Tuesday, January 22, 2013

Residential Real Estate is the Credit Cycle

Sankowski finds the Ed Learner paper and says:
I’ve been thinking a lot about this over last few weeks when I have the chance to think. It seems like we are on a real estate monetary standard. Much like how we can use assets like gold to create a commodity money system, it seems like we operate our current monetary system as a real estate standard.
Banks create money against real estate assets. We use this money in our day-to-day transactions, without much thought about what stands behind this money, but most loans are for residential and commercial real estate.
I'm not sure I'd go as far as that, but I do think that the residential real estate market is the primary mechanism through which monetary policy has an effect. When people buy a house, they look at their monthly payments, not the cost of the house or how leveraged they become.

4 Comments:

Blogger Ralph Musgrave said...

“but I do think that the residential real estate market is the primary mechanism through which monetary policy has an effect.” Not sure about that.

Buying a house is a long term investment. No one with their head screwed on will incur that liability just because “monetary policy” has reduced interest rates by one or two percent. Anyone with half a brain knows those rates may go up again in two years time, and then down again, and then up again before a decade is out.

The real problem with the “real estate monetary standard” is that it contains a feed back loop: real estate prices rise, when makes real estate better collateral plus everyone thinks you cannot lose by borrowing and investing in real estate, and that borrowing or “money creation” drives up real estate prices even further, etc, etc.

3:30 AM  
Blogger Neil Wilson said...

Ordinary people don't really think about buying a house as an investment or a mortgage as a debt. Not in the way economists like to suggest anyway.

Ordinary people think in terms of rental payments. How much a month do I have to pay out and can I afford it?

So when rates drop the amount per month drops and more people look at buying because it is favourable with their renting.

And the effect of that is enhanced if you have full term fixed rate mortgages. This is where the US system differs from the rest of the world - since they have fixed rate full term non-recourse mortgages in their system.

The rest of us are lucky if we can fix a rate for two years, and even then the loan if fully recourse.

3:40 AM  
Blogger sheetal sagar said...

This comment has been removed by the author.

8:26 PM  
Blogger Muhammad Amir said...

It seems like we are on a real estate monetary standard. Much like how we can use assets like Dubai property for sale gold to create a commodity money system, it seems like we operate our current monetary system as a real estate standard.

3:11 AM  

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