Coded gray.

Friday 8 September 2006

Screenshot anime 6/17

Pic of the day: What happens when the magic runs out? Do the houses suddenly shrink?

Pop! Goes the bubble

A house is like a car, not like a tree.

Of course, you read about it years ago here in the Chaos Node. Not that it requires any prophetic gift or anything, although you could sometimes believe it. And for some months now, the reports have been coming in from many large cities in the USA: Property prices are not rising anymore; in fact, they are starting to fall.

The amazing thing is that it took this long. Then again, I greatly underestimated the lengths that the Bush government would go to. Ironically I don't think they particularly meant to create an artificial bubble in the property market. It was simply a side effect of spending without corresponding taxes. The billions that are borrowed and pumped into the economy need to go somewhere. A lot of them have got into property.

***

I have wondered why this has to happen, again and again. It is not the first time in history, you know. Japan had this in the 1980es, although I think it was more focused on business property and less on private housing than the recent American and British bubble. The country spend a decade trying to get back on its feet, although some of this comes from bad strategies, trying to hide the extent of the bad loans. Around the same time, the Scandinavian countries had a property bubble as well. I witnessed it here in Norway, and remember it well. A large part of the populace are adults like me, and should be able to remember at least roughly how it went. And yet gradually the feeling seems to have spread that "this time is different". But every time is different, except not really. It's more like, every time we've forgotten last time, and basic facts.

Remember, a house is like a car, not like a tree. It is an artificial construct with a limited lifespan; it does not grow on its own as the years pass over it. Is this really hard to believe?

The problem, I suspect, is that the lifespan of a house is longer than that of a human. It doesn't seem like it will fade over time. If only we paint it every couple years, it will just stand there and look the same. A car lasts perhaps 10 years, or 20 if it is of good quality and maintained carefully. Houses last ten times as long. If you buy or build a new house, it will outlive you and quite likely your grandchildren too. So why worry? It is virtually eternal, as far as you are concerned.

But if you lived longer, or if your mind ranged over a greater length of time than your body, you would see that it is the same thing as a car or a bike, only much slower. At some future time, its value is zero. Or at the very least, maintaining it is no longer worth the cost. So if you think logically, you will take the price for the house and spread it out over those years, and then ask yourself: Do I get back what I put in here? Is this worth paying X thousand dollar a year for?

It probably is. Because you need to live somewhere, and the benefits of a house over the streets or a tent are pretty obvious. And if you were to rent a similar house, you would have to pay the exact same expenses, including the diminishing worth of the house, to the owner. And in addition he would want to have a profit for renting it out. Capitalists are generally not in it for your happiness alone. So logically you would compare your cost per year, including any interest on loans, with the cost of renting. If owning is cheaper, then by all means go for it. This would of course depend on the cost of financing your home, of course, so you better have a pretty good idea of what this cost will be. Not just this year, but the next, and five or ten years from now.

***

What confuses people is when the price of houses go up. And not just slowly at the same speed as inflation in general. At some times, the prices of houses rise more than other things. This is perhaps because more people move to the place you live, and there are not enough houses for them right away. Building new homes is expensive and takes time. Competition makes people bid up the prices. But this stabilizes over time, unless the local governments restrict the area that can be used to build new housing.

The other situation where prices go up is when interest rates are low. This is because people calculate, like I mentioned above, and find that it is now more affordable to buy than to rent. After all, the yearly cost of owning a home is now much lower, but they assume that rent will be the same as before. So more people want to own, and they are willing to pay more for it. So of course the prices rise, at least until balance is restored.

The problem is that balance is not restored, it is overshot. For when this lasts for years, people start thinking: 'House prices keep going up, it is a law of nature.' And then they also think: 'If I buy a house now, I can sell it at a profit later. After all, the neighbor / coworker / guy I heard about just did that.' Which is all true. Of course, the neighbor had to give correspondingly more for his new house, unless he was lucky and got a house for free, so most likely he did not actually earn anything. He just held the cash for a little while, if at all.

So when everyone expects the house prices to go up, so they can sell at a profit at any time (and conveniently forget that all that profit will be needed to buy their next home), this becomes a self-fulfilling prophecy. Everyone wants in so they can get rich too, and they are willing to bid over the others who also want to get rich. And so we get the kind of mass hysteria we have seen lately.

The way interest rates have been rising recently, more and more people realize that they just can't afford that much. The bank will reasonably ask: "How do you plan to pay this back?" and they are unlikely to accept "by selling the house for profit" unless you have another house already that you can live in. As buyers drop out, there is suddenly less competition. One day there are more people trying to sell than buy. Then begins the downward spiral, which is the same as the upward, only reversed. "Hmm, if I wait a bit longer, I can get it even cheaper. No point buying now."

This downward process has just begun in many American states. And this time, neither the government nor the central bank has the tools to stabilize the fall if it gains momentum. The government cannot slash taxes, because the deficit is already ballooning and somehow they will have to pay the public servants. The central bank cannot lower interest rates or the currency will slide, causing all imports to grow more expensive, which would cause a runaway inflation. History shows that this is a bad thing. So there is no way around it: House owners, and indeed all who own property, will have to take the fall. After all, they enjoyed the ride up. (Well, some of them. And some jumped on at the top.)

I hope you, dear readers, listened while you could. Things are about to get quite ... interesting.


Yesterday <-- This month --> Tomorrow?
One year ago: PSP (vs DS?)
Two years ago: Unhappiness and TV
Three years ago: Sudden shadow
Four years ago: DAoC Paladins rule!
Five years ago: Country road ...
Six years ago: LHC & the end of the world
Seven years ago: More lovely women

Visit the archive page for the older diaries I've put out to pasture.


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