Let's say Joe wants to spend / can afford a $1000/month mortgage payment. If interest rates are 5% and the maximum mortgage period is 30 years, Joe can afford to buy a house worth $190,000. However, if interest rates go down to 2% and Joe can now take a 40 year mortgage, Joe can now buy a house worth about $330,000. Great for Joe! The only problem is that housing supply is relatively inelastic, so the supply of housing didn't magically increase overnight. When Joe buys a house, he's essentially bidding against a bunch of other people for that house. If those other people's mortgage payments were affected the same way, then the actual effect is that what was once a house worth $190,000 is now worth $330,000.
This sounds like a problem out of an Econ 101 exercise. Either politicians are stupid, or more likely, they know that "homeowner policy" like this can make them and their other rich buddies even richer.
Early movers purchase a higher grade of home than they could have previously. Eventually this shifts the market as a whole as income distribution remains stable. Then people buy the same house they would have previously at a higher price. Now nothing has changed and people are more in debt as the cycle returns to normal, if it ever does.
Plus the whole investor (foreign and domestic) vs owner occupier discussions we are seeing plenty of...
In all but the smallest cities you have options for a different job. They might not be as good, but there is an option. If you lose your job you can find a different job close enough to your current house that you don't have to move.
Remember this is NOT an rational economic problem. There are good reasons to live near by the same neighbors that you know well for years. There are good reasons to live near your family. When you own a house you can make modifications to support your hobbies which in turn make your house a better place for your to live than anyone else. These all mean there are good reasons to accept a job that pays less than you could earn elsewhere and thus stay in the same house. With inflation you can probably afford the house on a lesser paying job after a few years.
Why is a living near the same people you know and love irrational or somehow an inappropriate object of economic reasoning? You could even estimate prices for such things! Just because they're not typically represented as currency amounts doesn't mean they're not 'rationally economic' or that making tradeoffs that involve these things couldn't be better done with good economics.
You are correct that it is fully rational behavior for people. However that is not the definition used in economics. (sort of like physics tends to assume no friction where possible)
[1]: https://en.wikipedia.org/wiki/Von_Neumann–Morgenstern_utilit...
* https://www.axios.com/sky-high-home-prices-are-thwarting-thw...
* https://www.citylab.com/equity/2017/06/the-other-side-of-har...
Cf. China, which has seen unbelievably explosive growth in its cities in the last 40 years and China has also seen ~1 billion people lifted out of poverty during exactly the same time period.
I bought as much as I could afford, but my budget included savings and a cushion. The bank would have loaned me plenty more than what my budget could afford. And my budget included repairs and maintenance. I also included in my budget a 4 bedroom house costs more than a 900 sqft town house to heat and cool. The big thing was I wasn't willing to give up maxing out our retirement accounts.
But in practice, "as good as you can afford" really means "buy the lead paint, lead water, asbestos ridden, foundation broken 'cheap' house? Or buy the no-lead, no asbestos, no mold 'expensive' house? "As good as you can afford" actually translates to the "least shitty" option, for most people.
Buying an 8 bedroom house just because the bank will technically let you, is a fun TV sitcom joke. Not a real thing most people are ever able to actually do.
If you grew up in a modest but well-kept house in a decent neighborhood, that is your baseline. If you then go on to reach some level of success in your career such that you are roughly on par or exceeding your parents income, your expectation naturally is that you should be able to afford something similar or better. Unfortunately the market dynamics have completely shifted since parents bought, and so people are having to take a really harsh look at the reality of their past expectations and how they align with their current reality. It often means paying way more than they ever wanted or thought was necessary to buy something way crappier.
There's a lot of evidence that shows that for every dollar of loans made available to students, the price of education rises, and that's a system without supply/demand dynamics since admissions aren't (supposed to be) based on a bidding process. It seems only reasonable to conclude that the availability of mortgages has similarly increased the price of housing. It's a hidden cost of our housing market that banks (and a few others) profit by. The banks loan fictional money, created out of thin air thanks to fractional lending requirements, and collect a percentage of that back every year on a house that only costs what it does because of that loan. Without mortgages, people would be forced to save up and the price of housing would be governed more by the cost of actually constructing houses and the amount that people were able to save before buying rather than a percentage of their income over the next 30 years.
