Why Governments benefit from high property prices, and why they might want to keep prices high?

Jan 27, 2020

Today – look at Why a Government benefit from high property prices, and why they might want high housing prices? To the point it moves away from being affordable – hurting population while benefiting Govs

They all say they don’t – and that their policies will help reduce prices - but why this is either just promises, or a known a lie –

 

Governments could easily solve the property price issues –

1. Incentivise spread
   1. Company and personal tax zones
   2. EPA laws – makes it easier
   3. Infrastructure taxes – should be the opposite – Gov chips in and then gets the price back on the sale
2. Remove costs –
   1. Stamp Duty – one of the biggest ways people thing property prices can drop

 

Wealth effect – The wealth effect looks at the impact of the rising value of assets on consumer spending - A rise in house prices creates an increase in wealth for householders. As a consequence of this increase in house prices, householders will generally:

1. Be more confident about spending and borrowing on credit cards. They can always sell their house in an emergency.
2. Increase in equity withdrawal. A rise in house prices enables homeowners to take out a bigger mortgage. Banks can lend more on the basis of the increased price of the house. Households could use this bigger loan to spend on other items. This can create a significant increase in consumer spending. For example, in 2006, with rising house prices, equity withdrawal added an extra £14bn to consumer spending. In 2008, with falling house prices, equity withdrawal was -£7bn. (people taking the opportunity to pay off the mortgage)
3. Went through a few studies - First, large housing wealth effects are not new. We estimate large effects back to the 1980s. Second, there is no evidence that housing wealth effects were particularly large in the 2000s; if anything they were larger before 2000. Third, we find no evidence of a boom-bust asymmetry that might arise from households hitting borrowing constraints during housing busts
4. often hypothesized that more households used their “houses as ATMs” in the 2000s than before due to automated underwriting, expanded credit, and increased access to home equity lines of credit (HELOCs). Moreover, household consumption may have been particularly responsive to house price changes in the bust because the decline in house prices pushed an unusually large number of households to high loan-to-value (LTV) ratios, causing borrowing constraints to bind.
5. Large housing wealth effects are not new: we estimate substantial effects back to the mid 1980s; 2) Housing wealth effects were not particularly large in the 2000s; if anything, they were larger prior to 2000; and 3) There is no evidence of a boom-bust asymmetry.

 

Why maintain high property prices? Theory - How does a fall in house prices affect the economy?

1. When there is a fall in house prices, there can be a negative wealth effect and a negative impact on economic growth
   1. households can be where most people have their main form of wealth/equity - see a fall in house prices, their main form of wealth declines, this reduces their confidence in the economy – may spend less out of concern – or are more likely to devote a higher % of their income to try to pay off their mortgage early.
   2. Falling house prices cause more people to be trapped in negative equity (a situation where your house is worth less than an outstanding mortgage). This causes a fall in spending and precludes any opportunity for equity withdrawal
   3. Falling house prices have an important psychological impact. A fall in house prices can pop a bubble of rising expectations.
2. Falling house prices have a negative impact on the construction of new houses.
   92. After the 1990 house price crash, there was a sharp fall in consumer spending, and this was a major cause of the recession of 1991-92. Falling house prices weren’t the only factor harming the economy (the economy also suffered from high-interest rates and high value of Sterling) But, falling house prices was an important contributing factor
3. When house prices are lower, and not as much economic activity around it – Gov has lower taxes
   1. State taxes – stamp duty, also fines as an income through EPA laws and restriction of use of land/planning regulations
   2. Federal – make income tax of those involved in property – real estate, developers, construction/builders (make GST as well)
   3. Higher all around prices create more income for Governments
4. Monetary policy - Impact and relationship to interest rates
   1. Most central banks are committed to keeping inflation within a government agreed target - UK CPI 2% +/-1., Aus 2-3%
   2. If a Monetary Policy Committee felt prices was at too a level of inflation - above the target, then they may decide to increase interest rates. For example, the late boom of the late 1980s saw rising interest rates to combat the inflation in the economy
   3. Higher interest rates will reduce the rate of economic growth and moderate inflationary pressure
   4. However, the MPC is unlikely to increase interest rates just because house prices are rising at a rapid rate
      1. Why? Inflation basked only counts the increase in the costs of construction – materials/labour – not the sale price
   5. Also – wouldn’t want to create a situation of raising rates to decrease property prices for potential negative economic growth outcomes
      1. The MPC primarily consider headline inflation and economic growth - can’t use interest rates just to moderate house price growth - by intention at least – but it has the same effect of changing rates regardless of intent
      2. For example, in 2000-2007, there was a housing boom, but the in the UK, USA, didn’t change interest rates because they were focused on inflation and economic growth.

