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When people borrow money for a house, they only consider the monthly payments for the mortgage and not the absolute amount of money they are borrowing. This mea

When people borrow money for a house, they only consider the monthly payments for the mortgage and not the absolute amount of money they are borrowing. This means that low interest rates are the main reason behind surging house prices and is why people have to spend decades paying back loans and being vulnerable to a drop in house prices. It creates too much debt in society and generally makes the economy more fragile than it has to be. The low interest rates may seem like a helping hand to house buyers but it is in fact the opposite: a transfer of wealth to house owners from people seeking to enter the market, a transfer of wealth from the younger generations to the boomers. This must end if we want to avoid a repeat of the 2008 crisis. But with the current levels of government debt, it's hard to see a political solution.

mrep 7y ago
That's really only the case when you have regulation limiting supply growth upwards, and/or limited amounts of land you can sprawl outwords. I grew up in chicago and we love to build high rises (chicago engineers were the ones that designed the Burj Khalifa to give you an example of our love for architecture), and we have hundreds of miles of farmland we can sprawl out to forever increasing supply of homes.
parasight 7y ago
Honest question: how should people seeking to enter the market behave in such a situation?
- sword_smith 7y ago
  I guess many people will not, and that this will lead to a higher rate of renting. That promotes economic inequality as the middle class is then prevented from entering an important way building savings: owning a house outright.
- esotericn 7y ago
  I honestly don't know what the answer is. I've resorted to moving way out. I'm probably going to buy a house somewhere I can work remote from. I'm not paying 300K+ for a small home near a city with jobs, sorry, it's just not happening. Whether I can afford it or not is irrelevant, the value just isn't there other than as a proxy for "this now allows me to get higher paying jobs in the city and... continue the cycle?" I think this is something that really needs to be addressed from a climate perspective as well. It is cheaper, dramatically so, for me to live way out, buy a car, and use it for everything. I use an electric car, and I chuck a load of the savings into offsetting, and I'm pretty sure I'm negative. But a far better model would be if people just stopped the rent seeking bullshit and let me build close to town.
  - fartcannon 7y ago
    You're not paying 300k+? Clearly I live in the wrong city. 300k would get you a leasehold to someone backyard with a tent in it where I live. I need to move.
- CalRobert 7y ago
  Hard to say, but I saved like hell and then looked for houses no bank would ever lend on, and no landlord would want. Got a dumpy old architecturally protected house on three acres an hour from the city (by train) for €68k. Of course it's a huge pain in the ass (thatcher started yesterday) but I had almost no buying competition.
viburnum 7y ago
Could just build more houses, though.
- sword_smith 7y ago
  Yes. But the high house prices feed through to higher land prices so the newly built houses will also be more expensive than they otherwise would have been.
  - firebacon 7y ago
    In most places, except the obvious exceptions, the government can also create new land for construction.
    - sword_smith 7y ago
      Absolutely. But not all land is created equal, most people want to live near a big jobs market, meaning near a big city. So the price of this land will inevitably go up.that being said, I am sure there is a lot municipalities could do to make housing more affordable.
      - firebacon 7y ago
        True. Still, one alternative model to consider is one where the recent trend of opportunity concentrating in a few big cities could reverse. Either due to market forces (cheaper everything outside of the big cities), remote work becoming more prevalent, or both.
        sword_smith 7y ago
        I would live to see this. But are there any indications that this is actually happening?
        firebacon 7y ago
        Indications of a net change - not sure, but individual examples, yes. For example, some parts of Eastern Germany have seen a trend reversal in recent years. Also a number of previously poor ("cheap") regions in southern Europe are experiencing a massive investment and tourism fueled boom. Portugal seems like a good example for that.
paulpauper 7y ago
>When people borrow money for a house, they only consider the monthly payments for the mortgage and not the absolute amount of money they are borrowing. That is how borrowing works. Otherwise the lender would not make a profit. >It creates too much debt in society and generally makes the economy more fragile than it has to be. and yet the post-2009 economic expansion is the longest ever, and this is in spite of all the anxieties over tariffs and trade wards and the fed raising rates. > The low interest rates may seem like a helping hand to house buyers but it is in fact the opposite: a transfer of wealth from house owners to people seeking to enter the market, a transfer of wealth from the younger generations to the boomers. Plenty of millennials own homes. There are tons of examples on Reddit of people in their 20s and 30s with homes and investments. Low rates makes it easier to get a mortgage and compound wealth by owning a home. Rather than a wealth transfer ,which suggests a zero sum game, more wealth is being created.
- samsonradu 7y ago
  Why does owning a home compound wealth? Honest question.
  - 14 7y ago
