The Dim-Post

August 23, 2016

Cause and effect

Filed under: Uncategorized — danylmc @ 12:50 pm

Via Hive News:

But yesterday UMR released results of a poll that found 60% of Aucklanders and 55% of home owners would prefer that house prices either fell a bit or fell dramatically over the next year.

The poll of 1,000 New Zealanders over the age of 18 was taken from July 29 to August 17 through UMR’s online omnibus survey and found a total of 63% nationwide who would either prefer house prices to ‘fall but not too much’ (37%) or to fall dramatically (26%).

UMR, which conducts polls for the Labour, found 55% of home owners would prefer house prices to fall a bit (40%) or dramatically (15%).

Here’s my problem with all this talk about lowering house prices. If prices fall, either ‘a bit’ or dramatically then won’t we also see people borrow less and save more and spend less (because they’re effectively poorer), leading to a drop in aggregate demand, leading to a recession? Isn’t that how these things work?

68 Comments »

  1. and spend less (because they’re scared shitless about losing all their equity), leading to a drop in aggregate demand, leading to a recession.

    Comment by Richard Williams — August 23, 2016 @ 12:55 pm

  2. Very likely that is how things work. The other possibility is that the price of houses would be bid right back up again if demand exceeds supply.

    ….and it does for now and for the foreseeable.

    Comment by truthseekernz — August 23, 2016 @ 12:56 pm

  3. Yep. So there’d need to be fiscal or monetary stimulus to offset it.

    Comment by RHT — August 23, 2016 @ 1:11 pm

  4. From a Green perspective, isn’t a drop in demand a good thing?

    A.

    Comment by Antoine — August 23, 2016 @ 1:25 pm

  5. “won’t we also see people borrow less and save more and spend less (because they’re effectively poorer)”

    Is that still the case when so much of your equity is likely to be tied up in a fixed asset for a large part of your life?

    “losing all their equity”

    I’m trying to think it through intuitively, but doesn’t a fall in prices effectively still help any home-owners who are planning to buy a more expensive house than what they already own?

    Sure, they lose equity, but supposedly the values of all the houses they might buy also drops. If all house values drop then the gaps are closer, and a bigger house will be more affordable.

    A drop in value isn’t so good for the baby boomers who might be looking to downsize soon, or for anyone who’s been planning their retirement strategy on perpetually-increasing house equity, or for anyone who’s thinking of cashing up for some other reason.

    Comment by izogi — August 23, 2016 @ 1:27 pm

  6. From a Green perspective, isn’t a drop in demand a good thing?

    What?

    Comment by danylmc — August 23, 2016 @ 1:29 pm

  7. What?

    There is too much consumption, and we are destroying the planet, etc.

    Comment by Graeme Edgeler — August 23, 2016 @ 1:32 pm

  8. That is how it works, but it’s still stupid – your residence isn’t a financial asset.

    Comment by Gareth Wilson — August 23, 2016 @ 1:57 pm

  9. “Here’s my problem with all this talk about lowering house prices. If prices fall, either ‘a bit’ or dramatically then won’t we also see people borrow less and save more and spend less (because they’re effectively poorer), leading to a drop in aggregate demand, leading to a recession?”

    That is what the Reserve Bank is for. The Reserve Bank, if competent, should always be able to offset falls in aggregate demand like this.

    Comment by Matthew W — August 23, 2016 @ 2:08 pm

  10. “won’t we also see people borrow less and save more and spend less (because they’re effectively poorer)”
    For most people real estate agents excepted) their incomes won’t change if property prices dropped by 10-20%. When you say “spend less” are you assuming a ‘wealth effect’ where everybody in Auckland increased their spending by 40% over the last few years to match the increase in their home values (and ignored all the media saying it is a bubble and the change in value is not sustainable?) and will now cut their spending to match the fall in their equity?
    Also – isn’t the rising property market the main thing preventing RBNZ cutting interest rates and putting extra dollars in the pocket of every homeowner (inflation is still below the target band and the bank has more room to cut)?

