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"Real estate prices rising means that the people are getting more wealthy. When real estate prices fall, it means that people are most likely getting less wealt

"Real estate prices rising means that the people are getting more wealthy. When real estate prices fall, it means that people are most likely getting less wealthy." Can you elaborate? For most necessities, we're happy when the price goes down. But for housing, we're happy when it goes up. Why? What's so special?

logicchains 12y ago
Because people invest absurd sums of borrowed money into houses? If people borrowed hundreds of thousands to invest in for instance the corn industry, they'd be cheering for the price of corn to go up. When house prices go down, many people really do become less wealthy, because they have lots of money invested in houses. Similar to how Google's shareholders would become less wealthy if the value of Google stock fell by 90%.
- ajmurmann 12y ago
  The difference between Google stock and a house (if you only have one) is that you need the house, but I have not practical value for Google stock other than it's monetary value. If I sell my house I need to buy another one or rent. So I am happy if my house's value goes up, but only if it's relative to other houses in areas I would be interested to move to, because it would open the option to swap it out for another one that's better or in a location I would prefer. So if real estate prices go up everywhere that wins me nothing. I am rich, but only on paper. Housing being relatively cheap also allows for people with low capital to try out business ideas that they couldn't elsewhere. Berlin in the early 2000s was filled with awesome little shops, restaurants and cafes that would have been impossible in any other comparable city. One of the big reasons was the cheap real estate.
  - logicchains 12y ago
    Good point. Even if real estate prices going up everywhere wins me nothing, however, real estate prices going down always causes me a loss if I've purchased a house with borrowed money. For instance, if I borrow $500k to buy a house, and its value soon after falls to $300k, I still owe the bank 500k yet my assets are only worth $300k, meaning my net worth is down by $200k. If I was renting this wouldn't happen. I think culturally there's too much willingness to buy houses with borrowed money. The proverbial average Joe wouldn't leverage themselves to buy any other investment worth hundreds of thousands with borrowed money, yet it's seen as perfectly reasonable to borrow hundreds of thousands of dollars to buy a house. The inherent risk involved in investing a large sum of borrowed money just seems to be ignored, and then people do everything they can to keep house prices rising in order to avoid this risk materialising.
melling 12y ago
For most things, we don't go to a bank and borrow 80-90% of the principal and pay it off over 30 years, effectively paying 2.5 times what we borrowed. If the house is worth less than what we paid for it, we made a really bad investment. In fact, if the value hasn't more than doubled, ... You get the idea?
- waps 12y ago
  Since most people at that point would declare bankruptcy, if house prices dropped by enough to make it really worth their while to do that, banks would be screwed (since they have at most 2% reserve). If banks are screwed, companies and countries can no longer roll over debt (for example in the US that would mean the Federal government would have to raise tax to 100%, and even then it would take a year before they could spend a single dollar again). The US state would be bankrupt in less than a month if interest rates rose to about 5%. Europe would be bankrupt in less than a month if interest rates rose to less than 2% (because they'd have to replace cheap loans with expensive ones they can't pay. The alternative is to pay back the money, but you know, if you can't pay 1% of the money, it seems unlikely that you can pay 100%). Most companies also roll over debt. Most companies are not like Google and Facebook. So if this happened, and they could not roll over debt, companies like Exxon Mobil, GM, ... would simply be bankrupt. Since most people who have jobs have jobs at companies like these ... Why do they do it this way ? It's the modern way of printing money. They switched to it because giving the state direct control of the money printers has always led to collapse. At the end of the 19th century, it was leading to constant collapses of currencies, sometimes 5 years or less apart. These collapses came with revolutions, wars, ... very ugly. So now we have the loan system. Now I guess we see who's smarter : the US/Europe who "loan" money, or China who prints whenever they feel like. There's a few other tiny banking systems that feel they should get a second chance (seems even more lunatic than the China way to me though). History has not yet shown how the Western system can fail, but it has shown time and again that the system China is currently using blows up. "This time it's different", well let me give the standard answer every economist gives : "that could very well be true <chuckle>". Money only works as long as it's mostly not spent, but in can rotate through the system indefinitely. So as long as the circle "banks -> companies -> people -> houses -> banks" works, with the central bank controlling how much money banks have to keep inflation stable ... Parliaments and dictators have shown themselves incapable of this. But of course, the western system is effectively a system that is an unknown. Every system fails at some point, we may very well be at the point where the western loan system fails. But I don't think so. History would seem to indicate China has some room to grow, but will collapse into chaos before a few decades pass. The western system will probably carry on until it doesn't. But that could be millenia away as far as we know.