• Similarly, from 2012 to 2016, house prices rose rapidly – especially in Sydney, London, but dropped from 4.75% to 2% in Aus, and interest rates stayed at 0.5% in UK

5. Question – is the relationship between house prices and interest rates – and increased spending correlated or causal – seems to be correlated in certain examples – as money becomes cheaper to borrow – or stays low while wages/wealth increases – additional borrowings can be afforded –
   1. House prices and interest rates – think this may be causal – trend of property – is it likely to continue to be affordable – not if interest rates go up –
   2. Wealth effect and house prices - Effect Causal? Think most likely correlated – but correlation changes
6. Why? Second, in our model, households with negative equity are insensitive to changes in house prices. In the presence of long-term debt, underwater households are not forced to de-lever to meet an LTV constraint and, furthermore, are unable to sell their house without an equity injection. Since these households cannot access changes in housing equity that result from increases in house prices, they are largely unresponsive to these changes, as Ganong and Noel (2017) have emphasized. As a consequence, the large rightward shift in the LTV distribution that resulted from the fall in prices during the 2007-2010 housing bust had two offsetting effects on the housing wealth effect. On the one hand, more households were pushed closer to their LTV constraint and consequently became more sensitive to changes in house prices. On the other hand, more households became underwater on their mortgage to the point that they became insensitive to changes in house prices. In our model, these two effects roughly offset to deliver a relatively stable elasticity in the Great Recession despite a large rightward shift in the LTV distribution.

LVR constraints – are there signs of this in the economy – well, yes – the defaulting rates –

1. If you are behind on your loan – and you aren’t able to pay this for any reason – but you have equity – you would sell and take the money – or be forced to by the bank – if you bought and have negative 10-20% equity in property, or forced to pay bank $60-100k to sell a $600,000 property = cash that you don’t have – you are stuck and may be forced to default
2. When the amount of money that is borrowed to real value (i.e. LVR) is high (which is bad) = less spending in economy as anything spare is likely going to loan repayments

 

Wealth effect – like anything economic manipulated- has diminishing marginal returns and can create a misallocation of resources

1. What happens when the money being printed is creating additional inflation on property – not consumer goods
2. Affordability gets worse while not being detected or included in though process of monetary policy decisions

 

Instead of Governments trying to decrease housing prices – their policies seem to be making it worse –

1. Increasing urbanisation - Another reason – is Climate change effects – and benefits that some say come from cities over living more rurally
2. Town planning and climate groups – book Whole Earth Discipline, Stewart Brand argues that the effects of urbanization are primarily positive for the environment
   1. the birth rate of new urban dwellers falls immediately to replacement rate and keeps falling, reducing environmental stresses caused by population growth
   2. emigration from rural areas reduces destructive subsistence farming techniques, such as improperly implemented slash and burn agriculture
   3. urbanization upsurges income levels which instigates the eco-friendly services sector and increases demand for green and environmentally compliant products.
3. book "Carbon Zero: Imagining Cities that can save the planet", Alex Steffen also speaks of the environmental benefits of increasing the urbanization level
   2. In July 2013 a report issued by the United Nations Department of Economic and Social Affairs warned that with 2.4 billion more people by 2050, the amount of food produced will have to increase by 70%, straining food resources, especially in countries already facing food insecurity due to changing environmental conditions.
4. What isn’t really mentioned is the existence of urban heat islands has become a growing concern over the years.
   1. An urban heat island is formed when industrial and urban areas produce and retain heat. Much of the solar energy that reaches rural areas is consumed by evaporation of water from vegetation and soil. In cities, where there are less vegetation and exposed soil, most of the sun's energy is instead absorbed by buildings and asphalt; leading to higher surface temperatures. Vehicles, factories, and industrial and domestic heating and cooling units release even more heat. As a result, cities are often 1 to 3 °C (1.8 to 5.4 °F) warmer than surrounding landscapes. Impacts also include reducing soil moisture and a reduction in reabsorption of carbon dioxide emissions.