Comments on: Housing Bubbles and Rent Ratios

By: Rob Read

Rob Read — Mon, 20 Dec 2004 21:57:48 +0000

I follow the UK housing market. This market has recently seen Interest Rates shift to favour savers, and the housing market has stagnated and started to fall, starting in London and spreading outwards.

Housing is currently a bubble (at least in the UK), people are using Mortgage Equity Withdrawal(MEW) to fund general consumption like purchasing a car. (A car bought in such a way will be rust long before the 20-25 year loan is paid off.) This long term debt has been sustaining the UK consumer economy. Then there's the BtL (Buy to Let) market that has been buying up houses, (and pushing the prices up further) in order to rent them out at interest costs, and collect the capital gain on the house.

Lots of the UK also uses self-certification (self-cert) mortgages where the bank "trusts" the house buyers declared income. This has led to higher multiples being loaned out, and higher loans = higher prices, but at much higher gearing and risk opacity!

The way to spot a bubble is that people are buying for the capital gain, and not the yield. House prices are a bubble in the UK, and IMHO high house prices have been a drag on the economy. A crash would be good, not bad.

By: XTremeBlog

XTremeBlog — Mon, 20 Dec 2004 09:47:26 +0000

Carnival of the Capitalists
Welcome to this week's Carnival of the Capitalists, here at XTremeBlog. I hope you'll be back to visit this place from time to time when there is no carnival to draw your attention. We post about everything from hardcore talk of programming, to bas...

By: Kappiy

Kappiy — Thu, 16 Dec 2004 18:30:59 +0000

Since home-ownership is so closely tied to the current tax structure, it will be interesting to see what happens as Bush attempts to engage in tax "reform."

James mentioned one of the major governmental subsidies that homeowners have over renters--deduction of mortgage interest from federal income taxes. The other is the ability to deduct local property taxes.

Apparently, Bush has gone on record as saying that the mortage interest subsidy isn't going away (not that this means much since Bush's credibility when it comes to keeping his word is suspect in many areas). Since the main beneficiary of this government welfare program are suburban homeowners in Republican districts, I wouldn't expect COngress to pass any "reform" that eliminated this.

However, some of the more radical tax plans by some Republicans do call for this elimination--as well as the property tax subsidy.

The problem, of course, is that Bush's economic plan is entirely conradictory--reducing taxes, increasing spending, & building up deficits. The dollar's recent fall is evidence of the internatinoal financial community's tepidness about Bush's so-called "plan."

For more on this:
http://www.modbee.com/business/story/9575784p-10465142c.html
http://www.magicvalley.com/news/worldnation/index.asp?StoryID=11462

By: Bithead

Bithead — Wed, 15 Dec 2004 22:12:01 +0000

Of course the one point that Yglesias, not surisingly misses, is that when the economy gets better, home ownership goes up. (One would hardly be expecting Yglesias to give any serious hearing to the idea that under W the economy is good enough for more peple to afford their own home!)
The idea that it's simply people moving out of rentals and ito home ownership is further backed by the idea that despite the Fed taking a rate hike the other day, interest rates are still on a historical basis, rather low.

By: Attila Girl

Attila Girl — Wed, 15 Dec 2004 19:56:44 +0000

For most people, buying a house is a "two-fer"--it provides housing for 20 years, and then becomes an asset one can retire upon.

After 20 years of renting, you have nothing (except, in many cases, lower rent--because landlords increase rent more when they get new tenants in than they do when it's the same person year after year [and many municipalities have some minimal kind of rent control that protects existing tenants]).