Bayard left the following comment on my previous post The Chinese are just more blatant about it...:
"Sure, homeowners pay income tax as well, but they get a refund of most of it with rising property values."
Shurely shum mishtake? Have you not said time and again that rising property values are not income, because when you sell, you have to buy into the same inflated market?
Taking the economy as a whole, or even succeeding generations in one family, rising house prices make us collectively poorer (that I have said many a time). That does not mean that the incumbents don't benefit (one man's loss is another man's gain). Of course, Home-Owner-Ism only stacks up as a philosophy if you neither care about the economy as a whole or what sort of housing your own children can afford (or how much they inherit), so we'll take that as a given.
In the short term, you do not benefit particularly if prices go up, but in the long run, it makes for a super pension (at the next generation's expense, of course). If you bought forty or more years ago, before Home-Owner-Ism kicked off and you are ruthless about equity withdrawal*, you'll end up with sum of money that is equal to about half the income tax you have paid while living there rent free (and having your mortgage debts inflated away), as well as a state pension that is broadly equal to the National Insurance you have paid.
This is quite different to building up a pension by investing in the productive economy - of course you invest to earn dividends and make capital gains, but your investment also benefits the wider economy (and especially the people who work for the companies you invest in).
* Or you're even more ruthless like wot I am and you sold to rent in late 2007 - I've had a refund which is approximately equivalent to all the income tax I will have paid in my whole lifetime.
Forbidden Bible Verses — Genesis 42:1-17
25 minutes ago
13 comments:
Come on Mark, give THIS your support. After all Nick Hogan is U.K.I.P.
"Taking the economy as a whole, or even succeeding generations in one family, rising house prices make us collectively poorer"
I guess that depends what you mean by "poorer". Overall, I can't see how rises in the price of a particular asset can make everybody poorer (or richer). It just means holders of that asset benefit, everybody else loses by the same amount.
(Just in case it comes through and I appear to be repeating myself)Did I not just say that in response to bayard's last comment?
STB.
I did think of those who sold and rented, but thought that most would be too wedded to the idea of prices always rising to sell and rent, in case they could never afford to buy again.
What do you mean by "equity withdrawal?"
I got into a very satisfactory row about all this with some prat that called himself a 'mortgage adviser' at a recent corporate dinner. One of the hosts asked him politley what he did. 'I make it possible for people to realise their dreams' quoth he. 'Supposing they become nightmares'?' sayeth I. 'Wot?' 'Well house prices will go down, and anyway if you rented and saved the difference over a mortgage repayment you'd be just as well off'. 'No you wouldn't!' 'Yes you would, and here are the sums......'. Lovely. Lovely stuff. Hysterical and heated. I got my whole end of the table going. Bliss. Not one of them would go for it despite the irrefuteable evidence. And then I started on how all this money in houses was killing the productive economy and destroying wealth. Well, you should have heard them. Bloody pointless though. I don't know why I bother.
But, there you go. Home-owner-ism is deep rooted. It has an industry to support. An industry busily churning money and taking 5% off the top each time.
PS Just to say something positive about 'mortgage advisers' (no, I can't really either - but here goes anyway) - talking to a Nationwide rep, intermediated mortgage business which accounts for over 50% of their mortgage business (it is higher - I think about 80% but I am not exactly sure) costs them 1% of their overhead. In other words to produce a minority of their mortgage business their branch network costs them 99% of their overhead. Hmmm. Just thought I'd let you know.
D&C, will do.
AC, there's knock on stuff as well which tips the balance.
The parents aren't earning any interest on their notional 'capital' but their children have to pay a lot of interest; asset price bubbles lead to credit bubbles lead to recessions; longer periods between generations so 'lumpy' population pyramid; fewer jobs in construction; less investment in productive things etc etc.
Quite clearly, the losses outweigh the gains (even I am earning a lot less interest on my stash than the bloke who bought my home is paying in interest).
B, if you save up an old fashioned pension and buy an annuity, your capital gets used up by the time you die. Equity withdrawal means you borrow against the value of the house so that when you die, the mortgage wipes out the value and you've spent it all.
L, excellent stuff, problem is that going round telling the truth is not the way to win friends :)
I thought it was something like that, but I'm not very clear about what happens to your debts when you die.
B, you die in debt, so what? You end up with net equity in your house of £nil, the same as if you had bought an annuity.
Fair enough, Mark, points well made.
One more interesting one though: in your last paragraph you talked about "building up a pension by investing in the productive economy - of course you invest to earn dividends and make capital gains, but your investment also benefits the wider economy". If you buy equities in the market (as opposed to new issues), I'm not sure that's true really - buying shares doesn't directly benefit the company concerned. The money goes to the previous holder of the shares. It's a bit more akin to buying a house really.
MW. Friends! Friends? Have you eevr been to one of these corporate dinners? You are never going to be 'friends with 90% of the guests, so I've decided to not give a shit anymore. Anyway I've been right about how to deliver retail financial advice for over 20 years and they've been wrong. I am tired of it, totally bloody tired of it. It being them not thinking. grrrrr.
Question. Is QE so bad? If the broad money supply is collapsing at a faster rate than the BoE is printing money, is QE going to be the disaster I think it is?
AC, yes, I was tempted to caveat that.
Of course, 99% of shares are bought "second hand", but the money all flows backwards up the chain to the original investor. It would be pretty harsh to have a system whereby you can invest new cash by subscribing for shares but had no exit route.
Either way, the current crop of shareholders in a business do have capital tied up in it - they could, in theory, vote to liquidate the business, sack everybody and asset-strip.
And all things being equal, if less money were going into housing, it would go into shares or corporate bonds (or your own business or education, or maybe just into a savings account which the bank then lends to a business to help it expand) and a lot of that would end up being invested productively somehow or other.
L, I gave up going anywhere since the smoking ban.
As to QE, it's smoke and mirrors - instead of borrowing by issuing gilts, they are borrowing directly off the commercial banks (once you net off all the ins and outs). It's the underlying borrowing and spending that matters (and, in this instance, destroys wealth).
QE has not increased the banks' ability - or willingness - to lend by a single penny.
I don't smoke. Never have. I allow myself one or two corporate dinners per year, and only when I will get something out of them.
Yes, I see the netting off bit, but I reckon QE is bad just because it is an attempt to keep up the volume of the broad money supply, just when we, the markets, are saying that money needs to be destroyed.
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