I'd hope that most people would answer "No" to that question, but allow me to continue the analogy expounded by The Fat Bigot today.
1. Imagine somebody steals £1,000 from your children, or a friend or a colleague. They have become £1,000 poorer and your wealth remains the same. In relative terms however, you are now £1,000 wealthier.
2. Imagine you bought a house for £100,000 ten years ago with a £90,000 mortgage, which you have since paid down to £60,000; and somebody on a similar income buys the identical house next door for £200,000 with a £160,000 mortgage (having paid as much in rent over the last ten years as you paid in mortgage interest).
Are you £100,000 wealthier than he is? Quite clearly yes, but on closer inspection, which is closer to the truth:
a) You have become £100,000 wealthier (your paper capital gain), or
b) You are no better or worse off (you're living in the same house as before) but he is £100,000 poorer than you are?
3. I'd submit that b) is closer to the truth. Now, in example 1, clearly the mugger is £1,000 better off as a result of the mugging and your child (or friend, colleague etc) is £1,000 worse off. If your neighbour is £100,000 worse off (from 2b) then who is £100,000 better off:
a) You? Unlikely, as you only have a paper capital gain.
b) The person who sold him the house? Possibly, depending on how he spent the money (if he merely bought a different house, he has at best broken even).
c) The bank, which can now earn two or three times as much in net interest margin (a larger loan takes longer to pay off, so even at a constant interest rate, the money the bank will earn in mortgage interest minus interest paid to whoever finances the loan, usually the person who sold him the house and pops the money straight back into the banking system)?
d) People who own land with planning permission in the vicinity, who can now make £100,000 more in 'profit' (rent, actually) than they would have done had they built and sold a house ten years ago.
I'd suggest it's a mixture of b), c) and d).
4. Would your answer to question 2) change if you consider yourself and your children (let's assume they are coming up to first-time-buyer age) taken together? Has your family unit become wealthier over the last ten years?
I would submit that your family unit is in fact worse off; although you have a nice £100,000 paper gain (actually, you've avoided a £100,000 loss) but the extra mortgage and mortgage interest that your children will have to pay is about £200,000 each (over the next 25 years); you can extend this maths all the way up and down your family tree and you will see that the hidden losses nearly always far outweigh the capital gains (whether realised or just on paper).
Monday, 14 February 2011
Do you celebrate when your children are mugged?
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13 comments:
Does it change matters if the government rigs the mortgage rate to be lower than inflation? (see: the UK, now)
JB, you do the maths, but it strikes me that:
a) these very low rates only apply to established homeowners who bought a while back and for whom 'equity' has appeared out of nowhere, and
b) the key to this is outrageously low interest rates paid to savers; half of which is passed on to borrowers and the other half of which is retained by the banks.
c) All things being equal, any interest saved by FTBs translates into higher house prices so the gains accrue to vendors etc, not buyers.
The hidden losses require an accountant to calculate but accountants themselves cost the earth. :)
The sad thing is that many people do care about relative wealth - they really wouldn't mind being £1,000 poorer, so long as everyone they knew was £2,000 poorer.
JH, I have no idea what the hidden losses are, but it must be pretty obvious that they are huge.
B, we argued about this before. The Fun Online Poll said that NIMBYs were primarily motivated by wanting to prevent other people have a nice house but you gave them the benefit of the doubt.
"but you gave them the benefit of the doubt."
Hardly; I said they were motivated by self-interest rather than envy.
There's a big difference between being pleased when something happens and actively working to make it happen (the difference, say, between being pleased when your obnoxious neighbour who continually obstructs your driveway has his car vandalised and actually vandalising his car yourself)
B, it is a fine line, but I would submit that most NIMBYs are "actively working to make it happen" and have therefore crossed the line. In any event, their whole attitude (they're happy to lose £1,000 provided everybody else loses £2,000) seems terrible Blue Socialist to me.
I think we will have to agree to disagree on this one.
On another (off) topic, when was the last itme inflation was higher than interest rates? Was it the 70's?
B, I dunno.
It depends what you mean by interest rates:
1. What a saver can earn after tax on an ordinary savings account?
2. The BoE base rate?
3. Average SVR for a resi mortgage?
and it depends what you mean by inflation:
1. CPI or RPI or RPIx etc.
2. Monetary inflation.
3. Some weighted index of RPI, monetary inflation and house prices divided by real growth in the economy.
but at a guess, I would say in the 1970s. Which is what the Lib-Cons are trying to repeat - in the early 1970s house price crash, prices fell by 40% in two years, but inflation was 20% a year for two years so most people didn't notice.
Mark, sorry for not being clearer:
Interest rate is the best savers rate available with reasonable notice of withdrawal (say three months) before tax.
Inflation is monetary inflation.
i.e when was it last pointless to save because your money lost value through inflation faster than it gained substance through interest. I can remember a time when it was so, but it can't have been much earlier than the mid-70's, I'm not that old!
B, OK, we've decided what the relevant interest rate is. The next problem is deciding what "monetary inflation" is. Is it M0, M1, M2, M3, M4, whatever? Remember that all these numbers are quite artificially defined!
But if you mean M4, then the answer is probably never.
Which sort of makes sense - there's no reason to assume that you can become richer by just sticking money in the bank and sitting back - the real reason for 'saving' is not to earn interest but to maximise the value of your money by spreading your consumption evenly over the longest period (marginal utility and all that).
If this were not true, then imagine an inflation free and interest free world where everything is stable and predictable: people would not bank their salary cheque on the first day of the month and piss it up the wall in the next couple of days and then spend the rest of the month living off baked beans.
I'm not sure I understand that. I suppose I really meant RPI. Consider the following scenario: I want to build an extension to my house. I have a quote from a builder for £10,000 to do the work. I have £10,000 in the bank, but I don't want to do the work until next year. The builder says that next year his price will be more, "because of inflation". I check out the possible interest I would get from putting my money in a savings account and find that, if I want to do the work next year, I will need more money now.
B, that's clear enough. I'm sure I can track down a chart somewhere, but as you say, savers were suffering the biggest losses back in the 1970s and nowadays.
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