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Comment by sword_smith | Hacker News Reader

When people borrow money for a house, they only consider the monthly payments for the mortgage and not the absolute amount of money they are borrowing. This means that low interest rates are the main reason behind surging house prices and is why people have to spend decades paying back loans and being vulnerable to a drop in house prices. It creates too much debt in society and generally makes the economy more fragile than it has to be. The low interest rates may seem like a helping hand to house buyers but it is in fact the opposite: a transfer of wealth to house owners from people seeking to enter the market, a transfer of wealth from the younger generations to the boomers. This must end if we want to avoid a repeat of the 2008 crisis. But with the current levels of government debt, it's hard to see a political solution.

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IMO this is the end game.

Scenario 1: If interest rates go up significantly this would bankrupt entire nations such as Italy, France and Greece (again) + runaway deflation. Conclusion: interest rates cannot and will not go up. This would be political suicide. Also deflation is the number 1 enemy of central banks and the economy in general.

Scenario 2: Lowering interest rates causes rich people, businesses and governments to lend as much as they possibly can to convert debt into "stuff" that they can charge more currency for. This causes zombification of governments, businesses and rich people: productivity of real estate is 0, productivity of businesses that can't go bankrupt (because you can't miss interest payments if there's no interest) goes towards 0, same for governments. Startups struggle to compete with larger companies, because they don't have the capital (and political lobby) and if they can somehow compete they just get bought. Also perhaps most importantly: this increases the divide between rich and poor and thus social unrest. The poor can't get significant credit so they are forced to finance the "stuff" that the rich own by renting it from them. AKA: the rich are home owners and the poor are home renters at ever increasing rents.

I don't believe for a second that interest rates will go up in the years to come. So scenario 2 is where we are (heading). Smells of hyperinflation to me. Scenario 1 = 1930 all over again.

I don't see any possible positive outcome, unless by some miracle the trade wars (and other government control over markets) end. And even then...

Disclaimer: economics n00b interpreting central bank president talks and stock trader news websites.

> Also deflation is the number 1 enemy of central banks and the economy in general.

I've always thought this was a weird claim, put this simply. Consumer electronics and computers have been deflationary for ever: You can always get a better TV, phone, or computer for less money if you are willing to wait for a year. Yet people can't stop buying them. Because they want them enough. Deflation should only hurt businesses producing stuff that customers aren't really interested in.

> businesses that can't go bankrupt (because you can't miss interest payments if there's no interest)

I would expect that on business loans you don't just pay interest, you are also expected to regularly pay back actual fractions of the principal. But I admit that I don't know how this works.

> The poor can't get significant credit so they are forced to finance the "stuff" that the rich own by renting it from them.

I've never understood this angle either. Buying stuff doesn't make stuff appear out of thin air. Buying stuff means buying stuff from the people who already have it, which for valuable things like housing is already the rich. The difference between buying an apartment and renting it is whether I give the rich person 30 years' worth of rent right now in a lump some or slowly over time. I don't see how I "win" against the rich person by giving them my money earlier.

The real issue in a deflationary situation loans effectively become more not less expensive vs 0 inflation situations.

Lending always carries the risk of not being paid back, where you can always just keep your own money. So, a 100$ loan needs to return the original 100$ + the risk + some incentive not to use this money for something else.

Thus loans are effectively the absolute value of (inflation or deflation rates) + a constant factor.

> I've never understood this angle either. Buying stuff doesn't make stuff appear out of thin air. Buying stuff means buying stuff from the people who already have it, which for valuable things like housing is already the rich. The difference between buying an apartment and renting it is whether I give the rich person 30 years' worth of rent right now in a lump some or slowly over time. I don't see how I "win" against the rich person by giving them my money earlier.

There are 2 ways to make a profit on a property investment:

1. Sell at a higher price in the future which offsets all of the costs of holding the property (rented out or not).

2. Rent out at a higher monthly price than whatever the monthly cost is (cost spread out over whatever your investment horizon is), right now.

