Thought: Banks
The first thing I will do is get rid of banks. Why?
I reckon houses wouldn’t be nearly as expensive as they are if banks didn’t exist. Prices for everything are based on supply and demand. If you have something to sell that is in high demand, like a nice house, it is worth whatever someone will pay for it. So the process goes:
- Caveman Boogawala puts his cave on sale for 12 clams.
- Caveman Googawinga has saved up 12 clams, so he offers Boogawala the clams for his cave.
- Caveman Digawinda has also saved up 12 clams, so he offers Boogawala the clams for his cave.
- Googawinga and Digawinda are tied, because they both have the same number of clams.
- A bank offers Googawinga 100,000 clams, at an interest rate of 100 clams a year.
- Didawinda knows that Googawinga will out bid him for the cave, so he borrows 110,000 clams to purchase the cave.
- Boogawala sells his cave to the highest bidder - the house is now worth 110,000 clams.
Notice how the existence of the banks put the price up? If no one could afford to purchase a house, no one would purchase a house, so houses would be cheaper. Banks make this game uneven because they give everybody the chance of outbidding everyone else by huge sums of money, which in the end only makes prices higher.
We need banks (well, home loans to be precise) because houses are expensive. And the only reason houses are expensive are because banks exist.
Think about this: If your home loan is from one of the big banks, there’s a good chance that the guy at the auction trying to outbid you, forcing you to spend more, got his loan from the same bank. That’s what they mean when they say bankers control the world.
Technorati tags: banks, home loans, cavemen
Filed under: Commentary
Free WPF Training in Melbourne Sydney and Brisbane June 30th
Couple people have pinged me about the Free WPF training I mentioned a while back and figured i had better
You might find this article on Wikipedia an interesting read:
http://en.wikipedia.org/wiki/Real_estate_bubble
On the upside, Adelaide is cheaper than Sydney.
–
Jason
Good point. In the Netherlands it is even worse. Interest you pay on a mortgage is fully deductible from tax. This means people can afford even bigger loans and houses are extremely expensive.
That this mechanism is at work is very clear in the border areas with our neighbouring countries Belgium and Germany. In those countries the tax system is different and interest is not deductible. Just across the border, houses will be tens of percents cheaper. So some people from the Netherlands buy a house just across the border in Belgium or Germany because they get a cheaper house and they will still get the tax benefit.
Guess what happens to the prices of houses just across the border…
Hi Paul,
Amen. Although who will fund your campaign to become Prime Minister - certainly not the banks!
The problem isn’t really the bank, its the demand. We need to reduce the need for a large central city, broadband is a helper here, by having workplaces distributed and still connected we can reduce the demand in the inner city.
And these days they’ll lend you an absurd multiple of your salary (>= 5 times, I think). Of course, if you can’t pay, they get your house, so they still win.
The only way the banks lose is if house prices drop, which is why they keep lending ppl more and more money, to make sure they don’t.
Someone told me they saw a study where they looked at all the possible contributing factors to house prices over the last few decades. The only one that was demonstrably connected to the actual prices was “how much banks were willing to lend”.
Grrr.
I’ve went to see the angry bank people recently and James is correct that they’ll happily loan you over five times your income. What really disappointing is that the current price of a standard 4 bedroom home is so high, that unless you’re household income is between 125-150k/yr, you’re pretty much being priced out of the market.
*sob*
People always say supply and demand. But this isn’t about supply of houses, it’s about supply of money. There is too much money sloshing about in certain parts of the economy, that part being all those people that just happen to have been born at the right time to ride the wave … it’s a totally 2 tiered economy. As wealth makes wealth, those small % of people in this bubble economy are driving up the prices. Nothing lasts forever that is my only solace. People forget in the late 80s the 15-17% interest rates. People ignore places like Toyko and Hong Kong that have had flat or falling property prices for 10 years. Justice will be served eventually.
This only works when the demand is bigger than the supply. When you really can sell caves that are worth 12 clams for 110000 clams there would be a lot of cavemen digging more caves.
