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> I can think of three mechanisms to bring down house prices: ... Reduce the amount of lending banks do How will this reduce the actual cost of housing? If ban

> I can think of three mechanisms to bring down house prices: ... Reduce the amount of lending banks do How will this reduce the actual cost of housing? If banks lend less, interest rates will go up, which will lower the value of homes. However, the value of the home will go down in proportion to the higher interest rates. So the homes will be valued less, but they will cost exactly the same taking into account the higher interest rates. The only one who wins here are the banks who get higher interest rates.

roenxi 7y ago
:P I didn't say the real cost, I just said house prices. So I have a weaselly escape route on that one. Nevertheless... You seem to be going to the real cost of housing; there are very complicated feedback loops and if there is a good argument for what should happen in theory I don't know it. My personal belief is that if you reduce bank lending then they will discover they can't raise the interest rate enough to make up the losses from people borrowing less money. You might reasonably disagree. Note that in practical terms the way a bank loan works is that a buyer can elect to jump to the front of the queue of buyers by promising some of their future earnings to the bank. Since all buyers have this option, the equilibrium is likely a bank extracts some portion of the future income from all the buyers without changing the ultimate order of the queue (the buyer with the most money is likely the one who can promise the best return to the bank to stay in front). It doesn't really cost the banks anything to create a loan, they just account the money into existence. That factors in. Given that frame, it seems likely to me that reduced bank lending activity will be to the net benefit of the buyers at maybe some cost to the sellers. Exactly how it shakes out depends on the details of how lending activity is reduced.
- speedplane 7y ago
  > if you reduce bank lending then they will discover they can't raise the interest rate enough to make up the losses from people borrowing less money. ... it seems likely to me that reduced bank lending activity will be to the net benefit of the buyers I agree with the first sentence, but not the second. Reducing a bank's ability to lend is similar to creating a price floor. It will certainly drive up interest rates, and this will effect each party differently. Banks: Even though banks will make more money on each individual loan, banks will make less loans overall and it will be a net negative. Home Owners: Obviously it will hurt home owners as the value of their home will decrease in proportion to the interest rate. Home Buyers with Capital: The effect on home buyers is more complex. Some, that already have capital and do not heavily rely on mortgages will do better, as the value of the home decreases. The higher interest rates don't effect them as they don't need to take out loans. Home Buyers w/o Capital: These folks would do worse. The buyers with capital will blunt the effect of higher interest rates. So even though home values would decrease, the decrease will be slightly less than it would otherwise be because those that don't require loans will be unaffected. Thus the total cost of purchasing a home with a large mortgage would increase. Conclusion: Slowing lending will hurt home owners, banks, and those without much money. It may help people who are already cash rich. It will likely exacerbate inequality, not help it.
  - notSupplied 7y ago
    Cheaper debt can be canceled out by higher prices. The fact that home values correlate so strongly with interest rates is very tellling. I think the net effect is simply higher asset prices and a greater portion of society's capital locked up in land. Easy money via debts is making every household more levered and more exposed without fundamentally improving access to housing.

roenxi 7y ago

:P I didn't say the real cost, I just said house prices. So I have a weaselly escape route on that one. Nevertheless... You seem to be going to the real cost of housing; there are very complicated feedback loops and if there is a good argument for what should happen in theory I don't know it. My personal belief is that if you reduce bank lending then they will discover they can't raise the interest rate enough to make up the losses from people borrowing less money. You might reasonably disagree. Note that in practical terms the way a bank loan works is that a buyer can elect to jump to the front of the queue of buyers by promising some of their future earnings to the bank. Since all buyers have this option, the equilibrium is likely a bank extracts some portion of the future income from all the buyers without changing the ultimate order of the queue (the buyer with the most money is likely the one who can promise the best return to the bank to stay in front). It doesn't really cost the banks anything to create a loan, they just account the money into existence. That factors in. Given that frame, it seems likely to me that reduced bank lending activity will be to the net benefit of the buyers at maybe some cost to the sellers. Exactly how it shakes out depends on the details of how lending activity is reduced.

speedplane 7y ago
> if you reduce bank lending then they will discover they can't raise the interest rate enough to make up the losses from people borrowing less money. ... it seems likely to me that reduced bank lending activity will be to the net benefit of the buyers I agree with the first sentence, but not the second. Reducing a bank's ability to lend is similar to creating a price floor. It will certainly drive up interest rates, and this will effect each party differently. Banks: Even though banks will make more money on each individual loan, banks will make less loans overall and it will be a net negative. Home Owners: Obviously it will hurt home owners as the value of their home will decrease in proportion to the interest rate. Home Buyers with Capital: The effect on home buyers is more complex. Some, that already have capital and do not heavily rely on mortgages will do better, as the value of the home decreases. The higher interest rates don't effect them as they don't need to take out loans. Home Buyers w/o Capital: These folks would do worse. The buyers with capital will blunt the effect of higher interest rates. So even though home values would decrease, the decrease will be slightly less than it would otherwise be because those that don't require loans will be unaffected. Thus the total cost of purchasing a home with a large mortgage would increase. Conclusion: Slowing lending will hurt home owners, banks, and those without much money. It may help people who are already cash rich. It will likely exacerbate inequality, not help it.
- notSupplied 7y ago
  Cheaper debt can be canceled out by higher prices. The fact that home values correlate so strongly with interest rates is very tellling. I think the net effect is simply higher asset prices and a greater portion of society's capital locked up in land. Easy money via debts is making every household more levered and more exposed without fundamentally improving access to housing.