Interesting article on falling house prices and the 'wealth effect'

justpurchased

Just in case anone wants to work it out.
if we did it as a personal loan it would have been

£65K loan over 6 years

Monthly payment arround £1010
total repayable = £84500

Mewing added around £4K to the mortgage in the end.
We made over payments of arround £16K.
What would we have repayed in 6 years say £10K

Total cost to service mew £30K

i would say if we did nothing to the house we would have had the same colateral as we did when we sold so it worked out £54K cheaper for us to do it via MEWing.

Guy_Montag

Conrad wrote: »

Some of my sucessful self employed clients viewed MEW as the essential capital raising tool, given it was the cheapest form of borrowing, indeed some have the view it is criminal to let free equity languish idly.

There's a distinct difference between using MEW to fund investment & using it to fund lifestyle. MEW (& debt in general) has always been used to fund investment; it's only recently that it's been used to fund lifestyle.

I remember old grandfather Montag telling me - borrow money to get ahead in life, but never borrow just to feel like you're getting ahead. Actually it wasn't as pithy as that, but it amounted to the same thing.

WTF?_2

Conrad wrote: »

I can say with a degree of confidence that people most certainly did MEW to indulge in discresionary spending.

Agreed - as far as I can see most people MEWed simply to blow the lot on consumption of luxury goods. Flash cars, gadgets, clothes, furniture, 'home improvements', holidays. Basically to live a lifestyle they couldn't really afford.

Some at least used the cash to invest in a business which at least offered the possibility of seeing productive returns on their borrowed cash.


One interesting thing is that people who MEWed didn't really see themselves as borrowing money. Nor was MEW marketed that way to the masses - it was all about 'releasing your equity'. Like you had somehow earned a huge pot of cash through your own ingenuity and hard work that was being unjustly hidden away from you.

If you had framed the deal along the lines of "You are borrowing tens of thousands of pounds and are going to lose your home if you don't pay it all back on time" it might have at least had the effect of making a few people think first.

Furthermore, an underbelly of free and growing equity certainly does embue people with the confidence to spend more than they otherwise would.

Again I agree. Knowing that you have tens of thousands of pounds of equity in your house will give most people a lot more confidence to borrow amounts they would otherwise consider unwise. People are great for counting their chickens before they hatch.

Dithering_Dad

Guy_Montag wrote: »

I remember old grandfather Montag telling me - borrow money to get ahead in life, but never borrow just to feel like you're getting ahead.

Does anyone remember those AA financial services adverts where the 'poor' Bev and Trev pull up at the lights in their old banger and see the 'rich' Bev and Trev in their shiny new Volvo? They then exchange annoying 'Hi Bev' and 'Hi Trev' pleasantries.

The aim of the advert was to convince people to get into debt in order to look wealthier, when in fact they were actually making themselves poorer. They don't show the ads anymore, but if they did I would imagine that 'poor' Bev and Trev would drive their old banger past 'rich' Bev and Trev who are stood at the bus stop, their shiny new car having been reposessed.

mewbie_2

Guy_Montag wrote: »

I remember old grandfather Montag telling me - borrow money to get ahead in life, but never borrow just to feel like you're getting ahead.

And my grandfather simply said don't borrow, especially off me.

But these old fashioned expressions need updating. The next generation of Grandads should be offering advice like..
Neither a renter nor an HPC'er be.
Don't borrow tomorrow what you can borrow today.
Look after the pennies...!!!! it.

WTF?_2

Dithering_Dad wrote: »

Does anyone remember those AA financial services adverts where the 'poor' Bev and Trev pull up at the lights in their old banger and see the 'rich' Bev and Trev in their shiny new Volvo? They then exchange annoying 'Hi Bev' and 'Hi Trev' pleasantries.

The aim of the advert was to convince people to get into debt in order to look wealthier, when in fact they were actually making themselves poorer. They don't show the ads anymore, but if they did I would imagine that 'poor' Bev and Trev would drive their old banger past 'rich' Bev and Trev who are stood at the bus stop, their shiny new car having been reposessed.

Yes - those horrible ad memories are flooding back ....