    Comment by Richard29 — August 23, 2016 @ 2:15 pm

  11. I had lunch with an ex-girlfriend a month back and she told me it was the first time she had been out to a restaurant in nine months, because her and her partner were paying off a gigantic mortgage. It seems to me the Australian owned banks are hoovering up our national wealth like coke from a hookers cleavage and busily shovelling it all back across the Tasman, while we all sit around with what will eventually be the booby prize of negative equity. More to the point, she points to how the economic colonialism of Australia’s banks already keeps NZ’s retail sector in a permanent mild recession.

    If I earn 3.5k net a fortnight (i.e. $100,000PA) then a drop in the value of my home doesn’t affect that. However, a rise of 1% on my 780k mortgage whips $300 a fortnight out of my pay packet, on top of the 2.2k in repayments. So about a quarter to a third of my remaining disposable fortnightly income is gone in 1% of interest rate rise. that’ll induce a recession for sure, since I’ll stop all unnecessary spending to keep up bank payments.

    I guess conversely, if I buy after a property crash and I only have a 350k mortgage then an extra 1% interest rate is only $134 a fortnight, out of a disposable income of almost $2,500 dollars… So I’ll keep up that lifestyle I am used to and any drop in the dividend of Westpac and co’s Sydney shareholders would be offset by a boom in local retail spending, surely?

    Comment by Sanctuary — August 23, 2016 @ 2:51 pm

  12. “The Reserve Bank, if competent, should always be able to offset falls in aggregate demand like this.”
    Perhaps you need to study some economics. Or maybe just history. Interest rates are at or near historic lows, yet the world’s economies are not feeling stimulated. A major part of consumer spending (beyond necessity) is down to confidence.

    “What? — There is too much consumption, and we are destroying the planet, etc” Maybe DM is not one of those deep greens, nor one of those watermelon greens. Maybe he’s one of those Champaign socialist greens, a liberal, who stands for simply “not conservatism”?

    One of the funniest things that we hear from the left is “we need sustainable development, we don’t want to burden our children and grandchildren” but then want deficit spending to stimulate the economy and create jobs. Forgetting that it will be our children and grandchildren who will have to pay it all back.

    Comment by Clunking Fist — August 23, 2016 @ 2:57 pm

  13. If capital inflows slow due to less mortgage borrowing then the current account deficit must fall too, due to the accounting identity. This could happen through a recession or through an increase in exports mediated by the exchange rate. It is sort of up to the RBNZ’s reaction function.

    Comment by BP — August 23, 2016 @ 2:57 pm

  14. “…A major part of consumer spending (beyond necessity) is down to confidence…”

    Actually it is usually down to not having any money, on account of stagnant wage growth and gigantic mortgage repayments.

    Comment by Sanctuary — August 23, 2016 @ 3:00 pm

  15. It’s not one market.

    Will there be anymore villas built in Ponsonby? No. Will there anymore apartments built there? Yes.

    Comment by NeilM — August 23, 2016 @ 3:01 pm

  16. Sanc, you do realise that the banks only earn a margin on the interest rate, not the full interest charge? They have to pay bondholders and depositors interest on the money they use to lend to you. That’s why they are busy trying to convince you to do daft things like buy your insurance from them: so they can actually make some money from you.
    “hoovering up our national wealth “: repayments of money borrowed isn’t “wealth”. The “wealth” is disappearing into the pockets of retirees who are willing and able to move from desirable Auckland addresses to cheaper locales. And/or downsize.

    Comment by Clunking Fist — August 23, 2016 @ 3:05 pm

  17. One of the unusual things about the recent housing boom/bubble is it *hasn’t* translated into extra spending. It usually does – the so-called ‘wealth effect’. there’s some worrying early signs that prudence may be disappearing, but its not clear yet whether this is a blip or a trend.

    Comment by Rob Hosking — August 23, 2016 @ 3:05 pm

  18. “Actually it is usually down to not having any money, on account of stagnant wage growth and gigantic mortgage repayments.”
    Sorry, I wasn’t clear. Indeed, those on low incomes have no leeway to increase spending. But those on higher incomes who may be able to save, will only tend to spend if they are reasonably confident that there’s no pending change to their employment status. That’s why retail spending can react drastically to talk of recession, often well before any sign of a growth in unemployment.

