I agree, and while I’m also often seeing things in a realistic way, I know that it doesn’t help me.
I guess there are multiple aspects to this one:
“the privileged” definitely don’t want to have another 1789 again
there’s a lot of things behind the scenes in international policy and economics which we will only understand in 10, 20 or 30 years
while I see the point that the rich are getting richer and richer, some other people (us? ) also have more benefits nowadays. Who would have imagined 50 or 100 years ago that retiring early is possible. If you go further down history lane, people “like us” were working on the fields their whole life.
before someone steps in with the argument: my grandfather was able to feed 5 children, his wife was a housewife and still they were able to afford a house → yes, I know those facts. The gap between the super-rich and the poor is getting bigger, and the so called middle class is disappearing.
I’m grateful that we have all the possibilities we have today. We can fly to almost any place in the world (pre-Covid) within one day, we can relax at beautiful beaches, we can share our thoughts with people we would have never met in real life (because of distance or different social circles)
I think almost none of us knows any super-rich person, so a lot of what we do are assumptions and judgements. Yes, there are super-rich people who are assholes, but I’m sure there are also super-rich people who are kind.
From my own experiences: my landlord is a multi-millionaire, and he’s one of the kindest and down-to-earth persons I’ve ever met. If you would meet this guy on the street, you would never think that he is pretty loaded. We’re not talking UHNW here, but pretty close.
PS: @mods@Bojack please move to a new thread if this going too far off-topic
Don’t use the term “super rich person” because it’s not a matter of power. For example the richest person on earth is definetely not one of the elites that moves things around, at least not at the level we mean here.
It’s not like they are checking outside the window to see what happens.
About asset price inflation: CBs and governments obviously consider it as a lesser evil. Some people are even very happy with that - look at some Fed members…
If the CBs stop printing, there will by quickly solvency issues. Look at Italy’s bond yields before 2011 (link here). NB: Italy is just an example. Or look at the Repo crisis in 2019 where the Fed had to start its 120B/month QE just to keep markets “functioning smoothly”.
About raising rates, options are limited. For the US the threshold of pain was 2.5% Fed funds rate in 2018 (see here). It’s certainly lower now.
Thanks at lot for the links. Interesting side-note for the first link: German 10y bonds are lower (-0.2980) than Swiss 10y bonds (-0.2310). So investors expectations are that Germany will more stable in 10 years compared to Switzerland (yes - very rough simplification). Interesting to see, especially considering the whole EUR setup.
Another potential reason behind the SNB comment is the decrease in asset value following the increase in rate. Right now, a property worth 1 milion only costs 8,000 per year in interest (1% of 80% of 1 milion). That’s quite affordable for most people. If the rates go to 4%, it becomes 32,000 per year. That’s less affordable, therefore making home owning less interesting financially speaking.
What happens when something is less desirable? Its price decreases. By how much does it have to decrease so that it becomes interesting again? No one knows but it could be brutal…
When the real estate market drops, banks own proportionally more equity. Going back to our 1 milion house example with an 800k mortgage, if the price drops by 20%, suddenly, the bank owns 100% equity. They are not allowed to own 100% equity so they “margin call” the client: he has to come up with 100-200k within a few weeks or else, his house will be seized.
Most people don’t have that kind of money laying around so… the house is seized and sold at a discount by the bank. Which drives the real market even lower, triggering more margin calls, etc.
So I think it’s both the fact that people wouldn’t be able to afford 4% interest payments AND the fact that since asset prices would drop significantly, most people would get margin called and have their property seized.
It would be a meaningful conclusion in a free market where you could interpret “real” investor’s expectations, but here the CB distortion is just too large - regarding Germany, through active bond purchases from both the ECB and the SNB! Perhaps the market just “thinks” that CB rates will stay negative for x years.
Who’s “the market” anyway? I agree that we are seeing a lot of distortions because of CBs interventions. If negative interest rates stay low for years to come, asset prices are going to increase. Gap is getting bigger.
I guess nobody wants to really cut that Gordian knot.
Maybe I’m missing the point here… I don’t see any hint that interest rates might go up even by a 0.25%, why are we debating a 3% raise? Of course if interest rates go up from 1% to 4% there’s only one basket of assets to invest your money in: guns, ammo and canned food.
There’s a lot of leeway between interest rates raising up 3% and a mad max world, with options I’d think worth considering on the spectrum but I do agree that a raise of interest rates to 3% seems very unlikely in the near future,
sometime I think about the great irony of many people in the western world, including leader, much more worried about interest rates going up from 1% to 4% then being worried about the increase in temperature from 1°C (current situation we are locked in) to 4°C.
That last one is going to actually bring mad max like apocalypse to the world. For real.
I agree with the general idea and process of driving down the price of the housing. Just a couple of questions/clarifications:
“Within a few weeks”: I very much question this time span. Do you have an example of this happening in Switzerland ? even in the early 90s I am not aware of a single case like that. If it were to happen, it would most likely be when you have to renew the mortgage.
“the house is seized and sold at a discount by the bank”: that is not how it works in Switzerland. The bank will ask for a reimbursement of the mortgage. The customer cannot pay. The bank sues (“met en poursuites”) the customer. His house is seized by the state, not the bank. The “cédule” guarantees that the bank is paid first from the amount collected when selling the house in an auction. There is a discount only if the market is down. Once the bank is reimbursed the remaining of the money, if any, goes back to the customer. If there is not enough money, the customer still owes money to the bank.
Whilst I agree climate change is important the economy is equally so. The world is in uncharted territory since 2008 with money printing and rising inequality, this is why we already ended up with trumpism, Qanon etc. High inflation and interest rates will hit the poor hardest, the rich and elite will be fine. The most recent parallel is the 1930s
Even if you don’t think we’ll end up with wars, if people drop into poverty global climate change is pretty low down their list of priorities (eg Trump voters)
Well… I haven’t researched cases but since a significant decrease in the value of the property according to the estimate of the bank is a cancelation condition of the mortgage, I would say that it’s a reasonable possibility.
Fair enough. End result still is that the house is seized and sold.
Aren’t there auction sales for seized assets? Anyone can come and bid but few people actually do since the financing is tricky. The prices start very low. And while nothing prevents them from going to market price, they don’t often do. Now imagine a world in which lots of houses are seized and put to auction: most of them will be sold at a discount.
However it can be hard to visit and have all the relevant information, so you are kind of buying a black box (think that the previous owner is maybe not to friendly since he just got seized).
Furthermore, you are obliged to bring in cash right away, plus have to secure the financing pretty quick. (could be tricky if you need to rely on 2nd and 3rd pillar).
Finally, houses are apparently not as discounted, especially in nice areas. Property developers will be there for sure.
Actually, can someone please explain to me how loans actually work? Mortgage loans in particular. “Explain it to me like I’m a 5 year old”.
What is the exact play between the central bank, the commercial bank, the loan taker and the rest of the economy? What role do interest rate play?
My current understanding is that if I want a loan, the commercial bank just creates the right amount in their system. It does not take the money from someone else to loan it to you. And somehow the rest of the financial system is ok with this “fake” money. You buy a house with it and the seller buys other stuff with it. For all purposes, this money is as good as any money.
And if it costs nothing to create money out of nothing, then no wonder that the interest rates are so low. After all, you only need to care that the debtor keeps paying interest.
As far as I know, only mortgage loans have such low interest rates, because the coverage of the loan is the real estate itself. So even if you stop paying, the bank can still get its fake money back. I guess it’s caused by the fact, that real estate value is quite stable. And this stems from the fact, that rental yields are quite stable. It’s an asset that provides steady cashflow, so you can leverage against it like crazy.
But this leverage increases the risk of real estate investment and eventuall puts it on par with stock exchange market (at least that’s how I see it). And in the short term more people can afford a home, but in the long term it’s the opposite.
What do you think, is there really a problem, or are the prices “normal”? Is it fair for banks to be able to print money out of nothing and reap all the benefits, while the average Joe has to save his whole life to pay off a house?
By reading and partipating to this forum, you confirm you have read and agree with the disclaimer presented on http://www.mustachianpost.com/
En lisant et participant à ce forum, tu confirmes avoir lu et être d'accord avec l'avis de dégagement de responsabilité présenté sur http://www.mustachianpost.com/fr/
Durch das Lesen und die Teilnahme an diesem Forum bestätigst du, dass du den auf http://www.mustachianpost.com/de/ dargestellten Haftungsausschluss gelesen hast und damit einverstanden bist.
) also have more benefits nowadays. Who would have imagined 50 or 100 years ago that retiring early is possible. If you go further down history lane, people “like us” were working on the fields their whole life.