Debate Magazine
See write up of "Moving Out" here, which is infuriating enough, but even worse is the small boy whose parents used to live with his grandparents (not clear whether on mother's or father's side) who can buy a house (in which the small boy is later born and grows up) because "The bank lent them some money". No the bank did not lend them any money at all, quite the opposite: 1. If you lend somebody money, you are foregoing a consumption opportunity, for the time being at least. It's up to you whether you want to charge interest or not, how much you can get depends entirely on what the borrower is willing and able to pay and/or how much you want to get. When banks grant mortgages they simultaneously take deposits and are not foregoing consumption opportunities, they are increasing their consumption opportunities by charging more interest on the loan than they take on the deposit. 2. Where does that "money" come from? a) The bank is just a middleman who splits the zero (with a vested interest in high house prices as this means more lending and deposit taking). b) It doesn't come from the vendor, because he never had that money, he had a house which he magically turns into a deposit. He can withdraw that money in future and spend it on something else (to which more below). c) So actually, the "money" comes from the purchasers. They are the ones who go out to work, transform their labor into wealth for which they receive wages or salary, and they devote a large chunk of that into mortgage repayments, which flow via the bank (which takes its cut) back to the vendor. So they are the ones foregoing consumption opportunities! 3. The true position in 2(c) is not materially different to that small boy's parents renting a home (where they can still have sex and bring up kids etc). If they take out an interest-only mortgage, they are renting the money instead of renting the house, is all. 4. "Ah!" cry the Homeys, "But they have paid for the capital value of the house, they are building up their own capital by paying off the mortgage, this is a form of saving etc etc." Nope, that supposed "capital value" is merely the estimated cost/value of all the future rent which they would have to pay, whether that is for a term of years (a lease) or to theoretically to infinity (a freehold). And borrowing is clearly not "saving" and neither is paying rent or interest - those make you poorer in the long run, not richer. 5. "Ah but..." cry the Homeys, "That house will go up in value, so they are getting richer etc etc." Well yes and no, all it means is that the next purchaser in a few decades' time will be even poorer. It is no net addition to wealth, unlike proper capitalism and investment. 6. Finally, seeing as there is only a marginal difference between renting and buying with a mortgage in financial terms from the purchaser's point of view, why is it different for the current owner? Answer: it isn't. a) Superficially, if the current owner decides to rent out the house, he has to make do with £1,000 a month rental income minus voids and costs etc, and he can't spend any more than what he takes. b) But if he sells, he is credited with a one-off deposit of £200,000, which he can withdraw and spend all in one fell swoop or just leave it in the bank and hopefully get a bit of interest (his share of the rent of interest that the bank is collecting). c) However, what the bank is doing here is dealing with the admin hassle side of collecting the rent/interest (fair enough) and spreading the risk. The banks has thousands or millions of mortgage borrowers, 99% of whom will be paying their mortgage every month, so that's £x million coming in every month, and on average, its depositors will be withdrawing rather less than £x million every month. d) A large enough group of landlords could do exactly the same thing. If you only have two or three homes, there is a small but real risk that in any month, no rent will come in at all or that costs will exceed income. But if thousands of landlords clubbed together and agreed that all the rents go into one account and all costs are paid from that account with each landlord entitled to his appropriate share of the whole, then those landlords would be in much the same position as depositors. So £z million comes in as rent, £y million goes out as costs, leaving a maximum of £x million which can be withdrawn every month. Some landlords/depositors will withdraw their share each month, other will be happy to roll up their share and yet others will withdraw in advance, i.e. they contribute a home generating £10,000 net income every year and immediately withdraw £200,000 to splash out, knowing that they will only be able to withdraw very little in future. e) The counter example is a really small bank, which only has two or three mortgage borrowers and one large depositor. It does not matter what it says on his bank statement, he cannot withdraw more than what the borrowers pay in each month. The risk spreading is not something that banks inherently do, they can only do it because of averaging out a few bad debts over a large number of depositors. Just sayin', is all.