    Comment by Clunking Fist — August 23, 2016 @ 3:10 pm

  19. Perhaps they could have added another question – do you want to see the price of your house fall and if so by how much?

    Comment by NeilM — August 23, 2016 @ 3:12 pm

  20. @Clunking fist

    “Perhaps you need to study some economics. Or maybe just history. Interest rates are at or near historic lows, yet the world’s economies are not feeling stimulated. A major part of consumer spending (beyond necessity) is down to confidence.”

    Don’t reason from headline interest rates. Two points 1) Real interest rates in NZ are actually fairly high, and arent especially low in other countries. 2) Wicksellian natural rates change. The stimulating effect of monetary policy relates to the interest rate vs the Wicksellian natural rate.

    Looking at interest rates and concluding anything about how accommodating they are based on the absolute level is meaningless.

    Comment by Matthew W — August 23, 2016 @ 3:27 pm

  21. If prices fall, either ‘a bit’ or dramatically then won’t we also see people borrow less and save more and spend less (because they’re effectively poorer), leading to a drop in aggregate demand, leading to a recession?

    Auckland has severe supply constrictions, the only reason prices will ever fall here is a reduction in demand. The question seems to be cart about horse, because one of the most likely reasons Auckland house prices will fall will be a global recession.

    But it might not require a global recession, because it is mainly an Auckland only problem that we do not build stuff. In less than 2 years time there will be a surplus of dwellings in Melbourne and Brisbane; in 5 years time there will be a surplus in Sydney. Meanwhile the BoP, the Waikato and Canterbury are creating new records in construction. If everything progresses without a recession it is likely that the massively increasing rents in Auckland will drive young people to leave and go to those other places. The correction will occur confined to Auckland (severe, but localised), it will have little detrimental effect on the rest of the country.

    Comment by unaha-closp — August 23, 2016 @ 3:53 pm

  22. NeilM raises a good point – how much of this result is a a consequence of survey respondents interpreting the question as asking how much they would like other people’s houses to drop in price rather than their own? I suspect it accounts for a distressingly high proportion of them…

    Comment by Conrad — August 23, 2016 @ 3:58 pm

  23. I earn fuck all but own a house in Auckland and have done for many years. I don’t want to live anywhere else in NZ ( they hate jaffas). In the time we have owned the place it has probably valued up by half a million dollars but the only way to get that money is by selling the property. Otherwise I am taking out a loan which I can’t afford. If I did loan against the property I would have to come up with a bloody good business plan.

    Consumer confidence in relation to house prices is dangerous nonsense that will see you living out your days in the Manawatu.

    Comment by Neil Miller — August 23, 2016 @ 4:30 pm

  24. I don’t want to live anywhere else in NZ ( they hate jaffas).

    I live in Dunedin. I don’t hate jaffas. I just hate Neil Miller.

    (I don’t really hate Neil Miller.)

    Comment by Andrew Geddis — August 23, 2016 @ 4:43 pm

  25. Clunking Fist comments @ 12:

    “Forgetting that it will be our children and grandchildren who will have to pay it all back”

    I don’t want us to get any deeper into who knows their economics better lest we divert from Danyl’s central question, but err, this isn’t strictly correct either. Potentially nobody’s children or grandchildren ever have to pay it back. The US has had federal debt continuously from a point predating the civil war. Whose children and grandchildren have or have not had to pay back that debt or any other debt incurred then or in the continuum since? A country is not like a household and government debt cannot be thought about in the same terms as the obligations individuals face.

    Comment by Joe-90 — August 23, 2016 @ 5:49 pm

  26. Matt W, has someone estimated the Wicksellian rate for NZ? I thought most had stopped using this.

    You say our headline rates are high, but I think you mean real rates? Some feel the official CPI is so arbitrary that it can’t be used to determine real interst rates. The exclusion of housing costs, for instance… So real rates may not really be as high as some think?

    Comment by Clunking Fist — August 23, 2016 @ 5:58 pm

  27. “Potentially nobody’s children or grandchildren ever have to pay it back.” Good for you, you keep thinking that. Full ahead and bugger those icebergs. Can we please adopt that attitude to those pesky co2 emissions that refuse to fall?

