Saturday, September 29, 2007

The mortgage conundrum


Much of the nation's wealth seems to be tied up in our houses, which don't appear to be very productive from an economic standpoint. There is a kind of circular logic:

1. Houses cost a lot, so you have to borrow a great deal of money to buy a house.
2. Houses cost a lot, because you can borrow a great deal of money to buy a house.

Having regard for the wider consequences of your proposals, what is the optimum solution?

12 comments:

AntiCitizenOne said...

Property value tax which is returned to every citizen equally.

CityUnslicker said...

we build more houses, stop mass immigration and allow the prices to go sideways for a few years whilst inflation catches up.

SACKERSON said...

Hi, CU, and welcome back, ACO:

(1) Leaving aside the question of those people who have come to this country and ought to go back, I don't think there is a housing shortage. I think there is a housing *misallocation*.

In an ageing population, there are millions of elderly people living alone, rattling about a family-size house.

There are also far too many people who have never learned how to live together, and try to maintain the same standard of accommodation apart as their parents managed between them.

Is there any statistic on the number of bedrooms in this country, as opposed to the number of dwelling units?

(2) To what extent is housing made expensive simply because money-lenders have gotten involved? What would houses (and rents) be worth if it were illegal to secure loans on real estate? Could one argue that mortgage lenders have simply created their own market, like drug-pushers, and are otherwise unnecessary and in fact, far worse than useless?

Nick Drew said...

A couple of piecemeal suggestions:

I do not approve of stopping people investing as they choose. But I strongly disapprove of financial institutions being allowed to under-state risk in their accounts.

So - properly-enforced, fully-risked capital adequacy requirements on lenders, to ensure proper pricing of credit risk and house-price downside risk.

Additionally, I disapprove of firms being allowed to lie to prospective investors, whoever they are. Today I received in the mail a brochure from a firm promoting property investment which states that once you have bought,

"you can sit back, because the market does all the hard work and increases the value of your property"

(it also states in minute print: this document [is not] an inducement to invest ... we are not authorised by the FSA)

Put a stop to that, too.

I see no downside or 'unintended consequences' of such measures

Nick Drew said...

Sackers, I have just seen your point 2, and I fundamentally disagree. No new houses would ever be built ! Nor would they ever have been: the number of people who would ever have been able to pay cash for a house (I don't mean a hovel !), even at 'cost', would always have been small.

Prudent lending/borrowing against proper security is a fairly basic aspect of capitalism. And positional value is real value in a free society, even if susceptible to rising and falling.

hatfield girl said...

Living in a beautiful house does have purposes other than shelter, S. If the house dweller chooses to spend their income in a particular way who is to question their choice? I suppose Schedule A could return. If you want a good garden too, they tend to come with a good house. Last week we had a guest lamenting that his (historic) garden, on which he has lavished quarter of a century of restoration and care, and sheer hard physical labour, would be lost to his children and possibly lost altogether, unless inheritance tax is removed. I sold my lovely arts and crafts house on whose garden (not to speak of the house and outbuildings) we had lavished time and quite silly amounts of money bringing it back, simply to remove the threat of Brown's 40%; as we would lose it for the children anyway we gave up. I google earthed it recently, total, vulgar devastation.
For many, houses are not a store of value but an extension of self, and a life environment. Where I am now has been the family house for generations and the house population swells and shrinks, as generations pass through, and the pattern of life associated with the building goes in and out of economic viability, being agricultural. But I shouldn't like to think of it being re-allocated because it's currently half empty. Doing feeling instead of economics again, sorry, but many don't want to play finance with their dwelling , or see slippery slopes locking onto their lifestyles.

SACKERSON said...

Nick:

People did build houses in the past, saving money and helping each other, without borrowing from third parties. A friend from South Wales, used to live in one of a row of such houses, built co-operatively by miners: granite-built and set to outlast NuLab (and GordoLab, as I hope to outlive both) - and very warm indeed.

When postwar women started to earn (or re-earn) a second income, it improved the family's standard of living; but pretty soon, when more did so, mortgages simply took into account two incomes and additional house price inflation was created. Now couples have three jobs instead of two (2 money jobs, 1 job running the home). What a trap.

Now, for most, a single-income family is unrealistic. Modern mortgages have locked-out a valuable lifestyle option (and rents have reflected mortgages, so renting doesn't get you out of it). My Mum was a home Mum, and it made the difference for us - we were Army kids, with frequent changes of school, so the cards were stacked against us. Her time and attention meant we both got to university, which neither of my parents did.

Besides, I've known numbers of women who hit a certain age, and want to give up work but can't. (PC readers who want to correct my old-fashioned thinking should leave here, and go and listen properly to women.) I know how capable women are - their candles burn hotter in the middle years, and so burn faster. Why should they be condemned to the long, slow burn of 40-50 years' paid labour?

More recently, when rates fell and house prices boomed, it became acceptable to borrow not 3 times income, but 6! Having climbed up that tree, all you can do is meow piteously when rates rise again.

I suggest that mortgages no more help you cope with the expense of buying a house, than drug-pushers help you "get well" (i.e. overcome your withdrawal symptoms).

HG: I sympathise with the house vandalism. But although we shouldn't penalise people for choosing to live alone (if that is actually their own choice, rather than that of their neglectful families), why should we subsidise the inefficient use of resources? Why offer a discount on domestic rates for singles, and exemption for the over-80s? Is this a tacit admission that the poll tax was just and right?

And then there is all the other Social Services stuff that the lone elderly get (and we pay for, or the young workers pay for)? In the past, this would be when the family took in "aged p".

Three boos for Miss Havisham.

Lord Higham- Murray said...

This is so, Sackerson. Over here, there is a distinct move to price parity with Europe by 2010 but not wage parity. Draw your own conclusions.

hatfield girl said...

And just think of all those new, brilliant novels we'd enjoy as the relations between us all under one roof and in one household were there to be considered again, S! This solitary living is answerable for the death of the English novel.
Intergenerational wealth distribution is a very specialized area, don't you think? bit like welfare - if you aren't Frank Field it's hard to catch all the unintended consequences aspects of the problems; Edwin Morely-Fletcher has written extensively on intergenerational fairness.

SACKERSON said...

HG:

I am an admirer of Frank Field and think that when he knocked the dust off his sandals on the doorpost of New labour, the curse descended upon it. After one year in office, the truth was there to see.

I think that when people complain of the selfishness of the young (a really essential survival trait), they haven't compared it with the selfishness of the old ("...set in his ways, poor thing, can't move now, too stressful") and the middle-aged ("...simply no room. You'd have to reconvert your office.")

Please tell me (us) more about Edwin Morely-Fletcher.

L H-M:

I'm a bit thick. Please spell out your conclusions. And is "over here" Russia?

dearieme said...

I remember schedule A: it was abolished in what must have been the first budget I paid attention to, presumably in the papers or on the wireless. "What's Schedule A, Daddy?" Explanation followed. "Is it good to do away with it?" "Good for us but probably not for the country." Perhaps right, the old boy.

SACKERSON said...

HG and Dearieme: thank you for your references to Schedule A, of which I was ignorant. Here's a reform proposal from 2002 that might have helped curb excesses and waste:

http://www.housingoutlook.co.uk/Papers/ft0702.html

What do you think?