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

It’s comforting to know that you know the future :wink:

I’m teasing a bit but I appreciate the historical perspective, thank you.

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.

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You forgot to add another point before guns: join a club like H**ls Angelos. If civil war breaks loose, you can’t just fight on your own.

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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, :wink:

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Don’t most people lock their interest rates at 1% for like 15 years…?

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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.

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The most ironical is that a rate hike would be the easiest way to cool down carbon emissions.

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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.

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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.

Hi, as far as I know yes this is right.

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?

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P.s. While banks can create money out of thin air, they still have to take Basel II into account. There are own capital requirements.

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If the central bank money expands, I guess commercial banks can also expand their own money creation (allow more mortgages) as long the Basel II (or similar) ratios are respected.
It would be interesting to know the interconnection of both (central bank money and commercial banks credit).

There was a Ben Felix video where he explained it. Title was something like “understanding the Fed’s money printer.”

If anybody wants to know more: I also completed the Coursera lecture “ The Economics of Money and Banking”, where the topic is treated in detail.

Essentially, banks can create money out of thin air, within the limits of regulations of course. That a bank only lends out money it actually has in its book is not accurate.

Thanks for the video. It’s a good start. But it was still not simple enough for me :smiley: . I have a few problems with it that i’d like to discuss. (ping @Julianek be glad if you joined the discussion)

What is the difference between money and credit? Money is issued by the central bank and credit by commercial banks? In the end, even if the amount in your account is a mix of both, it’s virtually indistinguishable for you.

The credit example that speaks to me is the one with me getting a beer and owing the bartender. This means, in order to create credit, someone has to give something material to me, and I owe him money. This obligation is then as good as my credibility, it’s not the same as actual money. The bartender could use my IOU to buy something, but everyone would be suspicious to accept it, and would surely discount the face value of it.

If we applied the same logic to buying a house, I would get the house from a seller, and the seller would get the promise of me paying him back in the future. But instead, there is a bank, the seller gets money (for him it’s not credit, nobody owes him), and I owe the bank. Why can the bank produce money, or something that is indistinguishable from money?

It’s OK if the bank wants to take over the role of controlling my credit-worthiness. But then it should issue its own notes and give them to the seller, instead of central bank’s money. A commercial bank is pooling the debts/risks of all its clients under one roof and under the same note. And it seems the central bank is pooling the risks of all commercial banks by allowing them to issue the national currency.

How can there be economic growth stimulated by credit? Productivity decides how much stuff there is. Getting a beer on loan does not mean there is more beer. So the people who have stuff have to give it to the people who don’t, hoping that these people will work for them in the future. By consuming today and getting into debt, you’re voluntarily becoming someone’s slave.

Allowing consumption for people who otherwise couldn’t afford it today, creates more demand. So, if supply can grow, more stuff will be made, and people will become even more indebted. Eventually, for the debtor this situation is only attractive if the interest he has to pay on his debt is lower than the benefit from the earlier access to “capital”.

But if more stuff cannot be made (real estate can only grow so much), then the increased demand will raise the prices to unnatural levels, right? But this can last for decades, until the next depression.

Is the previous debt cycle really over? The video says we had the last depression in 2008, and since then the central banks have been printing money (as an inflationary measure) and cutting expenses, restructuring debt & raising taxes (deflationary measures). But has the economy really cleared itself off debt? I don’t think so. You can still get a super low mortgage loan. So how is it?

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I think most mainstream economics will say there’s very little difference.

Personally I recommend https://www.amazon.com/Money-Changes-Everything-Civilization-Possible/dp/0691178372 and my sibling who’s been working at treasuries/central bank recommends https://www.amazon.com/Money-True-Story-Made-Up-Thing/dp/1549107089

For a more detailed but the first classes are accessible class: https://www.coursera.org/learn/money-banking/home/welcome (explains really well balance sheet and interactions between banks and central banks (and rest of market e.g. eurodollar) still somewhat US centric tho)

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If that’s the case, then how does getting out of a long-term debt trap look like really?

  • cutting down consumption: I think we haven’t seen much of it in the last decade
  • restructuring debt: some people had trouble in 2008 but what happened with their debts? there have been some corporate bailouts, but a bailout is just printing money and giving it to the debtor
  • raising taxes: here I see the most pressure

And then on the inflationary side we should see:

  • printing money: this has been done on an unprecedented scale, yet we fail to see some real inflation, I still wonder why. And what does money printing achieve? It hands out free money to indebted people, alleviating their problems. But it has to come at a cost. If you’re replacing credit with money, what changes? People pay their interest with money printed out of thin air and everybody’s happy?

The only realistic way to get out of the global debt pile is inflation.

Ray Dalio posted a series of articles on LinkedIn “The Changing World Order” which discuss exactly this. What is happening now is a repeat of history

If there was high chance of inflation, would banks be still willingly giving out fixed 10y loans with 0.7% interest? Unless you mean to say that inflation will be high, but interest rates stay low?

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