Number 2 means (assuming the house was purchased on credit, which at negative interest rates it should always be as much as possible) that you as the renter(s) are paying back the owners credit he took out for the house, the house's maintenance, the owner's house insurance and taxes and all other costs + THE APPRECIATION IN VALUE OF THE HOUSE FOR THE TIME YOU RENT (higher housing prices = higher monthly rent) + a profit.

When you buy a house, you're not giving the owner 30 years worth of rent. You're giving the owner the value of the house, which is way less than the accumulated rent would be over 30 years.

Buying a house (on credit) is only ever a net loss if the house's value goes down significantly for whatever reason. Reasons can be: uninsured destruction (war, fire, bad renters) or deflation (due to oversupply of houses such as is the case in Japan right now or due to the overall economy going bad).

In other words: assuming a healthy economy, buying a property as an investment (with a 15 - 30 year investment horizon to be able to spread all initial costs over a longer period of time) is ALWAYS a win assuming you can find renters. In the current market (at least in most cities of Western Europe) you will always find renters, because a significant part of the population who would like to buy a house simply can't get the credit they need to buy a house close to where their employment is. Due to the housing prices being too inflated relative to average income from employment.

Summary: housing prices higher than the credit people can afford = people can't get credit to buy a house = lots of renters on the market (people rent instead) = makes it interesting to own houses to rent out for profit = housing prices higher = poor people can't get credit to buy a house = lots of renters on the market and so on.

See what's happening? Those who can afford real estate investments start receiving an ever larger portion of the income of people who can't afford real estate investments. AKA: the poor and middle class get poorer and the rich get richer.

> AKA: the poor and middle class get poorer and the rich get richer.

Yes, that's what I said. If the rich control apartments, they can always arrange to get richer. I cannot cheat them out of that.

bboygravity: I agree with everything you just said except that deflation is bad for the economy in general. It doesn't have to be. The Guilded Age (Belle Epoque in Europe), 1871-1914 had several percentages of deflation each year and this was a period where a massive number of people went from being poor farmers to middle class city dwellers and the period saw a massive growth in productivity.

Deflation will destabilize the economy if there is massive borrowing, and since most Western government owe about 100 % of GDP, they will prevent deflation for the very reasons you describe. But the middle class should embrace deflation and so should the general economy as it encourages savings which encourages investments which is where the growth in productivity comes from.

> Deflation will destabilize the economy if there is massive borrowing, and since most Western government owe about 100 % of GDP, they will prevent deflation for the very reasons you describe. But the middle class should embrace deflation and so should the general economy as it encourages savings which encourages investments which is where the growth in productivity comes from.

You're right. Deflation is not always a bad thing. But runaway deflation is. And runaway deflation is especially likely when there is no increased productivity (like their was in the period you mention) combined with massive debts (which didn't exist in the period you mention, because there was not fractional reserve banking like we have now and value of currencies where intrinsically backed by scarcity of gold).

A little deflation shouldn't be bad for a healthy economy with "sound money", but as you describe yourself: that's not what we're working with here.

It's not just governments who have massive amounts of debt. It's also large businesses and most real estate owners. The middle class should definitely not embrace deflation right now, because deflation could very quickly spiral into runaway deflation.

Runaway deflation = lower wages, lower housing prices, less government budget (less absolute taxes coming in). Less government budget = greater inequality, worse educational quality, leading to decrease in productivity, more crime, more corruption, more waste of resources and aside from government issues: less investments by companies, lower stock market prices, insufficient pension fund reserves due to investments going down (= lower pensions), people losing their house (lower wage = some people can't afford payments on house credit and are foreclosed), housing prices going down more because of foreclosures and bad economy, people increasingly start selling their house at an increasing loss, housing prices go down further, more people start losing and so on.

End result: Japan. Or perhaps worse: the 1930's crash (a prime example of runaway deflation), subsequent poverty, social unrest and wars.

I feel this is not a great explanation though, perhaps someone else can do better.

I think the main reason behind the better economic situation in the 1871-1914 period was not a deflationary economy, but the steady increase in factory output -- the industrialization was on its height -- and medical knowledge -- proper sanitation, proper medical procedures, hygiene. Add to that the benefits Europe and the US reaped from colonial imperialism: the "masses" gained access to commodities like sugar, tea, coffee but also cheap alcohol and opium.

