Would a legislated cap on appreciation quell kool-aid intoxication?

Like California, Great Britain has witnessed several major housing bubbles since the early 1970s. Great Britain has growth restrictions like California, so when prices get overheated, supply can’t come to market to blunt the increases. Once these rallies get started, they are self-perpetuating. They go on until Ponzis implode and lenders take away the punch bowl.

Unlike California realtors, estate agents in Great Britain recognize that house price volatility creates volatility in their income in addition to causing a great deal of pain and hardship on ordinary citizens. Rather than lobbying for more volatility and endlessly higher prices as realtors in the US do, estate agents in Great Britain lobby for constraints on appreciation and stable house prices. It’s quite refreshing to see a group trying to do what’s best for homeowners.

Estate agents and surveyors call for house price growth cap

Rics says Bank of England should use powers to calm market as new figures suggest record rise in prices

Hilary Osborne and Heather Stewart — The Guardian, Thursday 12 September 2013

The Bank of England should take action to cap house price rises at 5% a year in order to prevent a dangerous new property bubble, reckless lending and a build-up in consumer debt, the Royal Institution of Chartered Surveyors (Rics) says.

Why isn’t anyone in the United States concerned about a dangerous property bubble or a reckless build-up in consumer debt? I write about it all the time, but I often feel like a lone voice shouting into the void.

In the latest stark warning about the housing market, Rics – which represents surveyors and estate agents – is calling on the Bank to limit house price inflation to rein in consumers’ and lenders’ expectations and give a clear sign of when the Bank would use its new powers to calm the market.

This organization recognizes that kool-aid intoxication (consumer expectation) enabled by foolish lenders is what drives house prices higher. Again, I write about this all the time, but I don’t see these common-sense ideas embraced by popular mainstream media outlets. These heretical notions certainly aren’t being embraced by the NAr.

This week, the organisation warned that house prices are rising at their fastest rate since their 2006 peak.

If the inflation limit was breached, Rics argues, the Bank’s fledgling financial policy committee, which is in charge of safeguarding financial stability, could act.

If it believes a bubble is emerging, the FPC has the power to direct the banking regulator, the Prudential Regulation Authority, to force lenders to set aside more capital against riskier mortgages, for example, which could make high loan-to-value mortgages more expensive.

Given the way lenders have captured their regulators and politicians, getting an agency to act here in the United States would be a challenge. Everyone here completely missed the obvious housing bubble from the 00s. What can we expect when the signs are not so obvious?

Joshua Miller, senior economist at Rics, said: “The Bank of England now has the ability to take the froth out of future housing market booms, without having to resort to interest rate increases. Capping price growth at, say, 5% is one way of doing this.”

Back when I wrote for the IHB, I was approached by a local gentleman named Bill McKim who made a similar proposal (See: Homemania: Understanding the Housing Bubble for great videos). Rather than attempt a legistlative cap, he suggested a 90% captial gains tax on amounts exceeding a 7% rate of appreciation. The result would be the same. Removing the reward of excessive appreciation also removes the incentive to pay any price to capture it.

Removing the reward for appreciation works. Texas limits mortgage equity withdrawal, so borrowers don’t inflate massive housing bubbles in hopes of obtaining free money through HELOC abuse. It’s the main reason Texas didn’t participate in the housing bubble when nearly every other state did.

Rics’ intervention comes amid growing evidence that the UK’s housing market has started to take off, with rising consumer confidence and government stimulus schemes boosting lending and house prices. In August, the Halifax house price index showed UK homes were fetching 5.4% more than in the summer of 2012, and several property firms and estate agents have predicted that growth will top 5% by the end of the year.

Business secretary Vince Cable said this week that the chancellor should consider halting the second phase of his controversial Help to Buy scheme – which is due to begin in January and will offer taxpayer-backed mortgage guarantees – because of the risk of inflating a housing bubble. …

Government officials in Great Britain have completely lost their minds. They are doing everything possible to reflate their housing bubble, and they haven’t implemented any of the restraints on lending we did with the new qualified mortgage rules.

Part of this problem stems from the over-reliance Great Britain has on its banking sector. Ours is too large too, but we have a diverse enough economy to allow our banking sector to shrink. Great Britain doesn’t. If banking goes down, the British economy would shrivel and die. This reality forces the government to do whatever it must to keep the sector afloat.

