They are at the threshold, in the past they could buy more and more since the Stock part increased without needing to add money. So if you consider a plunge in the stock market, some funds might have to rebalance and sell RE or add capital in the stock market.
But they will not beablte to buy at the same rate.
You have to ask yourself who is the buyer of the properties in future, And im not talking about the single family homes but the 25m+ RE.
A few of my (Swiss) friends who own houses and mortgages (managed to buy 3-20 years ago) have enjoyed a nice ride up and say that all the indicators show that this will only continue. They say it’s impossible for real estate prices to drop more than 10% from where they are now. When I hear this I really wish for a spectacular collapse which would make people work crazy overtime just to pay their interest.
But realistically, if someone has a 10-year mortgage with a FIXED 1% rate, are they at any risk? OK, if in 10 years their property is worth 50% of what it is now, they will have to use their savings to pay off the debt, but they will have saved a lot in rent, so it’s still not tragic. What else can happen? What if a bank that lends them money went into financial trouble, like bankruptcy? Is there any situation in which they would have to give back the money before the fixed term expires?
No. So for the next 10 years they should be fine.
Plus they have a hedge against (hyper)inflation.
Apparently there’s so much (printed) money in the world that for years you can borrow at 1%. If this persists for much longer, prices (both real estate and stock) can only keep increasing.
I’m also renting by the way, for all the same reasons mentioned above…
Interesting. So pension fund allocation thresholds can somehow link the stock market with real estate. A plunge in stock market would trigger a sell-off in real estate, which would also cause a plunge in real estate valuation for the entire market. If the drop was high enough, this could cause the LTV of some people to go over 80%, so the bank would ask them to come up with some capital to re-cover their loan. This could trigger another sell-off on the stock market, as the people would be looking for cash. Sounds like a potential feedback loop.
Yes this is the way.
feedback loop on the upside often means feedback loop on the downside. Since when then lots of normies sell stock to cover the mortages, Funds again need to unload RE to rebalance…
Isn’t it the wrong framing? And the main reason many people’s decision making is impacted?
You can also see it as an investment in RE, paying market rent to yourself with all the costs for maintaining the property. In practice people get a net 1 or 2% max return, right? (+Leverage)
Money is an IOU. You do your work, the one who receives it, owes you. But instead of giving you something material right away, they hand you over an IOU note they got from someone else. So, eventually, someone else will have to pay you back that debt.
On top of that, there is Credit. Some people want the material stuff now, some want it only in the future. You can sell your IOU note for the promise of getting even more IOUs in the future.
So if more money or credit is being “printed”, but the total available labor is not increasing, this IOU note can buy less and less labor. Real estate provides a steady cashflow through rent, so it’s a popular choice for the ones who want to delay their consumption.
Sorry if it’s obvious what I write, I just like to “think out loud” to organise the thoughts in my mind and make sure I still understand what’s going on…
Risk of bankruptcy is low especially since SNB has obliged amortisation to 66% in 15 years. Owners will likely live a normal life and retire at a normal age
They would likely lose out on other investment opportunities. Human nature means most people focus on reducing costs not on growing income. However we are in a FIRE forum and we are a group of mostly like minded people who think differently which is why opinions here differ from the mainstream
If you want a different result versus a « normal life » you have to do something differently
Hypothetically speaking, what if there is deflation? I guess having a fixed 1% mortgage during heavy deflation would not be so great? Let’s say we have an AI revolution and robots replace humans in many jobs, dropping the costs of many goods and services. I guess what hedges real estate against deflation is scarcity. If everything is suddenly cheaper, what will people want to spend more on? I guess better accommodation and holidays.
Wouldn’t we just end up wanting more stuff?