My last comment on the "Fin De Siecle" post suggested that less emphasis in the "valuation-literature" has been placed on the single biggest investment of most people's lives, where the single biggest investment of most people's lives was touted as the purchase of a home.
I still don't doubt the relatively lower level of emphasis in the literature, but further reflection on how I phrased "the single biggest investment of most people's lives", makes me think that this phrase may be somewhat disingenuous.
This is based on a perspective related to house prices that I have been talking about for a while now. The point is that home owners (as opposed to property investors) shouldn't panic too much if a major fall in house prices does happen to be imminent. Furthermore (and especially), home owners who have only recently taken out their mortgage should also not panic, even though they may enter into "negative equity" on their investment.
The logic here is that "What Goes Up Will Most Likely Come Up Again After Going Down". So even though one may enter into negative equity after a fall in house prices, house prices should eventually recover after the fall and resume their upward trend again. So what I'm really trying to get at here is a concept of "inter-temporal perceptions of equity".
If one's investment will eventually return to "positive equity" in the future, can one doubt (in a philosophical sense) that one's investment was ever in negative equity? What is negative equity, but a perception of value at a certain point in time, when mortgage repayments seem like they are being paid towards something that is worthless. However, if individuals can take a less myopic view of life-cycle investment, then they will realise and appreciate that their mortgage repayments on a "negative equity" investment will not be wasted. As time passes and the property market recovers, their mortgage repayments will turn out to be a much better investment.
If this message about "inter-temporal perceptions of equity" could be rolled out to the public then multiple benefits would arise. Firstly, the extent of a fall in house prices would be much smaller, as the initial correction would not trigger as much panic amongst all those who enter negative equity (upon the initial correction). Secondly, the banks would not have as many bad debts on their books as people realise that negative equity isn't the end of the world, simply a perception of how much value their investment has at a very particular point in time.
There is a nuance (and possibly several) to this perspective that I'm peddling. If one doesn't want to lose out by selling or emigrating upon the occurrence of negative equity, then one has to stay in the same location until one's property recovers in value. This has some severe implications for labour market flexibility and is a particular thorn in the side of my perspective (Thaks to Peter for pointing this out). However, until crowds can appreciate the nuances of inter-temporal perceptions of equity, I will be reluctant to call them wise.
I still don't doubt the relatively lower level of emphasis in the literature, but further reflection on how I phrased "the single biggest investment of most people's lives", makes me think that this phrase may be somewhat disingenuous.
This is based on a perspective related to house prices that I have been talking about for a while now. The point is that home owners (as opposed to property investors) shouldn't panic too much if a major fall in house prices does happen to be imminent. Furthermore (and especially), home owners who have only recently taken out their mortgage should also not panic, even though they may enter into "negative equity" on their investment.
The logic here is that "What Goes Up Will Most Likely Come Up Again After Going Down". So even though one may enter into negative equity after a fall in house prices, house prices should eventually recover after the fall and resume their upward trend again. So what I'm really trying to get at here is a concept of "inter-temporal perceptions of equity".
If one's investment will eventually return to "positive equity" in the future, can one doubt (in a philosophical sense) that one's investment was ever in negative equity? What is negative equity, but a perception of value at a certain point in time, when mortgage repayments seem like they are being paid towards something that is worthless. However, if individuals can take a less myopic view of life-cycle investment, then they will realise and appreciate that their mortgage repayments on a "negative equity" investment will not be wasted. As time passes and the property market recovers, their mortgage repayments will turn out to be a much better investment.
If this message about "inter-temporal perceptions of equity" could be rolled out to the public then multiple benefits would arise. Firstly, the extent of a fall in house prices would be much smaller, as the initial correction would not trigger as much panic amongst all those who enter negative equity (upon the initial correction). Secondly, the banks would not have as many bad debts on their books as people realise that negative equity isn't the end of the world, simply a perception of how much value their investment has at a very particular point in time.
There is a nuance (and possibly several) to this perspective that I'm peddling. If one doesn't want to lose out by selling or emigrating upon the occurrence of negative equity, then one has to stay in the same location until one's property recovers in value. This has some severe implications for labour market flexibility and is a particular thorn in the side of my perspective (Thaks to Peter for pointing this out). However, until crowds can appreciate the nuances of inter-temporal perceptions of equity, I will be reluctant to call them wise.
4 comments:
i knew that going to that sociology conference in France was going to be a bad influence on you!
You just read a critical behavioural economics post Liam, not sociology!
Furthermore, I'd like to try and formalise my theory of "inter-temporal perceptions of value". Maybe at some later stage in the future, when it woukld be worth more!
This is an interesting article which makes some very good points. As a follower of the stock market, I can see an echo of what you say in holding shares. The market for both property and stocks is going up in the long term. Of course there will be occasional pullbacks. But if we're investing for the long term, a pullback shouldn't worry us as the trend is upwards. "Inter-temporal perceptions of equity" is a term I hadn't come across before, but basically it's about the anxieties of those who buy and hold for the long term. By the way, If people ask me where's the best place to get a mortgage I usually recommend a company I know from personal experience, called Interesting Mortgages. They have special schemes for all kinds of people, whatever their circumstances. They’re very helpful and reliable and have a good reputation:
http://www.interestingmortgages.co.uk
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