The problem in the netherlands is that erwyn is pointing out has more to do with the enormous amount of rules you have to comply with before you can build a house keeping supply low artificially. I dont know how that works in australia. But banks are usually not the cause of these problem. They just make the problem more visible.
Hey Paul, sorry on your failed political bid
I hear your pain on this one (I’m assuming that you’re trying to get a mortgage for a new home), but you’re really yelling at all of the wrong things. The banks are doing their jobs by trying to extract more money for the situation.
People tend to value home ownership very highly. So mortgages are generally very safe loans b/c borrowers short on cash put the mortgage at the top of the pile. Truth is, it’s not even banks that do all of the mortgage lending, b/c of their low-risk factors independent “mortgage lenders” have actually sprung up (usually dealing through a mortgage broker).
Real estate is the single most expensive investements that most of the population will make. It’s very common, in fact, for people to have 80-100% of their invested capital invested into a home. So on top off the “stability” thing, people tend to be *very* emotionally attached to their homes.
This can really wreck house prices. I know, I live in Edmonton, Alberta, Canada. House prices have jumped about 50-100% in the last year, and I moved here 6 months ago. In our case, oil money has pushed up wages and made minimum wage basically irrelevant. But people don’t tend towards being very intelligent when it comes to homes, so they use all of this extra money and sink it into an, arguably overpriced, home.
So guess what I’m doing? Not buying! I rent for less than it would cost to own (usually way less) and then I throw the difference into the bank. Where I just moved from (Winnipeg, Manitoba), the average one bedroom went for about 600 clams/month. But the average home cost over 600 clams/months just to maintain (taxes, insurance, heating AND cooling, water, regular maintenance, etc.). So mortgaging in that market was actually just throwing your money at the bank. I mean, you could either pay 1000 clams/month for a mortgage and cover the bank’s interest while hoping your house goes up or you could throw 1000 clams in the bank and MAKE interest.
So what’s the point? Well, you’re a smart guy, you know how much you make, you know what the average person makes. If you can’t find a reasonably priced home and you’re in the top 30% or so of incomes, then it’s probably a good bet that other people are buying way more home than they can afford. You, you’re looking for a home, so you’re probably renting right now. Figure out the difference between owning a home and your current rental costs (don’t forget to include taxes and maintenance, etc).
Now if the monthly difference between rent and like less than (25%), then you’re probably hooped. ‘Cause then nobody can afford to buy or rent at which point the bubble is going to pop. If your rent is more expensive than the house next door, you may not want to buy or rent, just leave :(. If the difference is quite large (like my Winnipeg example), then take the difference out of your pay-cheque and sock it away for a down-payment on the house.
Now you’re winning both wars. The banks are paying you interest and you’re biding your time for fall in the housing market. If everyone is spending money they don’t have, then things will eventually have to crash.
Even here in Edmonton I can see the burdne starting to weigh down. University-educated 20-somethings can’t afford a simple bungalow b/c they’re making 50k and the houses start at 325k! Low-pay businesses (convenience stores, fast food, gas stations) are struggling to maintain any staff and they have to pay them 30% above minimum just to keep them around. And now the renters have started jacking up prices so the people working the gas stations are funnelling much of that dough back into the rental unit. The average worker is making 30% more here than other nearby provinces, but that doesn’t make up for the fact that houses are costing 50% more.
Either way, just some food for thought.
Very good point Paul. I know that when we brought our house (in NZ) that I was freaking out at a morgage 3.4 times our household income, yet, in the end the bank was happy to lend 4.1 times. So we paid ~40K over the initial asking for our area. Just because we could. As I brought to live there for years, the buy prices was not really a concern. We knew the selling agents, and they said that 40K push the hole neighborhood up by 40K. So others now have to pay more, because I could, and didn’t mind. So it does really just come down to money the bank will lend. If you don’t have a house and want one, good luck.
If you think about it, what you’re actually arguing against is credit. Banks are simply agents that provide credit. After abolishing them, other organisations could very easily spring up and provide either the same or a very similiar service with a different name. Building societies, mortgage brokers, credit card companies, etc already do.
Tell me Paul, do you have a credit card?