    “MOST countries are like a household and government debt can be thought about in the same terms as the obligations individuals face.” How nice to have a currency that folk like think of as a reserve currency.

    Comment by Clunking Fist — August 23, 2016 @ 6:02 pm

  28. “….there’s some worrying early signs that prudence may be disappearing,…”

    Or as Lowell George once sang, “Hello, Missing Persons? They said, what is that you need?………”

    Comment by Tinakori — August 23, 2016 @ 7:00 pm

  29. “MOST countries are like a household and government debt can be thought about in the same terms as the obligations individuals face.”

    So most households have armies, print their own currency, and haven’t paid off their mortgage after 200 years? Name one non royal household in the world like that.

    You need to do a bit more reading.

    Comment by Joe-90 — August 23, 2016 @ 7:36 pm

  30. Clunking fist there is no direct measurement on the natural rate of interest. The point is if you have low NGDP growth you have tight money. 1% OCR could be loose, or tight, you just don’t know. Speaking of history though, the last few years of US monetary policy has been pretty successful. The fiscal cliff was offset and growth ensued.

    Comment by Matthew W — August 23, 2016 @ 8:54 pm

  31. #schroedingerslawyer.

    Comment by Neil Miller — August 23, 2016 @ 9:38 pm

  32. The other question would be – do you think house prices will and if so would you sell your house now to buy back in later at a lower price.

    It’s all hypothetical but it’s laying things on the line a bit more.

    Comment by NeilM — August 23, 2016 @ 9:38 pm

  33. will drop

    Comment by NeilM — August 23, 2016 @ 9:39 pm

  34. Most likely there will be changes to some prices. Some might fall at the same time some might fiatten at the same time some might increase.

    It’s remotely possible they might all go down but I don’t think we can predict how or when. It would be something no one expected.

    Just like no one predicted the dramatic reversal in transtasman migration.

    Comment by NeilM — August 23, 2016 @ 9:45 pm

  35. From a Green perspective, what does a well-functioning economy look like?

    I doubt it includes everyone running out to buy a bigger plasma TV and stick it on the mortgage.

    A.

    Comment by Antoine — August 23, 2016 @ 10:19 pm

  36. “From a Green perspective, what does a well-functioning economy look like?”

    Let’s try to have a bit of respect. Danyl’s made it clear that he isn’t comfortable discussing Green policy here.

    Comment by Ortvin Sarapuu — August 24, 2016 @ 6:30 am

  37. “…Let’s try to have a bit of respect. Danyl’s made it clear that he isn’t comfortable discussing Green policy here…”

    None the less, the meta is interesting. I mean, this is a post about housing. The immediate response of the right wing trolls was to attack the Greens economic credibility. The two are not particularly linked, but like the UK Blairites who keep dredging up every identity politics meme they can think of all the time no matter what the question is in trying to smear Jeremy Corbyn (He hates gays! He hates Jews! He hates women! He hates people of colour! One of his loser Trotskyist entryist hate fuelled mob once voted against a gay Jewish women of colour!) they do it because it is a cheap shot, it diverts reasoned debate on issues into appeals to hair brained identity politics prejudice, the media will duitfully report it in the horse race commentary and it is a line takes time to counter.

    Corbyn’s followers in Momentum and on various sites like the thecanary.co have quickly developed a strategy to counter the Blairite identity politics assault. The problem for the Greens though is, as you say, they are not comfortable robustly discussing their economic policy. It is long acknowledged the Green’s Achilles heel is their economic credibility, so to me it is extraordinary the Greens have still not developed a counter to this right wing narrative, even if it is just to counter attack line. They need to get it sorted, and soon.

    Comment by Sanctuary — August 24, 2016 @ 8:23 am

  38. “I mean, this is a post about housing…”

    That’s ironic because you seem to think it’s actually a post about Corbyn.

    Comment by Ortvin Sarapuu — August 24, 2016 @ 8:40 am

  39. Well, no. I am saying that the meta is interesting, and the scary thing is the Greens still don’t have a strategy to deal with it. But whatever.

