Housing – Page 3 – The Menace of Privilege

Saudi housing bubbling

Suppose you are a king. And suppose you have a restless, mostly young population, high unemployment, with most people having to rent because housing and land are too expensive. Few people can get mortgages, because they involve large down payments and high interest rates. Also suppose that you have a big country, lots of land relative to population, and a huge government surplus. What to do?

You could examine why housing is so expensive, and whether there’s a way to make more land available. Maybe that’s happened in Saudi Arabia, but recent news reports give no indication. Instead, the Saudi solution is to encourage the mortgage industry and expand credit. Will that make housing cheaper? Will that make it easier for an underemployed population to get decent housing? Or will it drive up the price of land and feed what seems to be an already-building bubble? It may be that the Saudi objective is to get more of their people into debt-slavery so they’ll faithfully serve the state. I don’t know.

What really puzzles me is how mortgage interest fits into an Islamic-dominated state. Possibly this is like the “Islamic Finance” offered by some U S banks, where no interest as such is charged, but either the price is inflated to compensate for the fact that it will be paid gradually, or the “homeowner” is technically a renter until enough rent has been paid to cover the cost plus what, to others, would be interest.

Bloomberg says the King pledged more than $82 billion for housing, but does not say whether this comprises direct government grants, or is simply some amount of debt which homebuyers will contract. It also says that

Saudi Arabia’s mortgage law will change the way home finance is regulated, from registering mortgages to prosecuting police officers who refuse to carry out eviction orders.

This will be interesting to watch, preferably from a distance.

More about Saudi housing and morgages:

Paradox of geoist publicity

Innovative geoist group Prosper Australia are promoting a homebuyers’ strike against that country’s still-high housing prices. It’s getting them worldwide publicity and certainly seems to be in the interest of non-homeowning Aussies, encouraging them to avoid leveraging themselves in a soon-to-burst land bubble.

But what is the message? The message is, “don’t get yourself deeply in debt to buy a house that may put you underwater in a few months.” I hope the message also is “We at Prosper Australia understand the economy and know how to fix it. Pay attention to us.”

Whether that’s getting thru, I don’t know. But the campaign can’t hurt.

How to prevent economic Ebola?

Economic Ebola is “the virus that infects scientists and engineers and causes them to go to Wall Street rather than create something of societal value,” says Paul Kedrosky. Graduates with quantitative skills are offered salaries up to five times what they could make in productive work, so of course many of them spend their time finding ways to scrape a few million from high-velocity financial markets, rather than designing products or processes that would actually increase society’s satisfaction.

“Let’s save the world by keeping our engineers out of finance,” says Vivek Wadhwa. [Well, they’re not really our engineers, they belong to themselves, but we’ll skip that for now.] A fine idea, but how to do it? One answer might be a financial transaction tax, a tiny levy on each financial trade which could remove the profit from “financial engineering.” It would have no real effect on “long-term” investors who hold a position for more than a day. Seems like a good idea, but of course there will need to be a definition of what is a “financial transaction” for tax purposes, and clever people will find a way to design a transaction which doesn’t meet the criteria.

Maybe a better approach is to eliminate or scale back some of the things that make financial engineering lucrative. For instance, if a land value tax prevented private collection of land rent, the mortage/financial crisis we’re still in would have been much smaller, or perhaps not possible at all. We might want to go back to the classical concept of usury, forbidding all transactions where interest is charged for the use of money. (People can still get compensation for lending money, but it would be as some agreed share of the profits which the investment generates, keeping the lender conceptually closer to the borrower.)

Of course we could start with something simple, like having the government take over insolvent banks, prosecuting and imprisoning criminal executives, letting stockholders, bondholders, and others who have unwisely trusted the bank to absorb the financial loss. That alone would make financial engineering a lot less appealing.

Vivek Wadhwa

Progressive revenue move in Zimbabwe

Harare is now taxing residential parcels based exclusively on the value of the land, with all houses free of tax. The net result is that most homeowners will pay the same or less, but owners of vacant plots will pay “a lot more,” with total revenue expected to increase from US$8 million/month to US$12 million/month. Authorities will not literally value every individual parcel, but assign values based on zones and size categories, providing a pretty good approximation of value at relatively little cost.

In addition to the 50% increase in revenue,

[T]he migration from land and improvements valuations to land only with the rates set by zoning was designed to encourage people to develop land fully or sell it to those who will.

According to the source article, houses in some parts of Harare had already been exempt before the change. Thanks to Gil Herman for the link.

Our local authorities, if they were serious about the need for more revenue without burdening residents, would seek a similar system.

And some Chicagoans might want to try Harare activists’ approach to the privatization of parking and towing.