Think, for example, if banks decided to change the standard loan time from 30 years to 40 years. What would happen to housing prices in areas with somewhat constrained supply? Homebuyers would still look at monthly payments and buy as much house as they could afford. So housing prices would increase accordingly and instead of mortgaging 30 years of our futures, we'd be mortgaging 40. We'd be buying the same houses and banks would be making more money. Change 30 years to 20 years and you'd get a similar drop in housing prices.
More than any other thing that we spend money on these days, housing prices have been decoupled from their cost of production and banks are largely the ones skimming that difference between what housing should cost and what it actually costs.
The most recent part of the increase has come from the slashing of interest rates to rock bottom following the global financial crisis and quantative easing, neither of which is the responsibility of the government.
It's not a malice vs idiocy situation, actually there is a third explaination : economy needs a growing money supply to work properly (and the money creation need to compensate the economic growth AND the reduction of money velocity[1]). But since the late seventies, money creation is only possible through the banking system via credit. That's why central banks reduces interest rates to stimulate economy, because you need to create money to enable economic growth. To get out of the rising housing prices trap, we need another money creation mechanism, but many people are affraid of the old ones (state-controlled monetary creation) and a lot of people (bankers, homeowners) have a lot to lose if we changed the system.
[1]: this is the failure of the monetarist view from the seventies, which predicted a constant money velocity, in fact we've had a declining one for the last four decades.
Personnally, I'd rather give the money to the governement like we did in the keynesian golden age, because it fuels the development of infrastructures, housing and social security. And at our point in history, it could be used to transition to a sustainable society. But that's because I don't trust the market on this, I'm kind of a socialist.
> am sure it would do more for the economy than just pushing banks to lend more money.
This is such a failure (esp. in the EU) I don't see how I could disagree with you on this.
Share market jumped, retailers rolled out significant sales. People bought TVs.
It's more likely that negative interest rates will be passed onto consumer bank accounts by elmininating cash.
http://saifedean.com/Saifedean%20Ammous%20The%20Bitcoin%20St...
A slowdown a la Thiel due to fundamentally flawed monetary policies.
Gold standard failed, no matter what libertarians like to fantasize about it.
The present primary reliance on fractional reserve monetary is not a carved-in-stone requirement of financial systems, only the present norm.
If you're interested in ideas and thoughts on money, I'd suggest William Stanley Jevons writing as a starting point for modern views. A. Mitchell Innis's "What is Money?" (1913) is not entirely mainstream, but strikes me as among the more insightful enquiries I've read:
https://www.community-exchange.org/docs/what%20is%20money.ht...
I'd stumbled across that here: http://neweconomicperspectives.org/2013/09/money-created-ove...
Their is no fractionnal reserve banking in the modern world anymore. And circa 2007, virtually nothing prevented the infinit expansion of credit, with the result we all know.
If you want to learn more about these topics, the keen-krugman debate (more of a controversy than a civil debate) a few years ago was really enlightening.
The St. Louis Fed tends to have the largest set of articles on economic policy, generally.
Here are 632 results for "fractional reserve":
https://encrypted.google.com/search?hl=en&q=site%3Astlouisfe...
And limiting to 2010 and subesequently, 27. None declaring the concept dead.
https://encrypted.google.com/search?q=site%3Astlouisfed.org+...
The second paper on the page is from 1968 …
In the US, there is no limit anymore on how much credit you can lend given the amount of reserve you have, the reserve requirement is on deposit not credit lent.
Thank you.
The emphasis on assets for retirement locks a lot of money up in an unproductive musical-chairs of asset transfership. For example let's say I have a pay-day and want to spend $100 on buying stock. When I buy that stock I'm purchasing it directly from someone else who now has $100 instead of the stock. They can spend that money on goods and services, but in my opinion there is a far greater chance that they will reinvest that money in some other asset. If the actual assets in the market don't change, I think you can say that my investment increased the total sum of costs of all assets. I'm not 100% sure this is solid logic but it's some rough reasoning.
