Negative Equity #Moduloft #Affordability. #AuthenticPlaceMaking #PlaceMakingBasics #RealRLD #SkinInTheGame
http://www.realrld.com/blog/placemaking-basics-by-for-and-of-the-people-basics-by-realrld-coming-soon-our-requirements-and-approach Rent Seekers or Placemakers? https://en.wikipedia.org/wiki/Henry_George
One day in 1871 George went for a horseback ride and stopped to rest while overlooking San Francisco Bay. He later wrote of the revelation that he had: I asked a passing teamster, for want of something better to say, what land was worth there. He pointed to some cows grazing so far off that they looked like mice, and said, "I don't know exactly, but there is a man over there who will sell some land for a thousand dollars an acre." Like a flash it came over me that there was the reason of advancing poverty with advancing wealth. With the growth of population, land grows in value, and the men who work it must pay more for the privilege.https://en.wikipedia.org/wiki/Progress_and_Poverty In his 1946 foreword to Brave New World, Aldous Huxley writes "If I were to rewrite the book, I would offer the Savage...the possibility of sanity...where community economics would be decentralist and Henry-Georgian".
#AuthenticPlaceMaking #PlaceMakingBasics #RealRLD #SkinInTheGame
I wrote this following bit in 2011.
Some people say a crash in house prices is necessary as a Valuer that has valued Oil refineries and Gas Terminals in another life I have one comment on that. There is a way of calculating the base market price on a real asset such as property the logical lower end price or entry price for property is not zero just as the maximum price must be related in some way to income multiples. ( my final year thesis for my degree was the Contractors Principle of Valuation for Taxation of Gas Terminals in Scotland, I had been employed by one of the Seven sisters. ) My very simple contention is that the basic price of a property in a market where there is no longer any activity.In a crashed or stagnant market supply and demand does not provide a Market price of comparable transactions in this situation the economic replacement cost of the property needs to be refrenced. This is a fairly easy thing to calculate there is a thing called Spons an almanac of prices/costs for the contracting world) that gives average building materials and labour costs for building. Today I would say £150 persqft would be a sensible price per square foot for a fairly traditional british house build there are cheaper ways and better ways to build but this is a first principles 101. The price of any property has a land element generally this is around 1/3rd of the total price any amount of sophisticated analysis will get you a variation around this figure and so on but the humble 1/3rd 1/3rd 1/3rd usually brings home the bacon so I’ll use it here so that then is £150 psft for the land element. Finally there is the last 1/3rd which is for the unknowns opportunity cost and profit. If we want to take the profit out again the maths to do that is easy but I’ll leave it as a 1/3rd for now. Right that gives a base cost pers sqft of £450 per sqft. For a more basic budget build one could argue for £100 per sq ft giving £300 pers sqft . Anyway if we say take £275 psf which is very low and in all probability below the actual economic replacement cost if you take a 750 sqft 2 bedroom apartment that would be a bottom line economic replacement cost value of £206,250. Regardless of anything people need somewhere to live in the future and an economic value has to be placed on production my question is this what policies going forward an banking system will support the proposition that every family should at least have a 2 bedroom family home and the cost of providing it would be roughly the figure I am suggesting if one factors in the opportunity cost for instance the government has lots of land it could contribute for free but its value still has to be recognised even if not charged for. These are open Market prices and assumptions but provision of housing has to be priced some way and I do plan to get into some analysis of the Affordable so called social housing side fo the equation as I say this is a first principles starting 101. I am going to develop this hypothesis further but just wanted to get it on paper going forward from this blog, in a melt down of the banking system and complete crash of the UK property market these first principles of economic replacement cost will be necessary to avoid a huge potential scam. And Here we are now in December 2020 9 and a half years later. I have indeed been developing this Hypothesis further. Moduloft Finance Affordable Finance A Framework of Understanding (First Draft Still Proof Reading)
https://en.wikipedia.org/wiki/Negative_equity Negative equity is a deficit of owner's equity, occurring when the value of an asset used to secure a loan is less than the outstanding balance on the loan. In the United States, assets (particularly real estate, whose loans are mortgages) with negative equity are often referred to as being "underwater", and loans and borrowers with negative equity are said to be "upside down". People and companies alike may have negative equity, as reflected on their balance sheets.
History The term negative equity was widely used in the United Kingdom during the economic recession between 1991 and 1996, and in Hong Kong between 1998 and 2003. These recessions led to increased unemployment and a decline in property prices, which in turn led to an increase in repossessions by banks and building societies of properties worth less than the outstanding debt. Since 2007, those most exposed to negative equity are borrowers who obtained loans of a high percentage of the property value (such as 90% or even 100%). These were commonly available before the credit crunch.