Collecting the Rent in Hong Kong

Georgists often like to point to Hong Kong as a successful example of funding a community’s needs from economic rent. The result is a prosperous and (relatively) free city, a magnet for immigrants. But our information is old, and numerous changes have happened since the transfer of power, from UK to PRC in 1997.

So I was pleased to spend a bit of time this afternoon with a Hong Kong native, who now lives and works in Chicago. Not familiar at all with Henry George, not even interested in political philosophy as far as I could tell, but able to speak with me about current economic conditions. If I have any errors below, I trust that someone will correct me. Continue reading Collecting the Rent in Hong Kong

Housing costs and land use regulation

Steve Keen did the great service of reading the FCIC report and confirming my impression (obtained without reading it) that it was not worth reading. And a few posts prior, he reported that Wendell Cox and friends are out with another edition of their annual Demographia report, showing, once again, that the ratio of house cost to income tends to be higher in metropolitan areas where housing development is relatively restricted, and lower where developers find it relatively easy to get clearance to build. (Their report is international in scope but I will limit my comments to their analysis of US conditions.) Continue reading Housing costs and land use regulation

Medical tax to burden homebuyers

Yes, the report of the Financial Crisis Inquiry Commission is out. It’s over 600 pages long. Sources I respect say it’s the expected whitewash. I probably won’t ever read it. I still haven’t read the Obamacare Act (yeah, thats not a good name for it, we really oughta call it something like DemoPublicare.) Anyhow, I just found out how it’s going to increase the screwing up of the housing market.

As Lew Sichelman explains, it includes

a highly targeted 3.8% tax enacted as part of the controversial health-care reform legislation that has been signed into law and which Republicans are now trying to overturn.

The tax will apply to individuals with adjusted gross incomes above $200,000 and couples filing jointly with more than a $250,000 AGI. If you and your spouse choose to file jointly, the AGI threshold is $125,000 for each of you.

The Medicare tax, so named because the proceeds are to be dedicated to the Medicare Trust Fund, will be on interest dividends, rents less expenses, and capital gains less capital losses. But the key thing to remember is that the tax is based on whichever is less, the gain you made on the sale of the house or the amount your income exceeds the AGI threshold.

It’s complicated, so it’s hard to predict how it will effect every seller. As always with tax matters, it’s best to consult with a professional.

Of course, the income limits may change (legislatively or thru unmeasured inflation), so any of us who own our housing better save all receipts which might possibly have anything to do with adjusting the basis. But at least it doesn’t immediately affect the rest of us, does it?

Not so. I’d say this is another in a series of moves discouraging old people from selling houses that are larger than they need or really want, and which would otherwise be bought by families with children who could use the space. Earlier policies with similar effect include real estate tax breaks targeted at old people, and whatever programs facilitate reverse mortgages.

So what will homeseeking families do? Most likely, they’ll find houses they can afford, and the probability is that these will be further out. (The tax presumably also applies to sales of high-priced vacant lots, another force discouraging construction of homes on well-located sites.)

So maybe instead of the Obamacare Act, we should call it the Sprawl Enhancement and Old People Stabilitzation Act.

Land prices, not house prices, have dropped

in the past few years, as well illustrated by this article from MSNBC. Homeowner insurance costs generally haven’t declined, because construction costs haven’t declined. (Homeowner insurance covers the cost of repairing or replacing the structure.) If it’s not construction cost, what went down? Must be the land. (ht Rob’t Blau)

I’m struck that an article about homeowner’s insurance doesn’t touch on title insurance, which is having difficulties of its own.

Bank bails itself out

The subhead of this (1/1/11) Tribune article summarizes well:

$15 million Marquette Bank program offers subsidized home loans to buyers who purchase homes in subdivisions of client builders

You’re a bank. You made some construction loans (or were they even land acquisition loans?) to residential builders who are now unable to repay. If you repossess the land you surely will have to recognize a loss; maybe your capital ratios will be endangered. What do you do?

You lend money to buyers on favorable terms, which they use to buy houses in those subdivisions. You hold the loans in your own portfolio, so they need not conform to recently-tightened underwriting standards. Win-win, at least for the bank and the borrowers.

We Institutionalize Kleptocracy

That’s how Yves Smith describes the probable outcome of the latest bunch of mortgage finance scandals. We already know that lenders lied, brokers lied, consumers were instructed to lie, and the whole house of cards was built on perpetually-rising land prices. In recent weeks, and especially the past couple of days, we are learning that the back office lied too, nobody bothered to process much of the paperwork, it was easier to just forge documents as needed, and for many parcels it will be difficult or impossible for tell who really owns the mortgage (which likely will never be repaid anyway as it far exceeds what the property could be sold for).

The solution? Smith (and others) expect the federal authorities to move in, Continue reading We Institutionalize Kleptocracy