Usually it was not a gradual improvement in the lifes of common people from poor farmers to well-off middle class. By far the most people not employed in the agrarian sector were working class (working in factories, mines, etc.) and their situation was, compared to today, a hellish nightmare: overcrowded slums, poor access to water and medicine, unstable food-supply. These conditions only improved slightly by the end of that period, usually out of pressure/fear of socialist/communist mass agitation.

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You are right, the life of most people living in that time period improved significantly. But I would say despite of a deflationary economy, not because of it. And only a minimal percentage of those were middle class.

Couldn't you use the same argument against inflation as well? That the improved life and economic growth in the 20th and 21th centuries have been driven by technological advances, and not by the inflationary economy?

Yes and no.

Yes, technological advances have improved life and have allowed economic growth.

No. Society as it is currently could not have been financed by those things alone. Massive loans that cannot and will not ever be paid back cannot exist without an inflationary economy (powered by fiat currency with no limit to currency supply and fractional reserve banking). And those types of loans and the inflationary economy have been crucial for the US/The West to attain and maintain their world domination politically, economically and militarily. That's where the term "military industrial complex" comes from.

Nixon moved away from the gold standard for a reason: the US was unable to afford its wars (Vietnam at the time) and keep its military happy and in check without an inflationary economy.

Inflationary economy = massive free buying power out of thin air for whoever controls the world currency, until they control the world currency no more and an empire falls.

Again: I'm no expert at all, this is just my limited understanding.

That is a good point, particularly your ending that it's for those who control the world currency... Until they fail.

But did that really improve the lives for people globally? Couldn't it be seen as a global redistribution of wealth, from countries who used the USD to the U.S? If you were cynical you might even say the U.S. robbed the other countries.

I wouldn't be so sure to conclude that inflation has allowed economic growth from your example, but more a redistribution of one.

We can add Canada to the list. If Interest rates were to rise just a few percent, it would bankrupt the entire country.

Add Sweden as well, same story here. The national bank (Riksbanken) can not increase interest rates because it would have disastrous consequences for the large majority of over-extended loan takers. The low interest rates in their turn lead to the value of the Swedish currency plummeting. No matter what they do, a 'correction' is unavoidable - either the Swedish crown goes to junk status or the number of foreclosures and bankruptcies will skyrocket, followed by the collapse of the housing market, followed by the collapse of those banks which have to write down all those loans with real-estate backing.

If you have a fixed rate loan, inflation is amazing. It is like free money.

Inflation: bails out debtors, punishes savers

Deflation: punishes debtors, rewards savers

Fixed rate loans are only 5 year max in Canada, so yes its great for 5 years but after that have to refinance at the new market rate.

Yes, good point. The standard 30 year fixed loan in the US is not common internationally.

I’m not so sure that a rate hike would be devastating for Swedish loan takers; banks typically don’t give out loans to households that can’t handle large increases. Real estate prices would probably come down a bit, but people would hardly be forced to sell as long as they keep their income. People with large loans typically have large financial buffers.

I’m also suspecting that politicians will step in with deductions, etc.

The Swedish bank (Riksbanken) disagrees:

https://www.riksbank.se/en-gb/press-and-published/notices-an...

High and growing household indebtedness continues to pose the greatest risk in the Swedish economy. To come to grips with the problems associated with household indebtedness, it is, above all, important that measures are taken within housing and tax policy. At the same time, there are structural vulnerabilities and risks linked to the banking system in Sweden. It is therefore important that the banks have sufficient capital and insure themselves against liquidity risks in different currencies. As the risks linked to international developments are assessed to be greater now than in the spring, it is even more important to manage the risks and vulnerabilities in the Swedish financial system.

And Australia

My employer is paying for really expensive publications on economics for electronics industry.

Some of the best paid economists in the world say to avoid capex with longer than 5 year payback time as rates are almost destined to go up due to multiple strong factors, including emerging markets becoming more attractive investments.

You kind of described Japan’s economy.

Japan's a known potential model of the future of the European economy as they're demographically about 15 years ahead of Europe.

Would make sense to some extend.