The message was basically that if you didn't have a flash car and lots of expensive stuff, you were a loser. Very nasty propaganda actually, I wonder did they get many complaints?

baby_boomer

carolt wrote: »

some of it will have been spent productively, in doing up and adding value to their homes. But an awful lot has undoubtedly been blown on new cars, holidays etc.- it has helped support the consumer boom we have experienced over the last 10 years.

MEW has not just been spent on houses, cars and holidays.

MEW has been the default way to fund private school fees for parents who had not done the long term planning necessary for such a large outgoing - i.e. the majority!

Look out for a few of the smaller private schools to go to the wall in the next 24 months.

Telegraph - Independent schools at a risk of closure as parents can't afford the fees

Independent - Credit crisis hits private schools - 3 prep schools and 2 girls schools have already gone to the wall

It also doesn't help when the credit crunch persuades the banks to call in their loans with no notice! Hardly fair on those children half way throught their GCSE or A-Level courses .

I wouldn't underestimate, as the Economist article seems to do, the effect of a collapse in MEW - particularly as it will go alongside the impact of a tightening of government expenditure and a rise in unemployment [neither of which have been seen for a decade].

All the "boom" factors have turned negative at the same time .

Generali

The Wealth Effect isn't really about MEWing though (although it is a related phenomenon). It's about people spending a larger proportion of their income than they otherwise would because they feel rich.

For instance, imagine a 55 year old man. He has a private pension plan and a small house paid off in full. Normally he puts aside 10% of his income each month for his retirement. That year he gets his pension statement and sees that his pension pot has shot up in value. Instead of putting 10% aside he spends the cash on a new cat litter tray and a weekend away with the Missus at the Luton Travelodge.

It's a bit of a controversial theory because instictively it just doesn't sound right and it's pretty hard to prove empirically. Asset values tend to go up when times are good so is it a booming economy or rising asset values that cause the extra spending.

I'm inclined to think that the booming economy causes rising asset values and also extra spending. I suppose this time around you could argue that MEW has meant that people could (and indeed have) get at the increased wealth they have in a way they couldn't before. I suspect that it's more a function of the very long boom we've had that people felt super secure and so super inclined to spend. Banks were more than happy to help with the whole process.

Don't forget that the article isn't meant to be a balanced piece on the WE but a review of a particular scientific (ok ok, this is economics, pseudo-scientific) paper. The most interesting bit for me is the last paragraph (from a publication that has been very skeptical about rising house prices for many years):

There is a also a more general point that emerges from Mr Buiter’s paper. Very often there is too much emphasis on the losers from falling house prices and too little on the winners. A fall in house prices is not bad for everybody. In an important sense, a house is much like any other durable good: a fall in prices is a boon for those consumers who have yet to buy one.

Pobby

Really those ads should have gone down the lines of `ere mate, done alright on ya `ouse price ain`t cha. Fancy a new motor, no probs. `ave 20 big ones and get wot ya fancy. Can always have ya `ouse off ya if it all goes belly up. lubberly, jubberly.

I often said to my wife regarding the amount of new cars around and how much that had to be down to mewing. My wife called `` riding around in your equity``. At the time I was drawing from my business about £50k a year and was driving an eight year old car.

I used to work for a wealthy guy, retired airline pilot and I managed a business for him. He always drove old bangers saying that cars are a waste of money.

My eighteen year old nephew borrowed, with interest £24k for a car. Tells me a lot about lenders.

mr.broderick

Pobby wrote: »

Really those ads should have gone down the lines of `ere mate, done alright on ya `ouse price ain`t cha. Fancy a new motor, no probs. `ave 20 big ones and get wot ya fancy. Can always have ya `ouse off ya if it all goes belly up. lubberly, jubberly.

I often said to my wife regarding the amount of new cars around and how much that had to be down to mewing. My wife called `` riding around in your equity``. At the time I was drawing from my business about £50k a year and was driving an eight year old car.

I used to work for a wealthy guy, retired airline pilot and I managed a business for him. He always drove old bangers saying that cars are a waste of money.

My eighteen year old nephew borrowed, with interest £24k for a car. Tells me a lot about lenders.

What are you trying to do to me pobby? :rotfl: