Tuesday, February 23, 2010

One type of financial asset: A Mortgage

A common financial asset, linked in with what we're covering in lectures this week, is a mortgage. A mortgage is a loan to buy a house with, where the collateral for the loan is the actual house itself - i.e. if you fail to pay off the loan and default, the institution that gave you the loan takes possession of the house.

It's a very illiquid asset in the sense it takes a long time to mature - most mortgages are 25 years in length, hence it will be 25 years before you see that money again, if you give somebody a mortgage.

Anyhow, many fewer have been granted in January compared to December, according to the BBC. This was partly to do with all that snow hampering economic activity (not just schools closing...), but also because of tax incentives imposed by the government. In January, stamp duty was reimposed on house purchases. Stamp duty is a tax the government collects on house sales. So in December people rushed through house purchases in order to avoid paying stamp duty, which can be pretty hefty.

Is this bad news for the housing market? And moreover is it bad news for the economy? Probably not, is the suggestion in the article, at least for the former - since the drop was only related to some very temporary factors that won't persist (tax changes and weather - we hope!), hence it's likely the market will pick up again.

Is that a good thing for the economy? Given, as we found out early in term, the UK is a nation of estate agents, perhaps! But for those of us hoping one day to buy a house, slightly less encouraging if it means house prices start rising again...

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