Japan has close to zero immigration where Europe has a large migration from countries with a much higher birth rate. For Japan this implies that their population will shrink while staying ethnically homogeneous while the European population is likely to increase and diversify. Europe will see more ethno-religiously motivated conflict, Japan will suffer from having a decreasing work force which needs to take care of an increasing number of people in need of care. If Japan continues on this path they'll eventually dwindle as a country and stand the risk of being conquered by one of its more populous neighbours. Europe should have a long hard look what happened in Lebanon when that country was torn apart by a civil war [1] between different ethnic and religious groups.

[1] https://en.wikipedia.org/wiki/Lebanese_Civil_War

Which neighboring country could mount a huge amphibious assault against a developed island nation with still 100+ million people?

The only threat is China and China's aging too...

China, Russia and possibly Korea (which army is far larger than Japan's) come to mind. While Japan still does have 100+ million people the population is going to shrink and those who live there are getting older and older. The low birth rate will make it hard for Japan to maintain a standing army, the ageing population also makes it harder to maintain a reserve force.

Russia has 20 million people more than Japan and its population is also aging rapidly.

Korea? Which one? North Korea? Please :-)

South Korea or a reunited Korea - keep in mind that I'm talking about possible future scenarios, decades from now. There has been and still is a lot of animosity between Korea and Japan [1], this goes back centuries.

[1] https://en.wikipedia.org/wiki/Anti-Japanese_sentiment_in_Kor...

The difference with Japan is that while they have a large amount of debt, they also have large amounts of assets. Japan is the world's largest creditor nation : https://en.wikipedia.org/wiki/Net_international_investment_p.... If you look at that list, you will find that US is the most indebted country in the world and that many Western countries tend to be very indebted.

> When people borrow money for a house, they only consider the monthly payments for the mortgage and not the absolute amount of money they are borrowing.

Yep exactly.

The same thing happens with cars too. The salesman does everything in their power to focus only on the monthly payment amount instead of what you're really paying total in the end.

It's way worse for houses because you can end up in a situation where if you make non-optimal choices with mortgages you can be paying off your mortgage for multiple generations on a low end house. Interest is crazy, but unfortunately most people don't pay enough attention to it or their debt (which makes sense since you need to go out of your way to really learn about it).

> people have to spend decades paying back loans and being vulnerable to a drop in house prices

So what if your housing price drops? If you are in for the long term, just ride it out. The risk in a long term loan isn't fluctuating prices, it is income stability. People don't lose homes because their home value drops, they lose them because they lose their jobs and can't afford to make payments.

>When people borrow money for a house, they only consider the monthly payments for the mortgage and not the absolute amount of money they are borrowing.

That is how borrowing works. Otherwise the lender would not make a profit.

>It creates too much debt in society and generally makes the economy more fragile than it has to be.

and yet the post-2009 economic expansion is the longest ever, and this is in spite of all the anxieties over tariffs and trade wards and the fed raising rates.

> The low interest rates may seem like a helping hand to house buyers but it is in fact the opposite: a transfer of wealth from house owners to people seeking to enter the market, a transfer of wealth from the younger generations to the boomers.

Plenty of millennials own homes. There are tons of examples on Reddit of people in their 20s and 30s with homes and investments. Low rates makes it easier to get a mortgage and compound wealth by owning a home. Rather than a wealth transfer ,which suggests a zero sum game, more wealth is being created.

> and yet the post-2009 economic expansion is the longest ever, and this is in spite of all the anxieties over tariffs and trade wards and the fed raising rates.

The economic expansion outside in the Eurozone is already over and that's despite interests rates going lower and lower. The Fed is done raising rates and it's exactly because the markets absolutely tanked in 2018 with the prospect of rising interest rates.

> There are tons of examples on Reddit of people in their 20s and 30s with homes and investments.

Why don't you look at a statistic instead of Reddit?

> Rather than a wealth transfer ,which suggests a zero sum game, more wealth is being created. Low rates makes it easier to get a mortgage and compound wealth by owning a home.

Rising prices do not equal an increase in wealth. If you pay double the price for the same home at a low interest rate, that's still a huge markup. If the prices fall, you will lose big time. The expectation is that prices can't fall because interest rates will not be allowed to rise. However, CPI inflation can still catch up to asset price inflation, it just hasn't happened yet.

