MicAtCyp wrote:Dear Turkcyp,
i don't know where you found that proposal however whoever wrote it obviously lacks knowledge of the most basic principles of monentary economics. In other words those schemes cannot be applied on a massive scale, because they touch monetary principles that will completely destabilise an economy.
I did not read the proposal anywhere, I come with it. And as any economic proposal it has ups and downs, but it will not have the destabiling effects you are talking about.
A) Although the writer knows what everybody knows i. e that loans for real estates are paying the lowest possible interest rate, on the other hand he does not seem to know that this is one of the most basic tools in drafting the monetary policy of a state i. e to boost the economy out of recession or slow down the inflation. Too many loans will lead to a hell of inflation!
I have never heard of home loans being used to draft monetary policy. Home loans I am talking about here are private home loans that you can get in any developed country. It is never used as a tool to administer the money supply in the economy.
There are three way conducting monetary supply, and what is called “open market operations” is one of them. Money supply and interest rates in the economy, are adjusted by what is called “open market operations”, i.e buying and selling of government bonds and notes in the open market.
I have never heard of any central bank buying and selling mortgage backed securities in the open market, which are primarily issued by private organizations.
B) Banks do offer such loans only when they have nowhere else to lend their money, and only within the limits set by the Central Bank, so as to avoid inflation.
I also do not understand where you are getting your information. Banks offer home loans because it is very profitable to do so. And almost never this is restricted by the central banks. Central banks do have the ability to restrict private borrowing in an economy by adjusting interest rates, but this adjustment affect the whole economy not just home loans.
C) The interest rates for property are indeed low, but they are NOT so low that would enable everyone acquire property that easy. For your information the lowest price for a house in Nicosia today on just half a building plot is 80K. The lowest possible interest rate for housing is currently 5. 5% for the first 2 years and thereafter it increases. So just to cover the interest a family man will need to pay 360 pounds a month! Add at least as much to cover capital paying up, we end up to 720 pounds a month. All this at current prices at the free areas where the average salary is only 700 pounds a month!
I do not know what the interest rates are in south of the island, and there is no comparable interest rate in the north as this market for home loans simply never existed in the high inflation environment of north Cyprus in all these years.
But home loans usually have very lower interest rates compared to other private loans, because their default rate are very low. They usually run around 1.2 basis point higher than prime rate in the economy. Of course individual rate that each guys gets depends on its credit worthiness as well.
What makes these loans very attractive in any developed countries is their maturity. They usually last anywhere around 15-30 years making the monthly payments for the loans quite comparable to the existing rents in the market for rentable homes.
I do not know the specifics of economy in the south so I can not comment on your figures. But the interest rate figures seems about right, if calculated on simple interest rate terms. If you calculate the information you have give as 80k initial loan with %5.5 interest rate with maturity 20 years, this will result in a 550.31 monthly payment. If you extend maturity to 30 years, then monthly payment goes down to 454.23.
D) It is extremely doubtful whether foreign investors will be interested to invest in a totally new state, where nothing is certain, and where the "united" economy has no history. Moreover the first thing foreign investors will ask is whether their profits will not be wiped off by the inflation that their own investment will cause.
This we do not know. But knowing the fact that Cyprus economy is getting ready to be part of Euro system, meaning out with Cyprus pound in with the Euro, will erase any doubt uncertainty about future levels of interest rates and inflation specific to Cyprus.
There are two problems with your proposal both at the borrowing side of the issue (current user of a property) and at the paying side (the owner getting cash) . If we follow your proposal then from one day to another we will have an X number of people owing money BUT also at the same time a Y number of people having cash in their hands which they will not know what to do.
If the total sum of that money is HUGE (compared with the size of the economy) that will by itself skyrocket inflation.(If you want to explain you how I will in another post). AND THE TOTAL SUM FOR COMPENSATIONS WILL IN FACT BE HUGE!! Like I said in my previous post for just one per thousand refugess we will need a billion pounds compensation compared to the annual budget of the RoC of only 2 billion!!!!
As a result of this inflation the originally low interest rate the borrowers got, will not be applicable anymore, and the borrowers will never be able to pay up their loans. As you know salary increases always follow the inflation by one or more years.
This is the only problem with this system. Presumably you may have a situation where we have lot of people with a lot of liquidity in hand which may affect the economy as a whole if it is to big in numbers.
I do not know the exact amount, but couple of things tell me that the effect will not be that much destabilizing. First of all this borrowing is not going to be done overnight. The whole property issue is probably going to take upto 3 years to be solved. So assuming 100k people on average will get 100k compensation (which I think you should appreciate that it is very generous, because in reality this figure is probably going to be less when the property left in south is deducted from it) makes 10 billion pounds. 10 billion pounds divide it into three years can be though as 3.3 billion pounds of injection into economy for three years. Last year the GDP of south was 13 billion dollars, and in the north this was around 2 billion. So total GDP on the island was around 15 billion dollars. Total money supply M1+M2 was around 8 billion pounds.
So this injection would mean around 40% increase in money supply in one year. But this is if we do the transition in 3 years instead of more and it is also the crude effect not taking into account the the contarction of aggregate demand due to high borrowing, and also this is before any taxes and assuming that all the liquidty will be spent with no savings. When you all take these into account I believe that we can easily contril the increase in money supply under less than 10% a year.
And if we further cut the normal increase in money supply of around 5% to lower levels the marginal increase in money supply would be much lower than you have anticipated.
And also assuming the fact that not all of the 100k accepted by the GCs are not going to be spent immediately but rather would be saved to some degree and also government taxation of capital gains in the property sale would further reduce the spendable amount.
But if everything seems still very high, government can force an temporary forced saving scheme on this money, to increase the time period into 5-6 years instead of 3. As I have said it all depends on how many years the goverment lies this transition.
The whole thing does not change if the loans are transformed to securities and sold to foreign investors. I leave aside the fact that foreign investors will not be interested to buy such securities in an economically destabilised state with a sky rocketing inflation. Lets take for example a foreign investor getting a security worth of 50, 000 pounds representing one real building plot. This foreign investor paid 80, 000 Euros to get his security. If within a year the value of that plot (due to inflation) is 100, 000 pounds the foreign investor loses because all he has in pocket is a 50, 000 pounds security which now due to inflation worths only 40, 000 Euros!! And foreign investors are not that ignorant you know. . . .
Your whole assumption is based on the fact that this will cause very high inflation rates in the whole economy which I disagree. Foreign sale of the securities in itself has a balancing effect because as more capital moves into the country the value of pound will go up limiting inflation. In fact it would be even worse if these securities are sold inside the Cyprus because this means inherently that money supply would go up causing inflation.
And also what you are missing is the effects of contraction of spending by the borrowers on the whole price level from the aggregate demand level. This in itself will have a stabilizing effect to curb inflation going up.
In my opinion the most healthy thing to do regarding the properties is to encourage people to exchange properties. This way yes a lot of people will get loans to pay their compensations. Now instead of letting those people who get the cash cause inflation lets give them the opportunity to get rid of their money by offering them the chance to buy land that is currently owned by the State! If the solution will be a Fed system then an equal proportion of State Land from both States should become available for sale to those who will get the cash compensations!
This is another solution, but I doubt it would be acceptable to GCs. And also here you are forgetting about the fact that 1) not enough state land exists to compensate 2) the plummeting property prices with the increase in aggregate supply of property.
Anyway. I think you are exaggerating the inflationary effect of this on the economy in a controlled environment.. If you are so concerned about those effects we can wait till we put this into practice until Cyprus start using Euro and all those inflationary effects would be nill.
Take care,
