Wednesday, 2 December 2015

The idiocracy of UK housing

The UK has always been a country particularly obsessed with owning property. The current Government continues to operate housing schemes that provide financial incentives for young people to buy a brand new home, via huge debt, all of it, government backstopped.

Ellie and Rory think they own a house

An early interest

House prices caught my attention from a very early age. Back in the mid 1980s, a typical 3 bed house in the southern English suburbs would cost around £30,000 ($45k). I noticed that the prices always seemed to rise

How could the price of a house rise, if the number of bricks, the amount of roof beams, and copper piping remained the same? Further, a house is a depreciating asset, things wear out, roof tiles, paving, it all has to be maintained/replaced.

Of course, I was later to understand that regardless of housing supply/demand issues, long term house price inflation was primarily due to underlying currency depreciation.

To close today, I wanted to highlight the latest 'happy housing story' from mainstream news, in this case, from the BBC.

Original story: see 'I'm 20 and I own a £250,000 four-bed house'

First... I can't help but note this generally overlooked, but key issue...

If you have a mortgage on your property, you do NOT own the property. 

I find it laughable to see how the 22 year old guy is claiming he owns the house.

Err.. no. The bank/lender holds the deed/note... Rory and Ellie are mere joint tenants until the debt is paid in full, which I'm guessing is probably not until the 2040s!


Couple, aged 20/22... buy a house

4 bed detached, £250,000 ($375,000).

Deposit 5%: £12,500  ($18,750)    .. I'll ignore the other miscell' fees/taxes.

The other 95% is via a mortgage/property loan of £237,500. This amount is FULLY backed/guaranteed by the UK Govt', and helps persuade the banking sector to offer such loans to people who would normally get turned down.

Key issues...

Ultimate moral hazard: risk moves from the buyer to the taxpayer

In the event of default, the couple will be evicted, with the house then sold. All proceeds would then go to UK treasury, who would then have to fund the difference if the sale revenue does not fully cover the outstanding debt to the given bank/lender.

... and that naturally leads to....

The UK government wants, and needs higher prices more than ever

Now that the UK govt' is backstopping the debt for the purchase of new homes, it will want house prices to rise.. and FOREVER rise.

After all, if tens of thousands - or even more, such loans were defaulted upon in the next recession, the taxpayer is going to be liable for a rather vast amount.

This policy is madness of course, as higher prices exclude even more people from ever have the opportunity to purchase a property.

I guess I could go on a wild rant about how this is a classic example of just how intellectually dumb socialists often are, but suffice to say....  everyone involved in developing, operating, and making use of the scheme are IDIOTS.

If you can't afford something, you should not be purchasing it via debt.

Of course, in these crazy times, perhaps this kind of talk is heresy.. almost borderline illegal to say?

How dare I suggest that a couple barely out of college are financially idiotic to take on such a large debt, for a house with not one bedroom, but FOUR !

When the next recession hits... as is inevitable, one or both of the couple might lose their job. Then it'll be a case of whether they can still meet repayments.

I guess I should not be surprised though, as most things are cyclical, and this couple (understandably) have ZERO experience of how bad times can get in a recession. Just consider that Ellie was a mere thirteen years of age when the economy/housing market last floored.

I'd wonder what she'd say if I suggested house prices might actually fall from current levels. Have either of them even heard of negative equity?

Anyway... I could go on, but clearly, not much has changed since the last housing bubble popped in 2007.

Looking ahead

Wed' is packed full of data and events...

Data: ADP jobs, EIA oil report, productivity/costs, Fed beige book (2pm).

Events: 4 Fed officials... inc' the Yellen, speaking at the 'economic club of Washington'.

Yours truly and housing

I'm sure not in my 20s anymore... but then, neither do I owe $356,250 to a bank. In fact, I'm debt free.. and I never borrow for anything.

I'd love a nice detached house.. 2 bedrooms would be fine. Or perhaps I should aim for a castle on the cliff tops overlooking the Atlantic ocean?  Right now, I can't afford such a home, and I'll sure as hell not take on a mountain of debt to fund such a purchase.

I guess I remain a financial anomaly in the 'new world economy' that so many speak of.

Goodnight from London