Bigger deposits equal less savings.

An often overlooked aspect of finance is that mortgages are actually a brand of savings, as perverse as that may sound, you have to consider what happens when you pay off a loan over time. The ‘interest’ is the part that pays for the right to use money from the future (which is what credit is, it’s moving money through time) in the here and now, the other part is a ‘capital’ repayment.

When you repay capital you are making a balance sheet gain (or for those into more up to date accounting speak, you make an improvement on your ‘statement of financial position’), even if prices stay static, over time you will eventually owe zero and that means you have a large asset which is the end result of this ‘savings’, albeit not in actual cash.

When you have a housing scarcity and rents are rising, this acts like a ‘tax’ on income, rent and mortgages are paid in after tax income, so the urge to buy when buying is cheaper and obtain a fixed outgoing (as you can with a fixed rate) means that people naturally may start to favour a purchase.

The macro-prudential rules prevent this by increasing the deposit required, banks play into the rules by saving ‘exemptions’ for the strongest and most attractive clients – a form of ‘selection bias’.

It means people stay in the rented sector longer, thus driving up prices as the flow-side falls out of kilter with the stock-side of the market and these higher rents then create higher prices, it’s a paradox of safety in a way, because creating ‘more safety’ actually creates further instability.

There is no evidence to say that prices would simply race to the sky had these rules not been brought in, rather the IMF have a paper showing that in fact, these rules likely made little difference.

Added to this you have a 41% tax rate on savings at a time of low interest rates, all said, purchasing falls out of reach for many people and the difference is captured by higher rents rather than savings – unless you have a rich mom or dad who can help. This is why we are seeing more cases where people get locked out and thus, higher deposits is equating to lower lifetime savings.

Leave a Comment

Awesome! You've decided to leave a comment. Please keep in mind that comments are moderated.