Saturday, November 12, 2005

Home ownership

I wonder - what percentage of total income should housing be at equilibrium?

At the moment an average Auckland household would probably make about 40k after tax. the average house is about 350k interest on that a the floating rate (I know its a bit high) is 32k leaving 8k pa for an average family (lets say 4 ppl) or $40 each for food clothes transport and so forth.

This is long run but short run it is effected by

1) the ease of borrowing against a house (since many people borrow to the maximum - making it easier to borrow tends to drive the prices up to a new equilibrium and thus home owners borrow an extra amount for no gain) obviously it is getting easier which pushes up prices and lengthens repayment times.

3) the wealth effect - you can dis-save against your own capital in your own house to avoid paying the full cost of borrowing (in this sense you lets say have 300k equity in a 350k house and only seem to be paying 50k on the mortgage (even though in the long run it is 350k worth of opportunity cost) new entrants of course get to see the full cost. This makes it easier to ride bubbles - and is reflected in our dis saving.

3) Population /population density (more density in Auckland would push up their prices at the expense of others). This is one structural reason behind house price rises.

4) The concentration of property in the hands of the wealthy (prices could go up faster than incomes if property moved into richer people's hands). This also seems to be happening as house prices go up and home ownership down. Only way to stop this is to burn the investors (since a rational investor will continue to snap up property as long as it is a good investment slowly forcing out the theoretical "home owners".


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