Comment by iso1210 | Hacker News Reader

Comment by iso1210 | Hacker News Reader

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> Round here in Cornwall the jobs are things like surf instructor, supermarket worker, barperson, etc. That's not gonna stretch to the local house prices.

That was the case. A colleague of mine, originally from St Just, moved to London for work as so many have to do. Another from near Cockermouth did the same. Both now work remotely full time from their 'home towns' on decent wages.

Covid has done wonders for local communities - good jobs are now available for people without having to move across the country.

https://www.rightmove.co.uk/properties/112353359 for example is under £300k. Assuming you got it for 300k (asking price is 285k) with a 15k deposit you're looking at £1,278.19 a month with nationwide on a 30 year rate, well within the range of a couple earning £35k each, which is a reasonable

Now sure if you didn't get the education to get a decent job. Hell even on 25k each, Nationwide can lend upto £275k for a first time buyer - just need that deposit.

For a small village of less than 5,000 people nowhere near any sort of city or population centre, this seems like a lot. £1,278/month is well outside the range for a lot of working class and even middle class families. The median gross salary in Cornwall was £27,223 in 2020.

I'm baffled by your comment to be honest; not very long ago I could buy a house in Bristol for the same or less.

> For a small village of less than 5,000 people nowhere near any sort of city or population centre, this seems like a lot.

Not really, people want to live there, and can now live there while working in a decent job, raise a family, send kids to school, etc.

Without remote work, villages like that are meaningless. Communication and social changes caused by covid have allowed people to actually live in remote villages.

> For a small village of less than 5,000 people nowhere near any sort of city or population centre, this seems like a lot.

Not really, people want to live there, and can now live there while working in a decent job, raise a family, send kids to school, etc.

Without remote work, villages like that are meaningless. Communication and social changes caused by covid have allowed people to actually live in remote villages.

House prices have shot up since the mid 90s as they become more affordable. A new 3 bed home in say east anglia is more affordable now (compared with median wages) than it was in 1980, despite being far far more expensive to buy. That's because

1) Most households have two incomes rather than one 2) Interest rates are much lower

House prices rise to the level people are able to pay for them. Remote work has allowed people to live in villages like St Just and continue in a decent job, which is great. Before it was mainly retirees and holiday owners, neither of which were good for the area.

Median post-tax household income in the UK is £30k. So, £25k each is roughly £20k post-tax, so you're looking at the top 30% of households.

Admittedly this includes households including people who are "retired" but I think that's reasonable as plenty of people have to keep working even though they're receiving a pension.

https://www.ons.gov.uk/peoplepopulationandcommunity/personal...

Median weekly earnings for full-time employees reached £585 in April 2019, an increase of 2.9% since April 2018 [0]

That's £30k a year.

[0] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwor...

> Now sure if you didn't get the education to get a decent job. Hell even on 25k each, Nationwide can lend upto £275k for a first time buyer - just need that deposit.

This horrifies me. Even the slightest increase in interest rates will ruin a huge number of home owners.

On the other hand, home ownership in the UK isn’t normal either. It’s only since the 50s or perhaps 60s that the average person has been able to afford a home. And then again in the 80s with council houses sold off to tenants.

Usually mortgages are a fixed rate for the life of the loan (usually 30 years) -- at least here in the USA. Variable rate (eg "ARM") mortgages are also available but are less common and mostly used for short term flipping and the like, for the very reason you say -- nobody wants to risk a rising payment due to rising rates.

Is the situation very different in the UK? Do Britishers actually prefer variable rate mortgages for some bizarre reason?

Edit: I did my own research and was shocked to find that in the UK it sounds like variable is indeed more or at least as common as fixed and that even fixed tends to be fixed only for the first 5-10 years!This is the opposite of the US, where I know someone on a normal middle class circumstance who just secured a 3.25% 30 year fixed mortgage, and this is extremely common right now if you have good credit. Even the "scary and risky" variable mortgages in America are things like a 5/1 ARM which is fixed for the first 5 years, which sound like they'd be relatively low risk for the UK!

I am baffled. Is the great advantage for the American homeowner simply due to the wages of empire, ie dollar supremacy? Federal policy favoring homeowners? Or what? I did always wonder how banks could afford to provide such a good deal.

This is a vast difference really worth wondering about; I hope someone has some insight.

Source: https://www.money.co.uk/mortgages/should-you-get-a-fixed-tra...

> Usually mortgages are a fixed rate for the life of the loan (usually 30 years) -- at least here in the USA.

Note that the very low share of ARMs is a recent (post Great Recession) phenomenon. Prior to that, ARMs were typically a large minority of loans.

https://www.newyorkfed.org/medialibrary/media/research/curre...