A growing economy should all other things equal lead to a higher home ownership rate as the rising productivity means that fewer man hours are required to build a house. However the low interest rate environment the US (and the whole Western world) has experienced since 2001 has led to a declining rate of home ownership.

> Historically speaking, the homeownership rate has risen above the 50-year low it reached during the second quarter of 2016 when it clocked in at 62.9 percent. Still, it's several percentage points away from its pre-recession peak of 69.2 percent. [0]

[0]: https://www.thebalance.com/the-homeownership-rate-what-is-it...

Edit: you can also have a look at the graph on page five here. It shows that the home ownership rate topped around 2003 and has been on a steady decline since then:

https://www.census.gov/housing/hvs/files/currenthvspress.pdf

I think both arguments sound right to me in some degree.

It is a wealth transfer, and asset prices can’t go up infinitely, unless wages rise equally for the population of house buyers. It seems wages have been stagnating in the US for a while now.

When there’s a shock or wide drop, the latest buyers will be left holding the bag.

But nobody knows for sure, maybe it really is different this time.

Whether the period since 2008 has been a true expansion is arguable. On the surface level equity prices increased, yet there hasn’t been much if any inflation or wage growth and yields have gone down for most assets.

Why does owning a home compound wealth? Honest question.

This stuff is honestly way over my knowledge but the way I see it, as a renter wanting to buy in the next couple years, if I own a house I am paying a mortgage. That gives me equity every payment. So every month instead of my landlord getting my money the bank will and in the end I own the house so can sell it back. Also owning a house opens all sorts of opportunities a renter does not get. Subsidies to install solar panels and save energy would go to the home owner. If you own a house and want a loan for a car let’s say, you automatically get a better interest rate then me because I am higher risk. There are all sorts of ways owning a house can make or save you money. But based on my understanding of this article the entire value of houses will crash at one point as we can’t keep increasing the costs so when the market finally realizes we have been over selling, the people holding the houses at that point risk devaluation of their home and potentially lost all their investments. Again I am trying to figure what this all means and there are certainly a lot more knowledgeable people here that know more then my layman’s view.

> and yet the post-2009 economic expansion is the longest ever, and this is in spite of all the anxieties over tariffs and trade wards and the fed raising rates.

A crisis is not an economic fact that magically happens when some predetermined values for some set of indicators are reached.

A crisis is a mix of two things: 1) a big financial/economic issue that affects an important sector of the economy, 2) widespread panic.

There are already multiple candidates for 1), but what hasn't happened is 2).

Why? That's anybody's guess.

My guess is Trump.

For people to panic, there needs to be sustained media coverage and focus. But now whatever Trump says is more important than anything else for the media.

If you look at the media since Trump became president, the most important issues have been all stuff related to his government, and whenever the media has focused on anything for too long, he's come out with some other thing that the media shifts their attention to.

So we've had lots of small panics, which by now have mostly desensitized the public.

If someone like Trump can continuously interrupt the media, they effectively control it through disruption, and then the media cannot focus for long enough on anything for people to fully panic and cause a full blown crisis.

Actually 'crisis' just means 'decisive change is impending'. There doesn't have to be panic.

Coordinated or systemic movement of money in any form can be a crisis. There doesn't have to be reporting or emotion for the situation to spiral out of control. That is to say, the panic can follow the crisis.

> That is to say, the panic can follow the crisis.

You are technically correct. Maybe I should have used the word recession instead.

What I mean is that a lot (most?) of the damage in a crisis is actuallly done by big masses of people reacting to it rather than the crisis itself.

Think about bank runs, widespread stock shorting and selling, people not investing because of uncertainty, lenders abruptly calling their loans, etc.

> If someone like Trump can continuously interrupt the media, they effectively control it through disruption, and then the media cannot focus for long enough on anything for people to fully panic and cause a full blown crisis.

Coming out of two straight years of one collusion “bombshell” report after another I agree with you. I avoided the markets when I was unsure if what was being said was true (it definitely seemed true to me).

