Why would an interest increase of 3% jeopardize so many real estate loans?

I assume with prices in CH this 40% lower income bracket do not have real estate loans at all. Or…(?)

So? As far as I know there is no human right to own real estate or to have children etc. so either you can afford to pay 400’000 CHF if you want to buy a property that costs 1m CHF, or you will not be able to buy it. Simple as that. People in the lower income brackets also don’t drive a Lamborghini. But as I said I don’t want to regulate the banks so I would prefer to prevent the government from stepping in if someone ends up in financial troubles, rather than more regulations in the banking area.

Regulating the banks is now only required because otherwise they could partially transfer their risks to some extent to the government / tax payers. In an ideal world, there is no government which steps in if someone is in financial troubles. So people would think much earlier on in the process if they really can afford something or not, before just blindly buying everything what they want. In that case, you could even let banks to 100% finance a property if they want to take that risk. At the moment this is not possible, because in such cases there is a high risk that people become a burden for everyone and as such we need some regulation at the moment unfortunately.

In the end, we need to make sure that if people buy real estate, that they also can finance it, not only now but also in the future, especially in their pension if they are allowed to use their 2nd/3rd pillar, to make sure others won’t have to pay for them later on. And there are only 2 ways to achieve that. We can either regulate the banks tighter, or we can reduce welfare services so that people think twice before they buy something.

Those that are retired maybe.

The thread is about impact of interest increase on real estate loans so I was asking if this was relevant. Cortana answered:

Funny coincidence but this discussion reminds me a bit of The Big Short movie which I just watched this week-end :wink:

It is interesting and entertaining at the same time if you where wondering…

Most governments do the same: they could take the opportunity of low rates to balance their budgets but most think “cool, debt costs nothing, so let’s go with new expenses”.
NB:

  • Not saying who is right or who is wrong. If debt costs nothing and is so easy to create, perhaps financial capital is worth nothing after all.
  • I’m sure that Western central banks are already in the phase where they are too afraid of crashing the system and will keep rates very low indefinitely.

I doubt a bank can control that. It has a fair idea of the client’s solvency (but not about his/her expenses) at the moment of the transaction and establishing the mortgage, but after that, everything can change on the client’s side.

It doesn’t make sense to compare government debt with household. Similar to corporation what you do with it matters more than the amount of debt, if 1 CHF spent increase GDP by more than 1 CHF it probably should be spent :slight_smile:

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Sure. However governments don’t care about the efficiency of that method. Perhaps it worked in the 1950’s-early 1960’s…

A point that hasn’t been discussed: If you talk to your bank about a mortgage and your wife brings a big belly, the bank will happily accept your wife’s last salary for the calculation before the baby gets born.
It usually does not matter for the banks compliance if you tell them, that mummy will stop working forever soon.

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I discussed the topic yesterday with someone else privately: from my point of view, the question is: how long can the central banks sustain that phase? I don’t think they can keep interest rates low indefinitely. There will be a point in time when they have to stop printing money, otherwise assets will just further appreciate in price. Which means that number of people who are actually able to afford buying a house / living a good life / having a good pension will decrease. I’m sure central banks and governments are not interested in a majority of people getting angry, because this could lead to protests, civil war etc. Governments and the super-rich can’t be interested in that.

But ok - there are also other options. Divide et impera, creating some fire here and there, starting a new war. Which I’m hoping nobody sane is really interested in.

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Ha!
They did that and they will do that again if it’s needed.
If “the priivleged” keep looking at themselves, they will leave like it is since they don’t see any issue at all. If we believe that those people can really steer central banks, then nothing will change. They get richer and richer, so why change? Global warming might be an issue (no more beachfront villas?)

sorry for the off topic.

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? :slight_smile: ) 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.

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Won’t happen like that.

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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? :slight_smile: 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.

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