How much false wealth is in the UK as a result of house prices?

PasturesNew

BiggaThanBen wrote: »

Inflation can seriously affect your savings ..., or "house prices can never fall" is replaced by "money value never fall" now? I would only rely on gold, Picasso paintings, own oil platform etc.

Inflation only affects the value of the money if you are changing asset class.
I sold a house. I banked the money. It is there waiting to buy another house. As house prices are falling, that money will still buy a better house than the one the money was created from.

It would only be a true statement if I were saving money to save up for a future purchase. Although even this isn't true in the case of saving to buy a house starting from £1 in the bank.

JonnyBravo

PasturesNew wrote: »

Inflation only affects the value of the money if you are changing asset class.

Eh?


Clever inflation that..... knowing where you got the money from and what you're going to spend it on.


What rot.

PasturesNew

JonnyBravo wrote: »

Eh?


Clever inflation that..... knowing where you got the money from and what you're going to spend it on.


What rot.

How is it rot?

e.g.
Sell a house for £100k.
Bank the cash.
Leave it.
Interest is 5% (let's forget compound interest and tax to pay)
House prices drop so that same house is down to £75k 5 years later.

5 years later:
Savings value is £125k
House cost is £75k

So, inflation is out of that loop.

lewt

PasturesNew wrote: »

Shhh. You're not supposed to make notes.
In fact, I don't even remember it.

There's no shame in owning nothing. So long as you owe nothing.

Actually, I gave away and binned everything I owned 9 months ago. The lot. Decided I didn't want to put stuff into storage, I'd simply travel light and possess the bare minimum.

I am now renting (furnished) and don't see the point of buying things. I want things to be easy when I move from here ... because I have no idea when that would be, where to or why. I could do anything from relocate for a job, through to buying next door in 5 years. Anything can happen.

Right now, I can put everything I own in my one small car and relocate anywhere I want at the drop of a hat.

when you say car do you mean caravan? and when you say relocate do you mean tow ?

PasturesNew

lewt wrote: »

when you say car do you mean caravan? and when you say relocate do you mean tow ?

Actually, Plan A was to buy and live in a camper van.
But things didn't quite work out quite right and I ended up renting. Which wasn't part of the plan. I wanted to be free to go wherever I wanted, felt really tied down by a 6-month AST.

Gallovidian

tomstickland wrote: »

It might seem obvious, but I was thinking about this last night.
Take an asset like houses that start off with a net value based on selling price at that time.
Then make borrowing money very cheap and relax the rules so that more money can be lent to people.
The increase in money supply means that prices can rise and people can still afford the same type of properties.
Prices do rise (for whatever reason).

Equity is "released" to fund consumer spending and to allow purchase of more properties.

Prices rise further.

The net sale value of the same set of houses is, say, now twice as much.
Call me old fashioned, but none of this has actually produced any output of value, apart from maybe stimulating other economic activity. So where has this apparent wealth come from? Well, it's based on the sale price of the assets. That in turn depends on a supply of money to pay for it.

Imagine that the full value is already covered in savings that people have and things will be OK. However, if the source of funds to cover that apparent wealth is more borrowing, then it only exists if those funds are there.

Say lending criteria and rates return to the conditions at the start. If the entire asset set was to be sold then there wouldn't be the funds there to pay for it. Their value is only a notional agreement on their sale price. Say that the entire stock returns to the value it had at the start. What then? You just end with a lot of people owing money to a lender to pay for things they bought.

Having written all of that I've just realised that it's very, very simple.

All that's happened is the rising value of the asset has allowed people to borrow money using the asset as security. If the asset falls back to its original value then they just have exposed borrowing.

My thinking two years ago was that house prices were fuelled mainly by cheap borrowing - a lot of people will always borrow as much as they can get hold of. When cheap borrowing is not available then prices will drop. Meanwhile a lot of consumer spending has been done using wealth that doesn't really exist. All that's really happened is that money has been borrowed.

Good, indeed excellent, post.

House price inflation falsely made people feel rich, and at the same
time got us into greater debt to the banks. Once the bubble bursts
the usual people; us, have less, and the usual people; bankers, have
more. All without them turning a sod or making a nail.

Ron2256

PasturesNew wrote: »

Actually, Plan A was to buy and live in a camper van.

I guess this is very MSE. Martin would be proud of you.
No council tax to pay.;)

http://www.youtube.com/watch?v=1b74SiLxf8k

PasturesNew

Ron2256 wrote: »

I guess this is very MSE. Martin would be proud of you.
No council tax to pay.;)

http://www.youtube.com/watch?v=1b74SiLxf8k

No income tax, no VAT ...
.... could have made a killing selling pegs and lace wherever I went.

Then saved up for a round lump of glass and a chalkboard, some fake gold charms and a shawl.

setmefree2

Just to add a new twist:-

If I borrow £100, 000 @ 5% costs £175, 377 (£1.75377 * £100,000)

If the market falls and interest rates rise 1% I pay the same
£90,732 @ 6% costs £175,377 (£1.9329 * £90,732)

At a 2% rise in interest rates
£82,713 @ 7% costs £175,377 (£1.75377 * £82,713)

Either way the buyer pays £175, 377 per £100k. But as interest rates rise the seller gets less and the banks get more.

JonnyBravo

PasturesNew wrote: »

How is it rot?

e.g.
Sell a house for £100k.
Bank the cash.
Leave it.
Interest is 5% (let's forget compound interest and tax to pay)
House prices drop so that same house is down to £75k 5 years later.

5 years later:
Savings value is £125k
House cost is £75k

So, inflation is out of that loop.

You've quoted nice figures.

Thing is.... so far.... none of that has happened.
(ok yes you've done the selling bit.... that's not the crucial part though is it?)

Is it likely to happen? Yes, IMHO. Is is certain? No.

Does that mean inflation only affects you if you are "changing asset class"? No.