    Comment by Sanctuary — August 24, 2016 @ 8:42 am

  40. Funnily enough I’m actually not trolling. I understand it’s a Green belief that people should consume less and in fact I agree. I think New Zealanders in aggregate spend too much money on consumerist junk. Myself included. I don’t think it’s desirable or sustainable.

    But if and when this changes, if and when people make do with less stuff that they don’t really need… it is pretty much going to look like a real big recession. From a conventional economic perspective.

    (Channeling Murray Grimwood here)

    A.

    Comment by Antoine — August 24, 2016 @ 8:54 am

  41. “…Funnily enough I’m actually not trolling…”

    See, the most likely response to constantly attacking the blog authors political leanings in order to divert attention away from the actual topic will be for the comments section to be disabled again. Now, I don’t think that is a particularly valid response to being attacked on an area you know your side is vulnerable on, I would prefer to see a rebuttal by a robust and easily articulated set of talking points, but in this country that is not how we deal with criticism so that’ll be where it ends.

    Comment by Sanctuary — August 24, 2016 @ 9:12 am

  42. @Sanc: Like I say, Danyl has said repeatedly that the purpose of this blog is not to discuss Green policies. If you don’t like that, find another blog to read.

    Comment by Ortvin Sarapuu — August 24, 2016 @ 9:21 am

  43. Dial back the hostility dude, it’ll kill you quicker than smoking.

    Comment by Sanctuary — August 24, 2016 @ 9:52 am

  44. Here’s my take on it: house prices are one thing, and the rateable value is another. My mortgage has little relationship to my rateable value. The price paid is not a realistic ‘value’ of the property. It feeds into the rating process but as rates are set as a proportion of rateable value there is little input vis a vis interest rates. I would be very happy to see my rates drop. When I come to sell, the market will decide how much I can get for it, irrespective of the GV or whatever it is called these days.

    Comment by Spitfire — August 24, 2016 @ 10:00 am

  45. @Sanc

    On this particular occasion I wasn’t attacking or criticising anything. Rather, I was suggesting that Danyl’s ‘drop in aggregate demand, leading to a recession’ might not actually be a ‘problem’ as he was suggesting.

    > the most likely response to constantly attacking the blog authors political leanings in order to divert attention away from the actual topic will be for the comments section to be disabled again

    I shouldn’t like that. But I thought he disabled it last time because people (including me) were making douchey comments about an unfortunate incident Danyl beheld while he was out walking, rather than anything political.

    A.

    Comment by Antoine — August 24, 2016 @ 10:57 am

  46. If prices fall… then won’t we also see people borrow less and save more and spend less (because they’re effectively poorer), leading to a drop in aggregate demand, leading to a recession? Isn’t that how these things work?

    What you’re arguing is the flip-side of ‘the wealth effect’; as asset prices increase, people fell wealthier and so go out and buy more stuff by either increasing their use of credit or reducing their rate of savings. In theory, the opposite should also hold true during times of asset price falls, as you articulate.

    However, real-world evidence for the wealth effect (in either direction of travel) is…. mixed. For example, we’re in the middle of a house price boom but growth in consumption expenditure has been pretty anemic, especially in the past two years.

    Obviously, economies are complex beasts and have lots of moving parts that often pull in opposite directions. You could easily imagine a situation where a fall in house prices leads to greater consumption expenditure because (a) savers have to save relatively less to buy the same asset and (b) investors take the signal of falling prices as a sign to reduce investment in housing and direct the same funds elsewhere. However, if house prices fall you’re also likely to see further reductions in interest rates, which could exacerbate the problem a lot of retirees currently have – they are struggling to live off the interest paid to their deposits and have had to reduce spending.

    The bottom line is: anyone who claims to have certainty about how changing house prices will affect the wider economy is a bullshit artist.

    Comment by Phil — August 24, 2016 @ 12:47 pm

  47. But if and when this changes, if and when people make do with less stuff that they don’t really need… it is pretty much going to look like a real big recession. From a conventional economic perspective.

    From a purely Auckland perspective, and since we are talking house prices Auckland is on-topic, the answer is no.

    The current development mode in Auckland is pro-sprawl inefficiency that distorts the economy by misallocating capital growth into high land cost and away from housing. From an Auckland perspective there is opportunity for improvement that is both economically beneficial and environmentally beneficial.

