If building houses where they are actually wanted, which we should, what do we do with the unwanted lot?

Sir, Robin Harding holds “What should not be in doubt is that supply limits are the single biggest problem with housing… reform the planning rules, and let people build homes where they are actually wanted.” “Planning rules are driving the housing crisis” August 15.

I agree, of course we should build houses where they are actually wanted, but the challenge of what to then do with the unwanted lot, poses major difficulties. 

It is not solely “the role of falling interest rates in pushing up house prices” that has caused houses to become financial assets. Much other preferential treatment is given to the financing of house purchases. Among other, because the financing of houses is perceived so safe by regulators, banks need to hold much less capital against residential mortgages than, for instance, against loans to entrepreneurs. (Those entrepreneurs who could create the jobs that would allow for mortgages to be duly serviced and utilities to be paid).

All that has helped house prices to shoot up and become the most important financial asset for way too many, whether for the owners, or for the banks or other who have helped many owners to extract whatever equity he had in his house.

As a consequence our society, our economies, have become mindboggling exposed to the need of keeping up house prices, while simultaneously needing house prices to become more affordable. To navigate well those waters will not be an easy task. 

Looking at some demographic realities perhaps what needs to be done is not to build more houses, but to build more senior citizens residences, thereby freeing many upstairs so that children could move up from the basements or other young move in.

@PerKurowski

Preferential access to bank credit for those buying houses have also turned houses in attractive investments, and so a house is no longer just a house

Sir, I refer to Sarah O’Connor’s “Cities only work if they accommodate rich and poor” March 21.

She is correct although it would be more precise saying that cities only work if they accommodate all those workers required to make a city work.

Here is my take on this issue.

By politicians and regulators giving so much preference to the purchase of houses, the prices of houses have been inflated beyond reflecting the need of houses, and so have also turned houses into attractive investments. That has created a financial disequilibrium because most workers who would anyhow struggle to pay for just houses, will find it impossible to service mortgages that also reflect the value of investment assets.

Most politicians would naturally want to be seen as helping people buy affordable houses, but they do wrong in that. What they should do is to help people to be able to afford housing, something which is absolutely not the same thing.

Before we clear out this distortion, our cities will suffer from what O’Connor’s describes. Alternatively, current house asset owners, might be required to start building houses where they allow the indispensable workers to live at a reduced rate… something that could affect the value of their houses.

In many places that are too distant for the firefighters to arrive in time, we have already heard of building houses in order to provide homes close by to these.

PS. For the purpose of the capital requirements for banks regulators have risk weighted  residential mortgages with 35% and loans to entrepreneurs with 100%, which means bank can leverage much more with residential mortgages than with loans to entrepreneurs, which means banks earn much higher expected risk adjusted return on equity with residential mortgages than with loans to entrepreneurs, which mean we will end up sitting in houses without the jobs that could provide the income to service mortgages or utilities.

PS. How much of current house prices is the direct result of easy financing? I ask because it would be interesting to know how much we are financing with easy financing of houses the easy financing of houses.

PS. One of the biggest pension crisis will be when we see all those who trusted houses to be safe investments, trying to cash out in order to convert these back into main-street purchase capacity to use in older days L

PS. Too much preferential finance for the purchase of houses, which increases demand for houses, which increases houses prices, and turns safe homes into risky investment assets, also promotes inequality as those without a house are further left behind… until L

@PerKurowski

High house prices, besides a function of low interest rates, is a function of senseless bank regulatory favoritism

Sir, You write: “With or without a price crash, [resulting from interest rates rising] thinking about real estate must change… A house is not, after all, a productive asset. It is a shelter.”, “When property becomes a roof and a floor again”, July 15.

With Basel II regulators allowed banks, when financing residential houses, to multiply their capital with 35.7 times the net risk adjusted margin, in order to obtain their return on equity. When lending to an unrated SME or entrepreneur, those who could help create new jobs, banks were only allowed to multiply that same margin 12.5 times.

The only reason for that senseless distortion was and is that regulators, as did and do the banks, considered financing houses something much safer than financing some risky enterprises. 

Sir, compared to the case in which such regulatory differences did not exist, what gets much more credit than it should, and what much less? Or are you among those naïve enough to believe bankers have a responsibility, for the good of society, to overlook such skewed incentive structure?

Extrapolates that, and the logical result is the future, we would all end up sitting in ample homey shelters, but with no jobs to be able to pay mortgages, utilities or food.

Sir, such is the short-termism of regulators you have cared nothing about to understand and denounce. On the contrary, you have dedicated yourself to silence my warnings.

PS. By the way if an AAA rating was present, like in the AAA rated securities backed with mortgages to the subprime sector, banks could multiply that margin by 62.5.

PS. Where do you think fiscal sustainability is heading if house prices crash and much property tax revenues vanishes?

@PerKurowski

Basel rules favor building “safe” basements for children to live with parents over financing “risky” job creation

Sir, Chris Watling writes “High house prices contribute to one of society’s great divides: that is between the haves and the have nots; between the older property-owning generation and younger renters unable to get on to the property ladder… Banks [when financing houses] now require substantially less capital than would have been required before Basel I and one-eighth of the capital required versus a corporate loan.” “Blame Basel capital rules for the UK’s house price bonanza” June 15.

Absolutely! The Basel Committee’s risk weighted capital requirements helps finance the “safe” basements where kids without jobs can live with their parents, but not the “risky” SMEs or entrepreneurs that could give the kids the jobs that could help them afford to buy a house… and less so at the current high credit inflated prices of houses.

How many letters have I written to you about the distortions in the allocation of bank credit to the real economy these regulations cause? Here are just some quite similar to this one. http://teawithft.blogspot.com/search/label/basements

Sir, you define yourself as “Without fear and without favour”… but the way you have silenced my arguments, only shows you running scared by some of your prima donnas with weak egos.

@PerKurowski

P.S. Washington Post. December 2018: “Affordable homes or houses as investment/retirement assets?”