Exhibit One, from yesterday's Times, Andrew Ellson on the topic of 100 per cent mortgages:
For a start, a statutory maximum loan-to-value ratio risks starving the property market of first-time buyers, undermining any chance of a recovery in house prices and trapping an increasing number of borrowers in negative equity. Only young people with wealthy parents willing to help them with a chunky deposit would be able to buy their own home.
Wrong - the number of potential first time buyer depends on the number of people with a job who are renting. Provided the cost of buying is roughly the same as the cost of renting, many would prefer to buy. It is only in a credit bubble that people are suckered into paying far more to buy than to rent (once you factor in future interest rate hikes and property price falls).
Wrong - a "recovery in house prices" is not somehow something to be welcomed, ideally, house prices would be low and stable, and would not be an easy route riches ...
Wrong - ... or to poverty. It is not falling prices that are "trapping people in negative equity", it is the fact that people were suckered in to buying or MEWing when prices were unsustainably high in the first place. Keep prices low, hey presto, no more negative equity. What he appears to be recommending is somehow keeping the whole insane Ponzi scheme going.
Wrong - it would not be "only young people with wealthy parents" who can afford to buy. However high or low house prices are, young people with wealthy parents will always be at an advantage (or what's the point of bothering to become wealthy, if you can't help out your children should you so wish?) Reckless lending does not do FTBs any favours at all, as they are competing with each other - take away the financial weapons of mass destruction and prices will fall, so by and large FTBs will be paying lower prices, thus being saddled with smaller, affordable mortgages.
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Exhibit Two, from yesterday's FT, Bob Sherwood on the impact of new railway links on house prices:
House values near the Channel tunnel rail link stations are predicted to rise by a total of £1.6bn after fast domestic services start to operate later this year. Homes around Ebbsfleet in Kent are set for the largest rise of up to £30,200, or more than 14 per cent of their average current value, according to a study of the economic impact of the rail line, called High Speed 1... Bridget Rosewell, of Volterra, said the report showed that HS1 – which is forecast to generate additional rail and car park revenues of £3.4bn over 60 years, offsetting net operating costs and about 31 per cent of the capital investment – was a good public investment.
At least he's noticed that new railways give a massive boost to house prices, but...
Wrong - it's not the houses themselves that increases in value, it's the land on which they are built.
Wrong - property values do not wait patiently until the station is opened and trains are running before jumping upwards. The permanent increase in land values is a function of how likely the development is to go ahead and how long it will be until completion. A vague statement of intent that something may or may not be built in ten or twenty years time has little impact, but over half the jump happens on the day that the plans become official. The increase in land values over the last year before trains start running is minimal as 'it is already in the price'.
Wrong - I shall have to take the calculations showing that the benefits far outweigh the costs of the new railway links at face value, but it is not really a "public investment", is it? From the point of view of those landowners and homeowners who make windfall gains, it is somebody else's investment for private gain. So, if any taxpayers' money is to go into this, why shouldn't the tax be collected from the landowners and homeowners who benefit, or indeed be diverted straight to the railway company, i.e. the railway company agrees to go ahead provided that those property owners are prepared to contribute?
This second example via Dave Wetzel, by email.
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3 comments:
One of the main causes of the property slump is the fact that lenders were willing to lend 100% mortgages to people who had no record of an ability to pay off a sustained debt.
(see many posts, especially Steve Sailer and the Diversity Recession at isteve.blogspot.com.)
The point of asking for a deposit is not principally to lower the size of the loan but more to force borrowers to demonstrate that they could cope with longer term commitments by saving up over a period.
G-B, 100% mortgages were one of the main causes of the property price boom; the slump is an inevitable consequence of that.
Don't quite agree that 100% mortgages are THE problem. They are part of the problem, and certainly the easy availability of 100% mortgages is/was a problem.
But IMHO it all comes down to the supply of and price of money. Banks only allocate money, governments control the supply - or should do. If the government oversupplies money at too low a price the banks will have to lend it out on ever more risky deals. So the 100% mortgage is a symptom, not a cause.
BTW they have been around for years. They are not a recent thing.
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