Imagine a broad 50% cut: what economic consequences?

What if everybody currently looking to sell cut their asking prices 50% tomorrow (contingent on a quick sale within 4 weeks at the new reduced price)?

How would this affect the economy? Some suggestions of mine follow:

Obviously, we’d see hordes of people no longer owning a house in negative equity.

The state would see a boost in Stamp Duty.

House sales would explode, as people currently on the sidelines would see their dream houses suddenly become affordable.

The new buyers would pay drastically lower mortgage payments.

Mortgage payments would be lower than typical rents, in cases where people bought with a big deposit. The “rent is dead money” cliché would be repeated ad nauseam.

What do you think would happen in this hypothetical situation?

"
Obviously, we’d see hordes of people no longer owning a house in negative equity. "

you’d be wrong there, if HP’s dropped 50%

We wouldn’t be able to borrow the cash to buy Prada bags at BT.

We’d just have to deal with the terror fraught by some people will have to put off becoming a millionaire until the next decade

I should have stated my assumption more clearly: I’m assuming everyone who’s currently trying to sell their house successfully sells it at 50% below current asking price.

I’m further assuming that that would leave many people in NE.

Anyone else got a notion of how the economy would fare in such an event?

Up or down?

Developers would be screwed - they’re carrying about 100bn of debt as it is.

Banks would be screwed - they’re owed that 100bn.

Anyone who bought in 2004 or later would be in negative equity or have sold for a loss (and have a big debt left in the bank).

New lending would be near impossible, since the banks would have swiss cheese where their balance sheets once were. Quite likely most of the gaffs wouldn’t actually sell, since there aren’t enough cash buyers (and anyway, buying for cash would just prevent someone else borrowing that money).

So down i’d guess.

Not sure why banks would necessarily be screwed.

The people in Neg Eq would, in general, pay off their debt, with only a tiny percentage going into repossession.

The deposits in banks would be higher, as new buyers’ after-mortgage income would be higher. So presumably that would allow a certain level of new lending.

Also, even if existing banks were screwed, the world is full of banks who aren’t currently exposed to the Irish mortgage market.

If a new breed of prospective buyer emerged (as they certainly would, in the case of a 50% price cut), then new banks would be eager to enter the Irish mortgage market to lend to them, if their income was sufficiently high and stable.

There are plenty of individuals with high incomes, independent from the Irish house market (Microsoft execs, as a banal example) to whom new entrants would be delighted to lend.

If everyone dropped their asking price by 50%, some houses would be bid back up to their real value, which might only be 10% or 25% or 40% off current asking prices.

Some might even be bid above their current asking price, given the numbers of buyers. You can usually get a premium selling into a strong market.

Other houses still wouldn’t get any offer, and they owners might have to drop the price again.

To demonstrate how it would play out take this example.

Family renting a 2 bed house in some provincial town from landlord A. Paying €1000 a month in rent.
Landlord B has an identical house sitting empty and he’s been asking 300K for it. He drops the price by 50% to 150K

The family can buy the house from landlord B and pay a mortgage of €750 a month instead of €1000 a month in rent.

Landlord A sees he can no longer get €1000 rent. He can lower the rent below €750 in the hopes of keeping the family renting, or he can try and sell them the property for the same €150K that landlord B is selling for.

The end result is the family paying a lot less per month either in rent, or mortgage that they currently do. And one or the other landlord still has an empty house.

You can’t clone buyers. No matter how low prices get, there simply aren’t enough people to fill them all, so some houses in some towns are going to always be empty

-Rd

Right, so landlord income would fall somewhat, and after-rent income would rise somewhat.

So, renters would be rewarded more handsomely for their work.

Small scale experiment is underway:

SIMI VALLEY, Calif., Feb. 8 /PRNewswire/ – D.R. Horton has announced
unheard of **savings up to 50% off **on a variety of homes at 23 participating
neighborhoods throughout Southern California. Unlike any Sale homebuyers
have ever seen, D.R. Horton’s UnAuction presents dramatic sale prices and
unbeatable new home value without the auction hassle. The UnAuction’s homes
will go on sale promptly at 10 a.m. on Saturday, February 16 and again on
Saturday, February 23 only.

During the two-day sale, all homes will be sold on a

first-come-first-serve basis. Homebuyers must pre-qualify in person or by
phone at a participating neighborhood to take advantage of the perfect
timing and get an unbelievable deal. Pre-qualified buyers need to arrive
early and present a $5,000 cashier’s check for the best selection and
before these brand new homes are gone forever!

prnewswire.com/cgi-bin/stori … 2623&EDATE

If these California houses really are worth more than the 50% knock down price that they’re asking, then somebody with a pit of cash could pick up the phone and offer to buy the lot for 55% or even 51% of the asking price.

The fact that nobody is willing to do that suggests that they might not even be worth the 50% price that they’re talking about.

-Rd

If they dropped 50% overnight I’d expect the following:

Some of the people who sold would end up holding a huge amount of unsecured debt. These people would drop their spending considerably and would soon be forgotten about from an economic point of view. They would continue to effect the economy by working but their spending would not count for much.