    The Greens could strip the benefits away from rentiers and lower the cost of building – this would depress the rentiers so they would purchase fewer holidays/jet-skis and TVs. But it would generate more building providing construction of much needed homes and economic growth.

    Open up more land around Auckland City to eliminate the distortionary price of land – the economy improves and the environment benefits. Everybody wins, except…

    The problem with this otherwise very Green initiative is that the people who have been governing Auckland for the past 6 years are Lab/Green councillors. The Lab/Green councillors have done the deed with pro-rentier, pro-sprawl economic planning and at this point they are looking to blame-shift towards the government.

    Comment by unaha-closp — August 24, 2016 @ 12:54 pm

  48. I agree with Antoine (#40): economic growth as ideology requiring everyone to buy more crap all the time has been eliminating ecosystems world-wide for more than half a century. If it takes recessions to wean people off that addiction, bring ’em on!

    How many people do you know that no longer park their car in the garage because it’s full of crap? I see it every time I go out for a walk. Cardboard boxes full of crap stacked high, blocking garage windows all over the city.

    Green councillors being poor planners: that gets caused by working with the left in a political collaboration – so you can blame democracy. Mainstream greens are prone to such compromises & who can blame them? I’ve found being a purist is liable to marginalise you when you work together with mainstreamers, so my pragmatism gene then kicks in & I focus on getting a mutual-benefit outcome.

    It’s true that purist greenies have always been anti-growth, but the best frame for them to use is nature: growth is natural (just like death). Those green shoots in your garden in spring, think of them as analogous to innovative technology powering start-ups in the economy. Recessions are times to consolidate, and the disciplines brought to bear on people & organisations teach efficiency & durability…

    Comment by Dennis Frank — August 24, 2016 @ 2:18 pm

  49. Joe-90, very droll. Apart from the coercive ability to raise money through taxation, most governments DO have to worry about how much they borrow. Aprt from, say, the US, Japan and Germany, if you were to simply keep borrowing money to fund “an engorgement of the public sector” and/or taxcuts, your creditors will begin to resist the urge to lend to you. Just ask Greece.
    Japan has been borrowing money for a while now in order to “kick start” their economy, for naught effect. With an aging population, is increasing debt the way to go? NZ governments of all stripes have agreed: no. That why we have the super fund…

    Comment by Clunking Fist — August 24, 2016 @ 3:24 pm

  50. I think the poll is horse pookey. What homeowner with an ounce of sanity would wish their home to fall in value? Like you would be busting your ass to pay your mortgage with one sole glimmer of hope at the end – at least you can realise some equity from it and maybe be able to afford to buy elsewhere in Auckland. No I think the question was probably pitched at a more general level about how people sympathise with first-time buyers. And of course people do sympathise… but not so much, I’ll wager, that over half of them would kick the stool out from under their investment in a fit of altruism. This would be akin to asking a turkey if they would like to bring Christmas forward. However if you asked turkeys a question like “Do you like the notion of people getting together with their families at Christmas?” you might half of them going ‘gobble’.

    Comment by Lee Clark — August 25, 2016 @ 7:31 am

  51. .. sorry would read ‘you might get half of them going ‘gobble’.

    Comment by Lee Clark — August 25, 2016 @ 7:32 am

  52. Lee, I’m a home owner. I wouldn’t care if my home dropped 50% in value, as long as everyone elses’ dropped roughly similar amounts at the same time. We’re in a bubble, either we let the air out gently (I’m not sure how to do that) or it will pop, and people who are over-leveraged are going to hurt.

    Comment by MarcoK — August 25, 2016 @ 8:57 am

  53. I’m pretty sure I’d be screwed if my home value dropped “50% in value”, as would most who have a mortgage. It makes little difference if everyone else’s homes devalue at the same rate, unless the mortgages devalue along with it.

    Comment by Michael — August 25, 2016 @ 11:13 am

  54. MarcoK presumably doesn’t have a substantial mortgage

    A.

    Comment by Antoine — August 25, 2016 @ 11:31 am

  55. “With an aging population, is increasing debt the way to go? NZ governments of all stripes have agreed: no. That why we have the super fund…”

    .. which the current mob have refused to keep up payments into. Hardly a consensus.

