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Came across this statement in an article about housing affordablity.
The whole article can be read at:
Came across this statement in an article about housing affordablity.
The affordability of home ownership is a product of three factors: the price of homes, the level of incomes and the level of interest rates. Whenever the property market booms, house prices rise a lot faster than incomes and so affordability worsens.
Property booms generally start at a time when interest rates are low. They reach a peak at a time when the rest of the economy is booming and the authorities start worrying about mounting inflation pressure.
That's when the central bank acts to cool things down by raising interest rates. Initially, that makes affordability even worse. This is the point where people, having been sitting back gleefully watching the value of their home soar, start worrying about how their kids will ever afford a home of their own.
Eventually, however, the authorities achieve - or, more usually, over-achieve - the desired slowing in the economy. They then start cutting interest rates, which improves affordability.
But by then the property boom has turned to bust, the banks are more reluctant to lend and many people, being uncertain about hanging on to their jobs, are reluctant to take on the onerous commitment of a mortgage.
Falling house prices are, however, a two-edged sword. As homeowners perceive their wealth to be diminishing, this can encourage them to cut back their spending, contributing to the downturn.
And were the fall in prices to be too precipitous it could give a lot of home owners - particularly those with big mortgages - a bad scare.
I think people with negatively geared investment properties are particularly vulnerable. They've structured their investment to run at a cash loss in the hope that big capital gains will make it all worthwhile in the end.
But when prices start falling, why hang on?
Why not cut your losses and sell before prices fall further?
Trouble is, the more investors who head for the exit, the more prices fall.
It's possible that owner-occupiers who bought at the peak of the boom may find themselves facing "negative equity" - owing more than their house is now worth. This is unlikely to induce them to sell up and crystallise their loss, however. Only if they lose their jobs and can't keep up their repayments are they likely to be forced out.
I have a feeling that the next few years are not going to be terribly pleasant.
Long before they're over, however, people will have stopped worrying about housing affordability.
Property booms generally start at a time when interest rates are low. They reach a peak at a time when the rest of the economy is booming and the authorities start worrying about mounting inflation pressure.
That's when the central bank acts to cool things down by raising interest rates. Initially, that makes affordability even worse. This is the point where people, having been sitting back gleefully watching the value of their home soar, start worrying about how their kids will ever afford a home of their own.
Eventually, however, the authorities achieve - or, more usually, over-achieve - the desired slowing in the economy. They then start cutting interest rates, which improves affordability.
But by then the property boom has turned to bust, the banks are more reluctant to lend and many people, being uncertain about hanging on to their jobs, are reluctant to take on the onerous commitment of a mortgage.
Falling house prices are, however, a two-edged sword. As homeowners perceive their wealth to be diminishing, this can encourage them to cut back their spending, contributing to the downturn.
And were the fall in prices to be too precipitous it could give a lot of home owners - particularly those with big mortgages - a bad scare.
I think people with negatively geared investment properties are particularly vulnerable. They've structured their investment to run at a cash loss in the hope that big capital gains will make it all worthwhile in the end.
But when prices start falling, why hang on?
Why not cut your losses and sell before prices fall further?
Trouble is, the more investors who head for the exit, the more prices fall.
It's possible that owner-occupiers who bought at the peak of the boom may find themselves facing "negative equity" - owing more than their house is now worth. This is unlikely to induce them to sell up and crystallise their loss, however. Only if they lose their jobs and can't keep up their repayments are they likely to be forced out.
I have a feeling that the next few years are not going to be terribly pleasant.
Long before they're over, however, people will have stopped worrying about housing affordability.
) WHY WOULD ANYONE DO THIS!! The quickest and slippery-est (sp?) way to get into trouble.
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