Rics said its proposed 5% cap had been chosen to take into account UK income growth, currently averaging around 3% a year, and the additional pressure on prices from a shortage of housing supply. However it said it was “not wedded” to the 5% level, and would be supportive of a “more robustly determined” figure.

Why not wed the number to wage growth?

Policies to tackle rising prices have been adopted in other countries, such as Canada, …. There mortgage terms were reduced, lending was restricted and more stringent credit checks were introduced.

Rics said greater transparency would add to the public confidence in this kind of action. Miller said a price rise cap “would send a clear and simple statement to the public and the banking sector, managing expectations as to how much future house prices are going to rise. We believe firmly anchored house price expectations would limit excessive risk taking and, as a result, limit an unsustainable rise in debt.”

That’s exactly what it would do. It’s also why it would never find support here in the United States. The fools at the NAr have not accepted that house prices can only go up at a sustained rate approximating wage inflation. Further, they wouldn’t want this to become common knowledge among potential buyers because then buyers would be less susceptible to bogus claims of appreciation from realtors. It’s a short-sighted, self-serving and misguided belief of NAr members.

Carney has said he is prepared to take action to prevent a housing bubble, a point he reiterated to the Treasury select committee on Thursday.

But any move to calm the market by forcing banks to put more capital aside against riskier mortgages, for example, could clash with Help to Buy, which is designed to encourage banks and building societies to offer loans to borrowers with small deposits.

In other words, any action on behalf of the citizens to curb housing bubbles would prevent politicians from reflating the old bubble to bail out British banks.

Although the second leg of the scheme will not launch until next year, there are signs of a thaw in the market for high loan-to-value mortgages, with surveyors e.surv reporting that the number of loans granted to borrowers with a deposit of 15% or less had increased by more than 40% over the 12 months to August.

So the British are so desperate that they are embracing the low-money down payment options already. Apparently, they learned nothing from the last housing bubble, and they are on their way to bubble number 5.


Would a legislated cap work here in the US?

Realistically, I don’t see a cap on appreciation working very well. First, nobody would support it. The NAr would fight it. Lenders would fight it. And homeowners would fight it. Nobody sees the overriding wisdom of it, so politically, it simply wouldn’t happen.

Plus, it would make flipping impossible, and for whatever you believe about flippers, they do serve a purpose. Legitimate auction flippers rehabilitate distressed properties and recycle them back into home inventory. Most owner-occupants don’t have the time, expertise, or cash to make this happen.

And how would this cap be enforced? What happens when the fair market value is above the cap? How does a seller get out of their property? If they must sell for the capped amount, there will be hundreds of bidders on the undervalued property. How would a seller chose? Imagine the ridiculous letters from buyers and the illicit payments to get around the cap.

There are far to many barriers in the real world to implementing a cap on appreciation. Far better to ban high loan-to-value, and non-amortizing loans as we have done here in the United States. It remains to be seen whether or not our measures will prevent future housing bubbles, but it was a giant step forward — a step they refuse to take in Great Britain.

Just for Fun

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972 SPRINGFIELD St Costa Mesa, CA 92626

$550,000 …….. Asking Price
$620,000 ………. Purchase Price
8/13/2004 ………. Purchase Date

($70,000) ………. Gross Gain (Loss)
($44,000) ………… Commissions and Costs at 8%
($114,000) ………. Net Gain (Loss)
-11.3% ………. Gross Percent Change
-18.4% ………. Net Percent Change
-1.3% ………… Annual Appreciation

Cost of Home Ownership
$550,000 …….. Asking Price
$110,000 ………… 20% Down Conventional
4.37% …………. Mortgage Interest Rate
30 ……………… Number of Years
$440,000 …….. Mortgage
$107,876 ………. Income Requirement

$2,196 ………… Monthly Mortgage Payment
$477 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$115 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$2,787 ………. Monthly Cash Outlays

($399) ………. Tax Savings
($593) ………. Principal Amortization
$175 ………….. Opportunity Cost of Down Payment
$158 ………….. Maintenance and Replacement Reserves
$2,127 ………. Monthly Cost of Ownership

Cash Acquisition Demands
$7,000 ………… Furnishing and Move-In Costs at 1% + $1,500
$7,000 ………… Closing Costs at 1% + $1,500
$4,400 ………… Interest Points at 1%
$110,000 ………… Down Payment
$128,400 ………. Total Cash Costs
$32,600 ………. Emergency Cash Reserves
$161,000 ………. Total Savings Needed
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