The people who came out of it with a profit would most likely sit on their money for a while, or maybe look to buy a better house with all the lower prices

Renters would have a great time as the lower house prices would cause more investors to come into the market and thus depress rents further.

People who have been renting and saving for the past few years would start to try out the market and maybe start playing sellers off each other.

Banks will become very risk averse seeing as they are holding all this unsecured debt. (That is if they let the owners sell at that discount) You would be lucky to get an 80% mortgage and I would imagine the banks would scrutinise your income very carefully.

You would see more young stay at home mums/dads as couples do not both have to work (unless they were the sellers). this could lead to a lot of bitterness as the 40 - 50 year olds who have to work watch the 20 - 30 year olds drop out of work after marrage and look after the sprogs at home. Meanwhile they have to keep the shoulder to the grindstone to keep paying down the debt.

Overall the economy would slow are the cash drains from the system. No more remortaging, banks being super careful with lending, savers money going into property so not so much temptation to spend it.

All in all it would be a return to normality after the hungover of the party had lifted. houses at 50% of todays prices are much closer to historic norms than now.

A big assumption. With residential construction comprising 16% of GDP and employing huge numbers of people, unemployment is sure to rise and you won’t be able to pay a mortgage on dole money.

We have to treat this as a mental experiment, becaus eit makes no sense in real life (why is the price falling? What about the response to that? etc.)

I guess the answer to this would largely be given in the relative “wealth” versus “income” effects.

A 50% reduction in housing costs would produce a substantial positive real income effect. It would accrue over time to new entrants and cohorts as they increase the spend on housing (i.e. buy a bigger house as their family expands). It represents a 50% recution in the cost of the single largest element of your cost of living.

Now the wealth effects, which would be negative. NO, HOME OWNERS WOULD NOT SUFFER A NEGATIVE WEALTH EFFECT OF ANY MATERIAL AMOUNT!!! (OK I fel better now, that is the last time I will mentin that. Maybe). Negative wealth effects would accrue to all those long property. "investors, sepcuvestors, holiday home owners and developers who haven’t been fast enough on their feet. The effects would come through more quickly, but (IMO be smaller in magnitude than the positive income effects that are large and accrue extermely widely).

So in balance, a net negative effect on output in the short term, but offset by a much larger positive effect on output of the medium term (10 years).

Net effect, Ireland would expect to enjoy a significantly higher standard of living in 10 years or so than otherwise. But some people (those very long property) will be worse off and those only a little net long (“I kept my apartment as an “investment” when I trade up”) might be net unchanged positive income, negative wealth), while the bulk of people finish in the black as better off. Note that those current home owners that would be tipped into “negative equity” would still be doing the same as they would have otherwise - pay off a fixed amount they borrowed; there would be frictional problems over a shortish period of people who find it more difficult to move - but that doesn’t burden them financially per se.

So, what are we waiting for??? :wink:

Hail Gekko!!!

Can I sign up for your news letter? Is there any Political party out there Ballsy enough to fly this Kite?

The competitive effects are not to be underestimated. With a reduction in the cost of housing we can put a halt to spiraling wage demands without affecting the standard of living and helping protect the Multinational jobs which we are in danger of losing overseas and upon which any real growth has been based.

We can also reduce the scandalous amounts of taxpayers money wasted on purchasing land for infrastructure projects that should have been CPO’d at agricultural prices.

That North Dublin land buy for the Prison was the greatest act of fiscal stupidity by a minister supposedly of a capitalist and radical anti public cost party.

If it was his own money he wouldn’t have spent it…

But our Wealth, Geckko, won’t somebody please think of the Wealth. :stuck_out_tongue: :wink: :wink:

There’s a lot of mentions of Irish banks being very cagey abouttheir money in a 50% fall scenario. I take it this means they’d be loth to issue new mortgages.

And yes, I agree that existing banks in the Irish mortgage market would be at least hesitant.

But I suggested that foreign banks, who *wouldn’t *have been exposed to the Irish housing market prior to 2008, would be tempted to come in. They wouldn’t be nursing wounds from the 50% drop.

I’m no expert in banking, so maybe you could point out the major flaws in this.

Oh noes. Does this mean we won’t be trillionaires anymore ?!? :cry:

Foreign banks like soc gen and credit suisse and the german banks… oh wait a minute they’re all getting burned…

the banks that didn’t get burned are the conservative ones,

the Govt will have to nationalise an Irish Bank and hope the IMF and workld bank give us a dig out…

It should be up in general, since one of the base costs is slashed, but the main problem would be the stupid banks might go bust messing it all up for everyone. This is the real problem. Who really cares if some developers go bust? They can be replaced in the morning. The banks affect everyone though. I suggest we send the directors to prison forever if they do go bust. The developers I can understand, but the banks are supposed to know better.

This is true, but the problem is that negative equity is a a state of mind. Those people will be depressed, and demand someone solves the “problem”. Then it becomes a question of numbers. How many voters will be in, or care about someone in, negative equity?