I'd be interested in seeing real house prices with real mortgages. Are people taking out larger loans in real terms? How much of the discrepenacy between house prices and income is mitigated by equity?
I'll see if I can find more data around real prices. As for equity mitigating the discrepancy, I think you're right. It's new buyers that are negatively affected by higher prices while existing homeowners gain equity. One benefits at the expense of the other.
This is something that I think about in terms of a potential crash. If it is equity only, then I suppose there is a significant cushion. But homes with higher and increasing equity are often refinanced to purchase other homes with mortgages themselves; this seems to me to poke holes in that cushion. When homes with greater and increasing equity are refinanced to pay off consumer debt, holes in the cushion appear again. This seems to me to be particularly dangerous when equity in homes in the past 10 or so years and certainly in the last 2, as well as tendency to refinancing as opposed to renew, are both a function of an exuberant environment with low interest rates. I don't know how to measure assess that risk. And perhaps I'm missing something here. But to me, it seems quite simply that many people are using one form of debt (e.g., refinancing the equity in a home) to get more debt (e.g., to buy another home with a mortgage). And at the foundation of that equity is also debt - its ubiquity in the markets driving up home values. Thoughts?
You're pointing to several connected issues. Debt upon debt creates fragility that can lead to a Minsky moment. Debt in many respects is being used to feed the system rather than create productive assets. Many people are using their homes as ATMs to pay for vacations, cars, renovations, etc. Not everyone is doing this, but enough to create broad-based fragility. Subprime mortgages in the US around 2008 were only about 12% and a smaller portion of those were in default. (Don't quote me on the %.) But that was enough to unravel the financial system.
*about 12% of overall mortgage market (I think). Similar story for the % of overall mortgages that were underwater. Regardless of the exact numbers, the point is that these crises can be triggered by what's happening at the margins.
I'd be interested in seeing real house prices with real mortgages. Are people taking out larger loans in real terms? How much of the discrepenacy between house prices and income is mitigated by equity?
I'll see if I can find more data around real prices. As for equity mitigating the discrepancy, I think you're right. It's new buyers that are negatively affected by higher prices while existing homeowners gain equity. One benefits at the expense of the other.
This is something that I think about in terms of a potential crash. If it is equity only, then I suppose there is a significant cushion. But homes with higher and increasing equity are often refinanced to purchase other homes with mortgages themselves; this seems to me to poke holes in that cushion. When homes with greater and increasing equity are refinanced to pay off consumer debt, holes in the cushion appear again. This seems to me to be particularly dangerous when equity in homes in the past 10 or so years and certainly in the last 2, as well as tendency to refinancing as opposed to renew, are both a function of an exuberant environment with low interest rates. I don't know how to measure assess that risk. And perhaps I'm missing something here. But to me, it seems quite simply that many people are using one form of debt (e.g., refinancing the equity in a home) to get more debt (e.g., to buy another home with a mortgage). And at the foundation of that equity is also debt - its ubiquity in the markets driving up home values. Thoughts?
You're pointing to several connected issues. Debt upon debt creates fragility that can lead to a Minsky moment. Debt in many respects is being used to feed the system rather than create productive assets. Many people are using their homes as ATMs to pay for vacations, cars, renovations, etc. Not everyone is doing this, but enough to create broad-based fragility. Subprime mortgages in the US around 2008 were only about 12% and a smaller portion of those were in default. (Don't quote me on the %.) But that was enough to unravel the financial system.
*about 12% of overall mortgage market (I think). Similar story for the % of overall mortgages that were underwater. Regardless of the exact numbers, the point is that these crises can be triggered by what's happening at the margins.