    This stuff is honestly way over my knowledge but the way I see it, as a renter wanting to buy in the next couple years, if I own a house I am paying a mortgage. That gives me equity every payment. So every month instead of my landlord getting my money the bank will and in the end I own the house so can sell it back. Also owning a house opens all sorts of opportunities a renter does not get. Subsidies to install solar panels and save energy would go to the home owner. If you own a house and want a loan for a car let’s say, you automatically get a better interest rate then me because I am higher risk. There are all sorts of ways owning a house can make or save you money. But based on my understanding of this article the entire value of houses will crash at one point as we can’t keep increasing the costs so when the market finally realizes we have been over selling, the people holding the houses at that point risk devaluation of their home and potentially lost all their investments. Again I am trying to figure what this all means and there are certainly a lot more knowledgeable people here that know more then my layman’s view.
bboygravity 7y ago
IMO this is the end game. Scenario 1: If interest rates go up significantly this would bankrupt entire nations such as Italy, France and Greece (again) + runaway deflation. Conclusion: interest rates cannot and will not go up. This would be political suicide. Also deflation is the number 1 enemy of central banks and the economy in general. Scenario 2: Lowering interest rates causes rich people, businesses and governments to lend as much as they possibly can to convert debt into "stuff" that they can charge more currency for. This causes zombification of governments, businesses and rich people: productivity of real estate is 0, productivity of businesses that can't go bankrupt (because you can't miss interest payments if there's no interest) goes towards 0, same for governments. Startups struggle to compete with larger companies, because they don't have the capital (and political lobby) and if they can somehow compete they just get bought. Also perhaps most importantly: this increases the divide between rich and poor and thus social unrest. The poor can't get significant credit so they are forced to finance the "stuff" that the rich own by renting it from them. AKA: the rich are home owners and the poor are home renters at ever increasing rents. I don't believe for a second that interest rates will go up in the years to come. So scenario 2 is where we are (heading). Smells of hyperinflation to me. Scenario 1 = 1930 all over again. I don't see any possible positive outcome, unless by some miracle the trade wars (and other government control over markets) end. And even then... Disclaimer: economics n00b interpreting central bank president talks and stock trader news websites.
- samsonradu 7y ago
  You kind of described Japan’s economy.
  - bboygravity 7y ago
    Japan's a known potential model of the future of the European economy as they're demographically about 15 years ahead of Europe. Would make sense to some extend.
    - Yetanfou 7y ago
      Japan has close to zero immigration where Europe has a large migration from countries with a much higher birth rate. For Japan this implies that their population will shrink while staying ethnically homogeneous while the European population is likely to increase and diversify. Europe will see more ethno-religiously motivated conflict, Japan will suffer from having a decreasing work force which needs to take care of an increasing number of people in need of care. If Japan continues on this path they'll eventually dwindle as a country and stand the risk of being conquered by one of its more populous neighbours. Europe should have a long hard look what happened in Lebanon when that country was torn apart by a civil war [1] between different ethnic and religious groups. [1] https://en.wikipedia.org/wiki/Lebanese_Civil_War https://en.wikipedia.org/wiki/Lebanese_Civil_War
nickjj 7y ago
> When people borrow money for a house, they only consider the monthly payments for the mortgage and not the absolute amount of money they are borrowing. Yep exactly. The same thing happens with cars too. The salesman does everything in their power to focus only on the monthly payment amount instead of what you're really paying total in the end. It's way worse for houses because you can end up in a situation where if you make non-optimal choices with mortgages you can be paying off your mortgage for multiple generations on a low end house. Interest is crazy, but unfortunately most people don't pay enough attention to it or their debt (which makes sense since you need to go out of your way to really learn about it).
the8472 7y ago
> and being vulnerable to a drop in house prices And there are no financial constructs to spread the risk?
dybber 7y ago
In Denmark, we have introduced regulation that limits buyers to only be able to borrow 4 times their yearly household income, when buying a house in the largest cities. That puts a limit on how much the house prices can rise.
pjc50 7y ago
The situation is, on one side, concentrations of wealth that are too large to invest in anything that captures a positive return; and on the other side, an endless list of things that desperately need investment but cannot capture returns to the individual investor, such as decarbonisation and healthcare. Negative rates are the market signalling that it's time for a wealth tax. Although these are tricky to implement because wealth can be moved very easily.
WillPostForFood 7y ago
> people have to spend decades paying back loans and being vulnerable to a drop in house prices So what if your housing price drops? If you are in for the long term, just ride it out. The risk in a long term loan isn't fluctuating prices, it is income stability. People don't lose homes because their home value drops, they lose them because they lose their jobs and can't afford to make payments.
gyuserbti 7y ago
The special thing about housing though is you have to pay monthly payments for housing. This is the reason why those monthly payments are privileged in consideration. So the alternative is rent, which at the moment in many places is looking like a less appealing alternative. The transfer of wealth in the housing market happens from one group to another regardless. I agree with a lot of your sentiment and what you're saying, but I think the monthly payment focus isn't irrational.

