/03/0393934241microeconb.pdf

    It’s called Intermediate Microeconomics: A Modern Approach by Hal Varian. Varian is the chief economist at Google. The textbook is a standard 1st year text at Cambridge and tons of other reputable institutions.

    From page 11:

    ‘Most people would think that at least some of the tax would get passed along to apartment renters. But, rather surprisingly, that is not the case. In fact, the equilibrium price of apartments will remain unchanged!’

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  • montesquieu says:

    @ cornishman – not not yet, chain issues down the line but hopefully early July.

    Not in Wokingham borough any more it has to be said, moving nearby but cheaper (edge of Bracknel Forest).

    As I said before I have 15 years till retirement and hoping to pay this off in something around 10 if all goes to plan. Loan is 2x joint salary so quite manageable. We can cope with a crash if it baloon goes up (and Gideot seems set on lighting the fuse), but mainly doing this as tired of renting after 9 years and 4 landlords. I want to live rent-free post retirement. Not too much to ask is it?

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  • mark wadsworth says:

    Reticent, thanks. I’ll have a look later.

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  • I live in Mr Redwood’s constituency and subscribe to Mark Wadsworth assertion that John Redwood knows full well the advantages of shifting taxation to land .

    I don’t however think this has anything to do with the demographic makeup of Wokingham or what his voters want .

    Most mp’s don’t know their backside from their elbow but J.R. does which makes it all the worse that vested interests and prejudices stop him doing the right thing .

    Obviously so much of this is stable door , horses , bolted but if it had of been down to Mr Redwood the banks would have been less but better regulated – by capital ratio’s , the relaxation of which by nulabor guaranteed a banking crisis .

    Look at the comments on his blog and every one says that house prices need to be allowed to fall .

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  • @ montesquieu – I was just curious to know how it felt moving into your own house after having held on for prices to come down – and then deciding to change tack and paying more than seems reasonable. Whether, having done the deed, the emotional benefit outweighs the concern about over-paying.

    Anyway, I hope the chain all holds together for you.

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  • montesquieu says:

    @Cornishman

    I don’t feel I’m ovepaying, I’ve been viewing for two years, but this is only the second time I’ve made an offer as most of what we have looked at has either been too shitty or too overpriced to bother with. I entirely stopped looking at property bought by its current owners post 2005 as I believed it likely very few would be able let alone willing to accept an offer at the level I was prepared to make.

    I have a motivated seller who appreciated the value of someone in a good position to proceed, and got 16% off what was already (I thought) a reasonably fair asking price in that local market. It’s only 35% above the year 2000 price (when its current owners bought it), WELL under peak 2007 values in that part of Berkshire, and probably about 2003-4 level. (My salary by contast is probably 60% higher than when I was last paying a mortgage in 2004).

    Several smaller houses in the neighbourhood have gone for around the same money and some larger ones are stratospheric, some 50-60% more than I’m paying for one or so more bedrooms (though often not much difference in square metres) and a smaller lot. I’m budgeting £20k for complete redecoration./recarpeting and getting rid of a 1970s ‘feature fireplace’ but most places I’ve looked at would ne redecorated to our taste in any case regardless of the property’s initial condition.

    There ARE bargains to be had even in the Home Counties less than an hour from London mainline stations, if you are patient and look carefully for them This is the sort of sale that sends the index, down not up.

    Is this capitulation? It doesn’t feel like it to me. When you figure in Sterling’s collapse and general inflation I believe we’ve had most if not all of our downward realigment, though short of Gidiot’s manipulations having an effect I doubt things are heading up any time soon. But even if things go down I’m not too worried by that as I’m staying put indefinitely.

    I’m not doing this for capital gain, I’m just getting on with my life rather than sitting round complaining about the injustice of it all. I have a timetable for my retirement and I’m going to follow through on it.

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  • @Striebs,
    John Redwood knows full well the advantages of shifting taxation to land. Just like Osborne knows the “political kudos” from inflating house prices again, against intelligent academic advice.

    We currently have a broken system of taxation in the UK. Osborne has ignored opportunities to fix it. The system particularly benefits extra large businesses like Vodaphone (see today’s articles) and the others which regularly get a mention on these pages. There is a whole industry geared towards making sure that top people don’t pay any tax whilst telling us to be more “Austere”.

    The Vulcan clearly wants to preserve the status quo, most of the Tory safe seats are supporting big business, which pays little or no tax. The BBC is doing it’s best to rubbish the protesters at the Bildenburg conference in Watford. Meanwhile, Osborne plans to stitch up the UK while supporting his chums 🙁

    Don’t bother setting up a website to publicise those views, it will only get taken down – PRISM has your address, and now it’s passed to GCHQ. If they were any good at catching REAL terrorists then the Woolwich killing wouldn’t have happened. If we are becoming a big brother/police state, it’s not to help Joe Public.

    When the crunch comes, the sharks will clean up on repos.

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  • OK, people. This is the big test. We’ll find out in 23 months time. Is this the first time in 30 years that the ‘house price’ put doesn’t work? (with the exception of Major, who only won from post Thatcher sympathy and the incredulous ineptitude of Kinnock).

    Over to you, if you care anymore?

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  • mark wadsworth says:

    Dill, I’ve said many a time that the only thing that has mattered at elections for the last 30 or 40 years is “Are house prices going up?” Major was an outlier, he shouldn’t have been elected but he should have been re-elected, but there you go.

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