Ah, makes sense. Low rates, you want fixed. High rates, you want variable. I just don't understand how the bank puts up with it.

Most of the ARMs were sold with very little downward adjustability. With rates at historic highs, the ones I was seeing when mortgage shopping in 2006ish consistently had wide open upward adjustment and one 0.25% step available of downward adjustment to their minimim rate from the initial rate.

The bank wasn't taking much risk on the adjustable rate.

I mean the risk the banks take today offering a fixed 30 year note at a very low rate, if there is significant inflation or rate increases anytime soon. It seems like a very good deal for the buyer right now and for the last decade.

Uk banks offer a wide range of mortgages. Interest rates used to be set by the government rather than the Bank of England and were a political tool until the late 90s. That added to uncertainty and pushed people to fixed mortgages. Then the era of low interest rates arrived and people were locked in to high fixed rate mortgages which had a fee to get out of.

Now there are Australian type mortgages, basically repay as quick as you can, that are variable rate plus X. Or fixed and floating, or pure fixed. It generally depends on your personal position.

A lot of things in the UK are set up essentially with the notion that you shop around as much as you can to get the best deal, but it extends to credit cards, utility bills, internet, your mobile phone plan, etc. and not just one-off purchases.

You have little to no incentive to stick around as a long-term customer when there will be a fresh new deal enticing you to switch whenever your last contract expires. It's often more expensive not to switch as there's no benefit to being loyal to an energy or telecoms firm.

This arguably extends to mortgages too.

At the root of it all is that there's more competition between these elements and legislation has forced businesses to make it easy to switch providers at no cost. Anecdotally, I've been through three different ISPs in as many years in order to keep my internet costs down.

That doesn't directly address the question, it just highlights a mindset.

Fixes in the UK now are typically 2, 3, 5 or 10 years, certainly not life of mortgage. Idea is that prices increase and you repay the mortgage and you remortgage onto a better rate (so start with 90% 5 year fix, after 5 years you've paid down to 85% of the original value, but value has increased so you now remortgage onto 75% LTV which is a lower rate than you would have on 90% LTV as it's less risky.

Mortgage rates in the UK are far lower than 3.25% though -- 80% LTV on a 10 year fix with nationwide is 2.8%, 2 year fix is 1.54%.

Drop that to 60% LTV and 2 year is 1%, 5 year 1.1% and 10 year 2%.

It all falls down if rates were to shoot up, or house prices were to shoot down. The UK government traditionally protects house prices like the US government protects the S&P though. A house price crash is bad for polling.

>This horrifies me. Even the slightest increase in interest rates will ruin a huge number of home owners.

And the slightest increase in inflation will benefit them.

A competent central bank would make sure that it all balances out.

Having lived through the 70s and 80s, the last 30 years have been relatively stable by comparison. But different. Zero interest rates, ERM, and QE, versus inflation, stagflation, currency devaluation, decimalisation and the winter of discontent. I can wait to see what black swans we get in the next 20 or 30 years. My point being really, the classic finance phrase, past performance is no guarantee of future performance.

The real problem is how much the bank earns off the interest it charges you throughout your life while it had to do what?... create new money from nothing into the money supply with special permissions given to it by the government. This is why housing is so expensive to begin with. This bullshit needs to stop.

That's a concern after more pressing issues are solved.

Banks don’t get to create money. Quantitive Easing isn’t something banks can call up on demand and it isn’t banks getting loads of free money. Instead they sell certain slightly risky assets to the government at a slightly higher price than they would be worth without QE. This small price difference is the free money but the bigger difference is that the banks have more liquid cash to use for e.g. making loans.

I think mortgages are pretty competitive, especially for reasonably well-paid people and there isn’t really that much profit made by the banks (your interest corresponds to inflation and the risk that you default on your loan with the house price having fallen.

Money today is worth more than money in 25 years and you have to pay the difference.

"Banks don’t get to create money." nope, they create debt, which is the same in practice.

Well, if we want to use correctish terminology then banks grant credit (the number on your bank account) when debtors offer a promise to pay (the debt contract).

Commercial banks create money when lending money.

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

> Banks don’t get to create money

Literally every loan a bank gives out is mostly made up on the spot, everywhere in the world.

In some countries, banks are subject to reserve requirements — typically from fractions of a percent to some percents of their liabilities to depositors. Basically: banks need to cover the savings of people.

In the UK (and many other countries), this is not the case; banks are not required to have cash on hand in relation to their liabilities to depositors.

Instead, they are subject to capital requirements, which means they need to have sufficient equities (cash, securities, other financial instruments) with sufficient liquidity in relation to their risk-weighted assets (credit and loans). In effect: banks need to cover the investments of the investors.