The problem is that at any given time more people are buying new assets instead of selling them off. This is because you can make money on purchased assets through rentiership (dividends, renting, or collateral for a leveraged investment that pays dividends/can be rented), and also because people are cautious and save more than they need, since asset prices are unstable.
I have two personal pet theories (is that really a common idiom in english ? I like it !) on that topic.
1. since we now focus on low inflation, people have little incentive to spend/invest their money, they can just hoard cash for a long time with no risk of losing money.
2. The low imposition rate since Reagan accelerate the concentration of capital, and rich people buy assets with their money, not consuption goods.
And yes, it is somewhat common! I think your second point is definitely part of the problem. As to your first, I think that looking at inflation in these terms requires looking at interest rates as well. When both inflation and interest rates are low, hoarding cash is highly incentivized. If inflation is low and interest is high, there is a large opportunity cost to holding cash rather than collecting interest via a mechanism directly tied to the cash (e.g. a bond). If both inflation and interest are high, it would probably be optimal to invest in assets that won't have their underlying value erode as they do with bonds.
There is no indirect means to receive money, except for profit, and that it is not related to stock.
Profit is ultimately the primary means for company cash liquidity, held as retained earnings, after the company has survived its initial years of inception and growth.
Dividends enable the company to go public. The secondary market makes the stock liquid, which is convenient but not mandatory.
? I don't know how the Kroner works, but usually a central bank issues currency into the market in exchange for some kind of asset - this is the primary mechanism for controlling interest rates.
Yes, more credit is created through fractional reserver, but this is taken into account.
There is no such thing as fractionnal reserve credit in 2017, bank don't need reserve to lend, they need reserve to hold bank accounts for their customers.
The fact banks can lend out more than they have in deposits means there is 'fractional reserve credit', or 'fractional lending' currently, in 2017.
Most of the credit in the world is created this way, actually.
It's why you've heard the term 'reserve ratios' etc..
[1] https://www.investopedia.com/articles/investing/022416/why-b...
And the following passage doesn't make much sense: "When a bank makes a loan, there are two corresponding entries that are made on its balance sheet, one on the assets side and one on the liabilities side."
If you take a loan to buy a house, it will not be a new deposit at your bank. It will be a new deposit at the seller's bank. And against that new deposit, that bank can extend new loans. Etc. http://thenextturn.com/wp-content/uploads/2015/04/Fractional...
Of course when you are just getting the loan it will appear as a deposit at your bank. But this is not to balance the loan. The loan is coming from a reduction in reserves. This temporary deposit (on the liabilities side) will increase the reserves temporarily (on the assets side), but only until you take the money out to do whatever you asked the money for.
Definitely banks do not lend out more than they have in deposits (ignoring other forms of financing for banks, of course).
Technically, you are correct - they don't lend out more than what is deposited, but what is deposited is 'created' (or at least deposited and lent money against those deposits are both considered 'in circulation') by they or other banks, ergo, banks end up lending out considerably more money than is created from the central bank.
...or simply a way to deflate the housing market, such as public housing and urban renewal projects.
I don't understand why a small issue that's easily solved and a very basic strategy all over the world is somehow interpreted as a insurmountable problem that means the entire economical system is broken.
You've just summarized the situation in Prague, Czech Republic.
Same in Australia.
Let me count the ways:
(1) reduced labor force agility as you say
(2) high rent and mortgage cost soaks up money that could otherwise fuel consumer spending, creating a demand constrained economy
(3) high housing costs in major cities also contribute to poverty elsewhere by preventing people from circulating between high priced urban and lower priced rural areas
(4) high housing costs risk actually destroying centers of excellence like the SF Bay Area and New York by making it impractical for new talent to move there
* 1st sub-$400 all-in-one with 6dof, face and finger tracking + 5 years