mrep 7y ago

That's really only the case when you have regulation limiting supply growth upwards, and/or limited amounts of land you can sprawl outwords. I grew up in chicago and we love to build high rises (chicago engineers were the ones that designed the Burj Khalifa to give you an example of our love for architecture), and we have hundreds of miles of farmland we can sprawl out to forever increasing supply of homes.

parasight 7y ago

Honest question: how should people seeking to enter the market behave in such a situation?

sword_smith 7y ago
I guess many people will not, and that this will lead to a higher rate of renting. That promotes economic inequality as the middle class is then prevented from entering an important way building savings: owning a house outright.
esotericn 7y ago
I honestly don't know what the answer is. I've resorted to moving way out. I'm probably going to buy a house somewhere I can work remote from. I'm not paying 300K+ for a small home near a city with jobs, sorry, it's just not happening. Whether I can afford it or not is irrelevant, the value just isn't there other than as a proxy for "this now allows me to get higher paying jobs in the city and... continue the cycle?" I think this is something that really needs to be addressed from a climate perspective as well. It is cheaper, dramatically so, for me to live way out, buy a car, and use it for everything. I use an electric car, and I chuck a load of the savings into offsetting, and I'm pretty sure I'm negative. But a far better model would be if people just stopped the rent seeking bullshit and let me build close to town.
- fartcannon 7y ago
  You're not paying 300k+? Clearly I live in the wrong city. 300k would get you a leasehold to someone backyard with a tent in it where I live. I need to move.
CalRobert 7y ago
Hard to say, but I saved like hell and then looked for houses no bank would ever lend on, and no landlord would want. Got a dumpy old architecturally protected house on three acres an hour from the city (by train) for €68k. Of course it's a huge pain in the ass (thatcher started yesterday) but I had almost no buying competition.

viburnum 7y ago

Could just build more houses, though.

sword_smith 7y ago
Yes. But the high house prices feed through to higher land prices so the newly built houses will also be more expensive than they otherwise would have been.
- firebacon 7y ago
  In most places, except the obvious exceptions, the government can also create new land for construction.
  - sword_smith 7y ago
    Absolutely. But not all land is created equal, most people want to live near a big jobs market, meaning near a big city. So the price of this land will inevitably go up.that being said, I am sure there is a lot municipalities could do to make housing more affordable.
    - firebacon 7y ago
      True. Still, one alternative model to consider is one where the recent trend of opportunity concentrating in a few big cities could reverse. Either due to market forces (cheaper everything outside of the big cities), remote work becoming more prevalent, or both.
      - sword_smith 7y ago
        I would live to see this. But are there any indications that this is actually happening?
        firebacon 7y ago
        Indications of a net change - not sure, but individual examples, yes. For example, some parts of Eastern Germany have seen a trend reversal in recent years. Also a number of previously poor ("cheap") regions in southern Europe are experiencing a massive investment and tourism fueled boom. Portugal seems like a good example for that.

paulpauper 7y ago

>When people borrow money for a house, they only consider the monthly payments for the mortgage and not the absolute amount of money they are borrowing. That is how borrowing works. Otherwise the lender would not make a profit. >It creates too much debt in society and generally makes the economy more fragile than it has to be. and yet the post-2009 economic expansion is the longest ever, and this is in spite of all the anxieties over tariffs and trade wards and the fed raising rates. > The low interest rates may seem like a helping hand to house buyers but it is in fact the opposite: a transfer of wealth from house owners to people seeking to enter the market, a transfer of wealth from the younger generations to the boomers. Plenty of millennials own homes. There are tons of examples on Reddit of people in their 20s and 30s with homes and investments. Low rates makes it easier to get a mortgage and compound wealth by owning a home. Rather than a wealth transfer ,which suggests a zero sum game, more wealth is being created.

samsonradu 7y ago
Why does owning a home compound wealth? Honest question.
- 14 7y ago
  This stuff is honestly way over my knowledge but the way I see it, as a renter wanting to buy in the next couple years, if I own a house I am paying a mortgage. That gives me equity every payment. So every month instead of my landlord getting my money the bank will and in the end I own the house so can sell it back. Also owning a house opens all sorts of opportunities a renter does not get. Subsidies to install solar panels and save energy would go to the home owner. If you own a house and want a loan for a car let’s say, you automatically get a better interest rate then me because I am higher risk. There are all sorts of ways owning a house can make or save you money. But based on my understanding of this article the entire value of houses will crash at one point as we can’t keep increasing the costs so when the market finally realizes we have been over selling, the people holding the houses at that point risk devaluation of their home and potentially lost all their investments. Again I am trying to figure what this all means and there are certainly a lot more knowledgeable people here that know more then my layman’s view.