The term for the type with reserve requirements is fractional-reserve banking: https://en.wikipedia.org/wiki/Fractional-reserve_banking

The bank is collect money in the future that is worth less than what they leant out today - time value of money.

Charging 0% interest means the bank is losing money.

I don't get how people can keep saying this. Is it that people are told banks lend out money from depositors in school?

Anyway, if you sign a contract that says you shall pay me every month for 30 years OR ELSE I get to sell your house (and whatever else you own, seize your income etc) then the document with your signature IS the value created and I can sell that document for what it is worth.

So the bank creates money not entirely out of thin air but against this contract.

This is a fantastic deal for them as there is almost no risk.

The seemingly few percent interest per year over 30 years quickly ads up to 2 or 3 times the initial sum.

I suppose this would be a reasonable amount roughly around the point where 3 out of 4 houses and the ground under them would just vanish in thin air with their owner stopping all payments after about 5 years on average.

The reality was that some people still had to pay rent for their flooded home.

So we are all suckers for putting up with the scheme, welcome to the club.

>>Charging 0% interest means the bank is losing money.

> I don't get how people can keep saying this. Is it that people are told banks lend out money from depositors in school?

They don't? Where is the money from? Due to complicated reasons (ie. bundling mortgages into mortgage backed securities and selling them), it might not be the case that the mortgage issued by Bank A is funded by Bank A's depositors, but it is the case that it's funded by depositors/investors somewhere.

From a technical perspective you need deposits but from a practical perspective deposits never leave the system except in the case of a bank run where everyone tries to withdraw their money. If we assume a cashless system then banks can never run out of deposits and deposits never limit loan creation. Saving doesn't increase the number of deposits, it just shifts them around. Borrowing money increases the number of deposits.

https://www.investopedia.com/articles/investing/022416/why-b...

However, saving does have one important function. It creates a hole in the economy and that hole can then be used for investment spending (motivated by a borrower taking on a loan) without causing inflation.

>If we assume a cashless system then banks can never run out of deposits and deposits never limit loan creation

...except for reserve/capital requirements, right?

>However, saving does have one important function. It creates a hole in the economy and that hole can then be used for investment spending (motivated by a borrower taking on a loan) without causing inflation.

In other words, capital isn't free as the parent poster suggests.

> Where is the money from?

It is created ex nihilo, limited by reserve concerns (which include hard requirements for some banks)

Note that the most of the money never exists in the form of currency, it is just accounting entries in the banking system.

> Where is the money from?

https://youtu.be/b6_SLwReMqo

The system makes some sense because your fiat isn't completely worthless paper as many people think but there is something missing. It's that promises inherently have a tendency to lapse so we artificially introduce inflation. Well, the problem with inflation is that it requires you to borrow more money so you replace the lapsed promise with an empty promise that is bound to lapse as well. If we were truly serious about letting promises lapse then we would consider having negative interest rates rather than inflation.

Rather than have 0% interest and 2% inflation there would be -2% interest and 0% inflation. Less need for endless debt growth and government stimulus.

It's not a lot to be fair, and interest rates are below inflation.

I've wondered lately, since the government backstops both banks and mortgages, shouldn't it just cut out the middleman? It could either give cheaper mortgages or use the difference as tax revenue.

There's this weird brain worm from the 1980s in a lot of western democracies where everything government does has to be bid out to companies and driven by profit motive under the theory that it produces better outcomes. It doesn't seem to be working after decades of this experiment, but people keep trying.

Well, I personally think that the banks profit margins are way too high but let me explain why they deserve to charge a profit in the first place.

We can make promises to each other. Essentially write debt contracts to each other at no fee. The problem is that we trust each other but if we want a more complex economy than a barter system allows, then we need to make it possible for a third party to trust the debt contract. Through the introduction of banks as middlemen they use their resources to check how trustworthy the debt contract you offer to the bank is. In exchange you get money, which is a liquid claim on your debt contract and thousands or even millions of other debt contracts. Thus the bank is primarily in the business of managing risk and the management of risk demands a net interest margin. If the bank didn't make money off of loans then any bad loan would lose the bank money and it would go bankrupt over the long term. In other words, the surplus profit that the bank made off your loan is its reward for correctly managing risk.

>This is why housing is so expensive to begin with.

Or it could be that housing is in high demand and banks offer financing so people have more money but since location is a monopoly, supply never catches up with demand in popular areas. Speculators themselves simply predict that there is sufficient demand for you to be willing to bay $400k for a house. Speculators didn't create that profit margin, it is the monopoly of land that created it and they merely exploit it.

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