This is the thing I never see addressed. Wouldn't fixing the housing crisis necessarily involve slashing down property values? Which are for a lot of people their only form of savings?
Genuine question by the way, I would like an answer.
> Which are for a lot of people their only form of savings?
It's fake savings unless you are speculating on properties.
Most people only own the place they actually live in and only resell to buy another place. A general property market crash doesn't affect the value of your house compared to other house so it's mostly neutral in this regard.
Of course people who borrowed before the crash will be in debt for longer than people who bought after but that doesn't actually change their debt situation. You might say it's unfair but well, not wanting other to be better of doesn't seem like a good reason to not solve the housing crisis.
In the end the only people who trully stand to lose are multi-owners but they are a significant part of the problem in the first place so that doesn't make me sad.
A case where it isn't fake savings is where people who work and live an a very expensive urban area, like london, may use the home as a retirement investment. So when they retire they move to a less expensive area and can use the difference in housing costs in the two areas as a retirement nest egg.
It's an interesting way to try to save, and assumes anyone will want and be able to buy it.
And that you will be able to keep the expensive property with expensive costs. Plus compare if living in the expensive vs cheap place gets you more savings...
No, it does not make sense. I can see holding a property for a child, but not as retirement.
You misunderstand I think. When you retire you sell the expensive property and then buy a less expensive property in a cheaper area. If retired, then potentially have fewer restrictions on where you live because you don't have to commute to work any more. The difference in property costs between the old and new areas is your nest egg.
You will still earn the difference between the expensive property and the less expensive one. It will just be a lot less and that’s a good thing.
Using properties as store of value or betting on them becoming more expensive have too many externalities.
Your case for exemple is directly leading to people actually living and working in the less expensive places being displaced by retirees from the city which is very much undesirable for local life.
It's not neutral if you've borrowed to buy the home...
If you're in negative or reduced equity your mortgage costs can increase dramatically when you refinance. This alone can easily cripple a large % of the population and tank the consumer economy
Why would you refinance if you're underwater? Wouldn't you walk away from the property in most cases?
Of course that doesn't eliminate the economic impact. It just shifts it elsewhere.
An decent case can probably be made for the government to take on such loans and offer some scheme to forgive the difference if certain criteria are met.
A sharp fall in house prices might hurt some people, although the number who would be in negative equity is probably smaller than you'd think. A quick Google says only 28% of homes are owner occupied with a mortgage, and the vast majority of those will have paid off substantial capital.
I think the premise is worth questioning though:
It's true that many people have most of their wealth tied up in their house. But unless they want to substantially downsize, they can't access these savings.
In general it seems bad that it's common for people to have most of their wealth in an illiquid, undiversified investment that they also live in.
The best answer I've seen is gradually increasing land value tax (yes, Georgist style). Would slowly deflate the market - but much more at the top end than the low end. Would also encourage efficient use of land. And be a new source of revenue that can replace other taxes.
Yes and no.. Slashing the problem completely is no worse than not fixing it since a climb into the stratosphere also has to burst.. I.e. with a new generation rejecting traditional lifestyles.
I think the solution is to artificially build new cities with ideal logistics. Distant cities inevitably draw away housing consumers but by least influential first and are outside each others influence for NIMBYs.
A nominal increase in value, while becoming more affordable in real terms might be feasible.
However to do this would require inflation of other goods, matched by wage rises, which would require actions that the British political establishment is not willing to take.
Making prices stagnant over 10-20 years would allow wages to catch up. This hurts speculators and finance way more than individual families and allows for a more gradual transition.
It's probably only something you can fix across generations.
You're totally right. It would be better for home owners since high houses prices make everything about buying and selling houses more expensive. You can't realise your housing gains except by dying. Or downsizing, but many old people rattle around in 3+ bedroom houses until they die or are forced to go into a retirement home.
It would also involve building more houses, which is bitterly and loudly opposed by a subset of home owners. Home owners are also richer, older, and vote much more than the (generally) poorer, younger renters.
If you're not planning on selling your house it's future value is irrelevant. All I care about is the purchase price of my "forever home".
The only difference it makes it that if your lender gives more favourable interest rates when your loan to value ratio improves. So if you purchase a house and the price doubles, your LTV is already 50%. Conversely if it drops after you paid off half the mortgage, your LTV might be shit
I'm not sure if the thing about LTV is true considering the whole picture, since the loan is larger. A larger loan at a lower interest rate still has large monthly payments. (I'd have to do the maths to be sure ...)
I looked up one of the major banks in my country and the difference in mortgage rates and monthly repayments for different LTV ratios is as follows for a €500k property with €50k down payment:
LTV <50%: 3.75% €2668pm
LTV >80%: 4.15% €2762pm
Over the lifetime of the loan you'll spend roughly half of the time paying the upper rate and half paying the lower rate.
However, if, over the first 10 years of the mortgage, your house halves in value due to a recession then you won't break the 50% LTV mark until year 15 (2040).
On the other hand, if house prices were to increase by 50% over that period then you might hit the 50% LTV mark within 7 years (2032).
The difference between the total mortgage interest in these two scenarios is €9216. The only thing that changed was the valuation of the home.
Yes, but that doesn't mean the people who had houses that lost value are screwed. It just means that they didn't pocket as much profit as they could have. They bought a value and a rate they could afford. They're no more or less screwed if the value of the house goes down. They're screwed if they can't pay the mortgage. Lots of people are screwed by high housing costs. The only rational conclusion is to lower housing costs. I say this as someone paying a mortgage.
Exactly. At some point a lot of people are going to discover that they are the bag-holders.
It's unfortunate, and at an individual level you can't blame people that felt compelled to purchase a home (only one!). However, if people are honest with themselves, they would admit that the only reason they were willing to pay such a high price is because they expected the price to increase. In other words they were speculating. After a certain point, nobody was buying for the actual ROI (i.e. income potential or substituted rental value). Not only was this mistake made, but it was made using massive leverage in most cases.
TLDR; Nobody was willing to admit that they were making a risky investment. A risk that it may turn out that they couldn't afford to make.
Yes. But that's just like any fake token being used by olds as a retirement plan.
Seeing as the olds control almost all of the wealth of industrialized nations, they should as a group be held entirely responsible for paying for entitlements and benefits for other elderly. The young should not be burdened with this. They have more burdens than they can handle already and are soon genetically extinct unless the olds take the boot from their neck.
Please stop spreading generational divide. Those olds were burdened with this just like today's young. Somehow some people think olds had it easy. Housing issues are not us(young) vs them(old).
I have more things in common with any young person from the other side of the world than I have with the olds from my own nation, city or street. It is what it is.
The olds have been waging a vicious economic war of extermination against the young for the entire 21st century. And now the cycle has to stop, because there are almost no more youth to exploit, and will be even less in the future.
No previous generation behaved like the current olds. We have to be much better than them, and let their twisted ways be forgotten.
Genuine question by the way, I would like an answer.