Now it seemed to be largely politically motivated and I’m totally “insensitive” to the MSM reports on Trump and I’m ready to make long term investments in the country again. Too bad I stayed out of the markets for the last year because those looked to be good times.

Making an investment asset out of a requirement to survive is capitalist insanity. The housing market crashes every 10-20 years, while most mortgages are 30 years, this means that many people stand to lose their entire "investment", but oh wait, its their home, not their fucking Robinhood account.

Saying that things are going well, therefore we are making good decisions is a terrible argument.

The loss or gain is not realized until the home owner sells the house. So just don’t sell during the crash.

People don't foreclose on their homes because they want to.

I thought in 2008 People were walking away as soon as they were underwater ?

In Denmark, we have introduced regulation that limits buyers to only be able to borrow 4 times their yearly household income, when buying a house in the largest cities. That puts a limit on how much the house prices can rise.

The situation is, on one side, concentrations of wealth that are too large to invest in anything that captures a positive return; and on the other side, an endless list of things that desperately need investment but cannot capture returns to the individual investor, such as decarbonisation and healthcare.

Negative rates are the market signalling that it's time for a wealth tax. Although these are tricky to implement because wealth can be moved very easily.

That's really only the case when you have regulation limiting supply growth upwards, and/or limited amounts of land you can sprawl outwords. I grew up in chicago and we love to build high rises (chicago engineers were the ones that designed the Burj Khalifa to give you an example of our love for architecture), and we have hundreds of miles of farmland we can sprawl out to forever increasing supply of homes.

Could just build more houses, though.

Yes. But the high house prices feed through to higher land prices so the newly built houses will also be more expensive than they otherwise would have been.

In most places, except the obvious exceptions, the government can also create new land for construction.

Absolutely. But not all land is created equal, most people want to live near a big jobs market, meaning near a big city. So the price of this land will inevitably go up.that being said, I am sure there is a lot municipalities could do to make housing more affordable.

True. Still, one alternative model to consider is one where the recent trend of opportunity concentrating in a few big cities could reverse. Either due to market forces (cheaper everything outside of the big cities), remote work becoming more prevalent, or both.

I would live to see this. But are there any indications that this is actually happening?

Indications of a net change - not sure, but individual examples, yes. For example, some parts of Eastern Germany have seen a trend reversal in recent years. Also a number of previously poor ("cheap") regions in southern Europe are experiencing a massive investment and tourism fueled boom. Portugal seems like a good example for that.

Honest question: how should people seeking to enter the market behave in such a situation?

I honestly don't know what the answer is.

I've resorted to moving way out. I'm probably going to buy a house somewhere I can work remote from.

I'm not paying 300K+ for a small home near a city with jobs, sorry, it's just not happening. Whether I can afford it or not is irrelevant, the value just isn't there other than as a proxy for "this now allows me to get higher paying jobs in the city and... continue the cycle?"

I think this is something that really needs to be addressed from a climate perspective as well.

It is cheaper, dramatically so, for me to live way out, buy a car, and use it for everything. I use an electric car, and I chuck a load of the savings into offsetting, and I'm pretty sure I'm negative.

But a far better model would be if people just stopped the rent seeking bullshit and let me build close to town.

You're not paying 300k+?

Clearly I live in the wrong city. 300k would get you a leasehold to someone backyard with a tent in it where I live.

I need to move.

Hard to say, but I saved like hell and then looked for houses no bank would ever lend on, and no landlord would want. Got a dumpy old architecturally protected house on three acres an hour from the city (by train) for €68k. Of course it's a huge pain in the ass (thatcher started yesterday) but I had almost no buying competition.

I guess many people will not, and that this will lead to a higher rate of renting. That promotes economic inequality as the middle class is then prevented from entering an important way building savings: owning a house outright.

The special thing about housing though is you have to pay monthly payments for housing. This is the reason why those monthly payments are privileged in consideration.

So the alternative is rent, which at the moment in many places is looking like a less appealing alternative.

The transfer of wealth in the housing market happens from one group to another regardless.

I agree with a lot of your sentiment and what you're saying, but I think the monthly payment focus isn't irrational.

> and being vulnerable to a drop in house prices

And there are no financial constructs to spread the risk?

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