Course
The American Housing Finance System (63 videos)
Objective: to understand the effect of anticipated inflation on the mortgage borrower, and how it "tilts" the burden of the mortgage payment
Contributed Content (0)
Ask a Question
"If inflation is too low, the mortgage borrower suffers from a lack of equity accumulation. If inflation is too high, the mortgage borrower suffers from an inability to afford high interest rates. We need a 'Goldilocks' level of inflation to help the borrower." Discuss.
I have a hard time parsing that, because it seems like the distinction between real and nominal rates is being blurred.
If inflation is high (part b), then nominal rates need to be high in order for real rates to be positive, but this shouldn't affect the borrower's ability to get a mortgage, provided they choose an adjustable-rate or refinance in the event that inflation falls in subsequent years.
On the other hand, if inflation is low, the mortgage borrower suffers from lack of equity accumulation - true - in that the majority of accumulation comes from house price appreciation, and the majority of appreciation comes from inflation. But by the same token, inflation-driven price increase and equity accumulation is only a nominal increase anyway; if the borrower sold the house and tried buy goods, the goods would also be inflated in price, other things being equal.
TL;DR: Someone - probably me - is suffering from money illusion.
Affordability is never illusory. For a given amount of disposable income, the amount of house one can buy falls as nominal rates rise.
As you indicate, the inflation effects on equity accumulation are illusory; given the preference to buy more house if possible, borrowers would be better off with real and nominal rates both at zero.
What about negative real or nominal rates?