bboygravity 7y ago

IMO this is the end game. Scenario 1: If interest rates go up significantly this would bankrupt entire nations such as Italy, France and Greece (again) + runaway deflation. Conclusion: interest rates cannot and will not go up. This would be political suicide. Also deflation is the number 1 enemy of central banks and the economy in general. Scenario 2: Lowering interest rates causes rich people, businesses and governments to lend as much as they possibly can to convert debt into "stuff" that they can charge more currency for. This causes zombification of governments, businesses and rich people: productivity of real estate is 0, productivity of businesses that can't go bankrupt (because you can't miss interest payments if there's no interest) goes towards 0, same for governments. Startups struggle to compete with larger companies, because they don't have the capital (and political lobby) and if they can somehow compete they just get bought. Also perhaps most importantly: this increases the divide between rich and poor and thus social unrest. The poor can't get significant credit so they are forced to finance the "stuff" that the rich own by renting it from them. AKA: the rich are home owners and the poor are home renters at ever increasing rents. I don't believe for a second that interest rates will go up in the years to come. So scenario 2 is where we are (heading). Smells of hyperinflation to me. Scenario 1 = 1930 all over again. I don't see any possible positive outcome, unless by some miracle the trade wars (and other government control over markets) end. And even then... Disclaimer: economics n00b interpreting central bank president talks and stock trader news websites.

samsonradu 7y ago
You kind of described Japan’s economy.
- bboygravity 7y ago
  Japan's a known potential model of the future of the European economy as they're demographically about 15 years ahead of Europe. Would make sense to some extend.
  - Yetanfou 7y ago
    Japan has close to zero immigration where Europe has a large migration from countries with a much higher birth rate. For Japan this implies that their population will shrink while staying ethnically homogeneous while the European population is likely to increase and diversify. Europe will see more ethno-religiously motivated conflict, Japan will suffer from having a decreasing work force which needs to take care of an increasing number of people in need of care. If Japan continues on this path they'll eventually dwindle as a country and stand the risk of being conquered by one of its more populous neighbours. Europe should have a long hard look what happened in Lebanon when that country was torn apart by a civil war [1] between different ethnic and religious groups. [1] https://en.wikipedia.org/wiki/Lebanese_Civil_War https://en.wikipedia.org/wiki/Lebanese_Civil_War

nickjj 7y ago

> When people borrow money for a house, they only consider the monthly payments for the mortgage and not the absolute amount of money they are borrowing. Yep exactly. The same thing happens with cars too. The salesman does everything in their power to focus only on the monthly payment amount instead of what you're really paying total in the end. It's way worse for houses because you can end up in a situation where if you make non-optimal choices with mortgages you can be paying off your mortgage for multiple generations on a low end house. Interest is crazy, but unfortunately most people don't pay enough attention to it or their debt (which makes sense since you need to go out of your way to really learn about it).

the8472 7y ago

> and being vulnerable to a drop in house prices And there are no financial constructs to spread the risk?

dybber 7y ago

In Denmark, we have introduced regulation that limits buyers to only be able to borrow 4 times their yearly household income, when buying a house in the largest cities. That puts a limit on how much the house prices can rise.

pjc50 7y ago

The situation is, on one side, concentrations of wealth that are too large to invest in anything that captures a positive return; and on the other side, an endless list of things that desperately need investment but cannot capture returns to the individual investor, such as decarbonisation and healthcare. Negative rates are the market signalling that it's time for a wealth tax. Although these are tricky to implement because wealth can be moved very easily.

WillPostForFood 7y ago

> people have to spend decades paying back loans and being vulnerable to a drop in house prices So what if your housing price drops? If you are in for the long term, just ride it out. The risk in a long term loan isn't fluctuating prices, it is income stability. People don't lose homes because their home value drops, they lose them because they lose their jobs and can't afford to make payments.

gyuserbti 7y ago

The special thing about housing though is you have to pay monthly payments for housing. This is the reason why those monthly payments are privileged in consideration. So the alternative is rent, which at the moment in many places is looking like a less appealing alternative. The transfer of wealth in the housing market happens from one group to another regardless. I agree with a lot of your sentiment and what you're saying, but I think the monthly payment focus isn't irrational.