NO PART of the financial crisis has received so much attention, with so little to show for it, as the tidal wave of home foreclosures sweeping over America. Government programmes have been ineffectual, and private efforts not much better.Now it is Barack Obama's turn. On February 18th he pledged $75 billion to reduce the mortgage payments of homeowners at risk of default. Lenders who help people to refinance their mortgages will receive matching subsidies from the government. These could reduce a borrower's monthly payments to as little as 31% of their income, and last for up to five years.https://www.independent.co.uk/news/negative-equity-set-to-pass-into-housing-history-1358889.html
Latest estimates suggest that the number of homeowners affected - which increased sharply after the 1992 election with house prices dropping more than 15 per cent- has more than halved to below half a million this year. Negative equity could be history by next May. The conventional wisdom is that house prices will continue to rise steadily without a return to boom conditions. The reasoning is that the bust is still too fresh in buyers' memories, so few will be willing to offer silly prices. In addition, the signs that the pent-up demand from buyers is being released should be met with pent-up supply from people who have been unable to move for the past five years.
David Miles, professor of economics at Imperial College, thinks this is a straw in the wind. House-price inflation could soar beyond the 5 to 7 per cent that most economists are forecasting. "You can't explain past frenzies unless you assume people do have very short memories," he says. "Once first-time buyers see that prices are definitely rising, they will come into the market and it will become a self-fulfilling boom." Even if the late 1990s turn out to be a pale shadow of the late 1980s, house prices will almost certainly stay ahead of inflation. That is their long-run trend in a country where earnings increase and land is in fixed supply. And after the housing nightmare of the past five years, there is some catching up to do.https://en.wikipedia.org/wiki/Negative_equity
History The term negative equity was widely used in the United Kingdom during the economic recession between 1991 and 1996, and in Hong Kong between 1998 and 2003. These recessions led to increased unemployment and a decline in property prices, which in turn led to an increase in repossessions by banks and building societies of properties worth less than the outstanding debt. Since 2007, those most exposed to negative equity are borrowers who obtained loans of a high percentage of the property value (such as 90% or even 100%). These were commonly available before the credit crunch.https://www.economics.ox.ac.uk/materials/working_papers/paper499.pdf
3.2.2 Measuring the debt-equity ratio and negative equity. One commonly used definition of the ratio of mortgage debt to housing equity measures equity by the estimated value of the residential housing stock owned by the household sector (as published in the National Income and Expenditure Blue Book, and interpolated to a quarterly frequency). A substantial proportion of owners of housing equity, however, have no mortgages. We prefer, therefore, to adopt a measure defined as the average mortgage for those with mortgages relative to the average house price. We take the mix-adjusted index of second-hand house prices, normalized to the average value of houses traded in some year, as a proxy for the average house price of mortgaged properties. An estimate of the proportion of mortgages in negative equity can be derived from the average debt equity ratio, using equation (4). The coefficients λ and λ0 can be calibrated approximately to match estimates of the proportion of households with negative equity. CML research (Tatch 2009) suggests that between 7.6 percent and 10 percent of UK mortgages were in negative equity in February 2009 (using Halifax and Nationwide house price indices, respectively, for the fall in UK house prices between December and February). CML previously estimated a peak of 17 percent of mortgages with negative equity in the early 1990s. A figure of 9 percent is assumed
for 2009Q1 and 15.5 percent for 1995Q4, to calibrate λ and λ0. 18 The debt equity ratio defined by the average mortgage to average house price is plotted in Figure 6, with the implied proportion in negative equity from equation (4). The calibration implies 9 percent of mortgages were in negative equity in 2009Q1 compared with 1.5 percent in 2002Q4 and 15.5 percent in 1995Q4. Comparable figures at the same dates for the debt equity ratio were 71.4 percent, 51.6 percent and 77.9 percent. Moves in the proportion in negative equity become more pronounced as the average debt equity ratio rises, due to the non-linearity of their relationship, see equation (4). One further small adjustment is made in the assumed relationship between negative equity and the ratio of average debt to average equity. It seems likely that a high number of recent possessions would have temporarily depleted the count of mortgages in negative equity, below those implied by the average debt-equity ratio. To take account of this, we subtract the cumulated number of possessions cases over the previous two years19, scaled by the number of mortgages outstanding, from the proportion of negative equity implied by equation (4).
To illustrate the magnitudes implied by this research, a 10 percent increase in the debt-service ratio, for example due to the mortgage interest rate rising from 4 percent to 4.4 percent, is estimated eventually to raise the possessions rate by around 19 percent, and the 6 month arrears rate, corrected for measurement bias, by 15 percent. This calculation holds the proportion of mortgages in negative equity and the unemployment rate fixed. At 2009Q3 house price and debt levels, a fall in house prices of 1.4 percent would raise the proportion of mortgages with negative equity from an estimated 8.5 percent to 9.35 percent, a 10 percent proportionate increase. An increase of this magnitude in the rate of negative equity is estimated eventually to increase the possessions rate by 7 percent and the 6 month arrears rate by 3.5 percent. A ten percent increase in the unemployment rate from 8 percent to 8.8 percent is estimated to increase the possessions rate by 2 percent32 and the 6 month arrears rate by 10 percent.