logicchains 12y ago

Because people invest absurd sums of borrowed money into houses? If people borrowed hundreds of thousands to invest in for instance the corn industry, they'd be cheering for the price of corn to go up. When house prices go down, many people really do become less wealthy, because they have lots of money invested in houses. Similar to how Google's shareholders would become less wealthy if the value of Google stock fell by 90%.

ajmurmann 12y ago
The difference between Google stock and a house (if you only have one) is that you need the house, but I have not practical value for Google stock other than it's monetary value. If I sell my house I need to buy another one or rent. So I am happy if my house's value goes up, but only if it's relative to other houses in areas I would be interested to move to, because it would open the option to swap it out for another one that's better or in a location I would prefer. So if real estate prices go up everywhere that wins me nothing. I am rich, but only on paper. Housing being relatively cheap also allows for people with low capital to try out business ideas that they couldn't elsewhere. Berlin in the early 2000s was filled with awesome little shops, restaurants and cafes that would have been impossible in any other comparable city. One of the big reasons was the cheap real estate.
- logicchains 12y ago
  Good point. Even if real estate prices going up everywhere wins me nothing, however, real estate prices going down always causes me a loss if I've purchased a house with borrowed money. For instance, if I borrow $500k to buy a house, and its value soon after falls to $300k, I still owe the bank 500k yet my assets are only worth $300k, meaning my net worth is down by $200k. If I was renting this wouldn't happen. I think culturally there's too much willingness to buy houses with borrowed money. The proverbial average Joe wouldn't leverage themselves to buy any other investment worth hundreds of thousands with borrowed money, yet it's seen as perfectly reasonable to borrow hundreds of thousands of dollars to buy a house. The inherent risk involved in investing a large sum of borrowed money just seems to be ignored, and then people do everything they can to keep house prices rising in order to avoid this risk materialising.

melling 12y ago

For most things, we don't go to a bank and borrow 80-90% of the principal and pay it off over 30 years, effectively paying 2.5 times what we borrowed. If the house is worth less than what we paid for it, we made a really bad investment. In fact, if the value hasn't more than doubled, ... You get the idea?

waps 12y ago
Since most people at that point would declare bankruptcy, if house prices dropped by enough to make it really worth their while to do that, banks would be screwed (since they have at most 2% reserve). If banks are screwed, companies and countries can no longer roll over debt (for example in the US that would mean the Federal government would have to raise tax to 100%, and even then it would take a year before they could spend a single dollar again). The US state would be bankrupt in less than a month if interest rates rose to about 5%. Europe would be bankrupt in less than a month if interest rates rose to less than 2% (because they'd have to replace cheap loans with expensive ones they can't pay. The alternative is to pay back the money, but you know, if you can't pay 1% of the money, it seems unlikely that you can pay 100%). Most companies also roll over debt. Most companies are not like Google and Facebook. So if this happened, and they could not roll over debt, companies like Exxon Mobil, GM, ... would simply be bankrupt. Since most people who have jobs have jobs at companies like these ... Why do they do it this way ? It's the modern way of printing money. They switched to it because giving the state direct control of the money printers has always led to collapse. At the end of the 19th century, it was leading to constant collapses of currencies, sometimes 5 years or less apart. These collapses came with revolutions, wars, ... very ugly. So now we have the loan system. Now I guess we see who's smarter : the US/Europe who "loan" money, or China who prints whenever they feel like. There's a few other tiny banking systems that feel they should get a second chance (seems even more lunatic than the China way to me though). History has not yet shown how the Western system can fail, but it has shown time and again that the system China is currently using blows up. "This time it's different", well let me give the standard answer every economist gives : "that could very well be true <chuckle>". Money only works as long as it's mostly not spent, but in can rotate through the system indefinitely. So as long as the circle "banks -> companies -> people -> houses -> banks" works, with the central bank controlling how much money banks have to keep inflation stable ... Parliaments and dictators have shown themselves incapable of this. But of course, the western system is effectively a system that is an unknown. Every system fails at some point, we may very well be at the point where the western loan system fails. But I don't think so. History would seem to indicate China has some room to grow, but will collapse into chaos before a few decades pass. The western system will probably carry on until it doesn't. But that could be millenia away as far as we know.