Rising house prices makes housing more affordable

Noted Austrian Economist and financial crisis predictor, Peter Schiff, came up with a thoughtful concept he called the “Paradox of Rising House Prices”. The idea was that rising house prices make housing cheaper. Sounds odd, but it makes perfect sense. In 2006 Schiff wrote an article (http://www.safehaven.com/article/5424/the-paradox-of-housingexplaining) that rising house prices are factored in when buyers buy. They expect equity to be formed. That means rising house prices make buying a house more affordable, particularly when houses are easy to remortgage. Simply refinance after one year for whatever price rise your house has given you. But when prices begin to fall, or stall, that affordability gain is lost, making houses more expensive. But there is another theory your editor has pioneered. At least as far as we know. When you buy a house, what do you pay? What are your costs? The price of the home, you might think. Nope, unless you’re paying cash. More likely is that you took out a loan, providing the deposit and making the loan repayments over time. Those are the costs, not the house price. Now, do deposits and loan repayments get larger or smaller given rising house prices? Well, if a bank perceives house prices rising as a safe bet, that reduces risk on the loan transaction very significantly. If the borrower stops paying, the bank is left with an asset that has gained value. Given the lower risks of being in the mortgage business, the market does the rest. Loan providers will compete for business and drive costs for borrowers down. Required deposits fall and interest rates go lower as lenders out bid each other for customers. Eventually, … presto! Buying a house becomes cheaper!

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