Why So Misunderstood?
This topic is very poorly understood. One reason it is misunderstood is because there are large interests in banking and real estate that promote the misconception. The misconception is that higher and higher real estate prices are a good thing because they become a substantial portion of net worth for normal citizens. Now it is generally understood that lower prices are better for things that people consume. However, this has been placed on its head as housing is considered an “investment.” Therefore, the higher the price, the logic goes, the more net worth that the individual has. This logic falls down for several reasons. The first being that a house is not only an investment, it is also consumption or an expense. The second reason is that once one sells a house, a new one must typically be purchased. Therefore having more expensive housing in general, makes citizens less wealthy as they have a lower percentage of their income to spend on other things. Banks want houses to cost as much as possible because this increases the cost of the mortgage. Real estate agents and other real estate professionals like mortgage brokers want house prices as high as possible because they are paid a commission based upon the either the house price or the mortgage size. Continual lobbying from these groups is one of the reasons for the real estate interest deduction. This is money that is paid to banks, but is tax deductible to the buyer. This means that the government and society overall is subsidizing the private purchase of real estate. The higher the amount of the mortgage, the greater the subsidy to the banking industry. Ordinary citizens are not supposed to understand this but rather to talk about how home buying increases the economy. Unstated, but implicit in our system is that bankers, real estate agents and construction companies know what is right for us and for our system and that their priorities should take precedence over other forms of economic activity.
See the explanation from Michael Hudson below.
“A simple example may illustrate the debt treadmill. Consider a little brick home in a suburb of Cleveland, Ohio. There are two economic conditions under which you could own it. Choice One is to own the home free and clear of a mortgage, in an economy that values it at $100,000. Choice Two is to own it in a debt-fueled market that values it at $250,000, requiring the buyer to take on a $100,000 mortgage to afford it. This appears to maximize wealth creation inasmuch as the homeowner has $50,000 more net worth.
But the Choice Two homeowner owns only 60 percent of the property. At 6 percent interest the $100,000 mortgage absorbs $500 a month, not counting amortization payments. This $6,000 annual interest charge – plus $3,000 for self-amortization on the typical 30-year mortgage – absorbs 30 percent of gross income for a homeowner earning $30,000 per year. Net of about $10,000 in wage withholding for FICA and income tax, the homeowner must pay 45 percent of take-home pay even before property taxes, fuel and repairs.
So which homeowner is doing better: Choice Two with higher net worth on paper, or Choice One which is less debt-ridden and whose home therefore is more affordable?”
Reference
http://www.michael-hudson.com/articles/financial/080417HillaryJoinsConspiracy.html