    Comment by Sacha — August 25, 2016 @ 1:15 pm

  56. Antoine, Correct, I paid my mortgage off as fast as possible while the going was good and I’d like to claim I have some sanity.

    Perhaps if Sanctuary had said “What Mortgage holder with an ounce of Sanity…”

    Comment by MarcoK — August 25, 2016 @ 3:24 pm

  57. Sorry, that should have been “Perhaps if Lee had said “What Mortgage holder with an ounce of Sanity…””

    Comment by MarcoK — August 25, 2016 @ 3:27 pm

  58. Sorry hat difference does it matter if you have a mortgage? It’s still the same mortgage you are paying, and it’s still the same benefit you are getting – a roof over your head. As an owner occupier the market value of your property doesn’t enter into that equation.

    Comment by Matthew W — August 25, 2016 @ 8:04 pm

  59. Matthew M – it matters if your home needs a bunch of work (like mine for example) that requires taking on more debt to complete.
    Or if say you want to relocate to another city for work opportunities and you need to sell up.

    Edge cases I guess, but it’s important to some people.

    Comment by Gregor W — August 25, 2016 @ 9:09 pm

  60. @Matthew W

    Try explaining to your bank that it’s OK to have a $800K mortgage on a $500K house and see how you get on

    A.

    Comment by Antoine — August 25, 2016 @ 9:59 pm

  61. Gregor, yes agreed in some circumstances it is going to be a constraint.

    “Try explaining to your bank that it’s OK to have a $800K mortgage on a $500K house and see how you get on”

    Why are you having such a conversation unless you are needing to borrow more?

    Comment by Matthew W — August 26, 2016 @ 7:41 am

  62. Try explaining to your bank that it’s OK to have a $800K mortgage on a $500K house and see how you get on

    If you have a $800k mortgage on a $500k house, then so will lots and lots and lots of other people and the last thing the bank will want to have is you (and the others) even thinking about it because their paper balance sheets will look horrible. So they’ll want you to just keep paying the instalments, because if you don’t and they have to foreclose, then their paper risk crystallises.

    Of course, if you lose your job with a $800k mortgage on a $500k house and so can’t meet your payments, then they’ll jump on you immediately before the debt blows out even further.

    Comment by Flashing Light — August 26, 2016 @ 7:52 am

  63. @Matthew W

    > Why are you having such a conversation unless you are needing to borrow more?

    If you don’t know, why are you so cheerful about the possibility of your house devaluing?

    A.

    Comment by Antoine — August 26, 2016 @ 10:58 am

  64. Please enlighten me Antoine? You think a bank is going to foreclose on you because you are underwater? Why would they do that?

    Comment by Matthew W — August 26, 2016 @ 9:17 pm

  65. Joking aside, I agree it’s possible that the bank might or might not foreclose (call for more equity, etc), but I wouldn’t like to find out.

    A.

    Comment by Antoine — August 26, 2016 @ 10:11 pm

  66. As to the ‘why’. Here you are, a lending manager. The Government has just enacted policies to crash the housing market. Your customers are going into negative equity. You know you may end up selling a good number of houses at some point. What do you do? Foreclose and get out before the housing market hits bottom? Or hang in there and hope the next Government will reverse the policies?

    Comment by Antoine — August 26, 2016 @ 11:31 pm

  67. Rob Hosking: “One of the unusual things about the recent housing boom/bubble is it *hasn’t* translated into extra spending. It usually does – the so-called ‘wealth effect’. there’s some worrying early signs that prudence may be disappearing, but its not clear yet whether this is a blip or a trend.”

    It’s not so unusual in a rentier-dominated system.

    Antoine: “From a Green perspective, what does a well-functioning economy look like?”
    I’d wager it’s one where a rising tide actually lifts all boats, instead of just the super-yachts & cruise liners.

    Comment by Kumara Republic (@kumararepublic) — August 28, 2016 @ 5:15 pm

  68. Surely if you’re a Green you think the tide is going out?

    A.

    Comment by Antoine — August 28, 2016 @ 10:39 pm


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