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Old 03.02.2019, 13:22
ch1015 ch1015 is offline
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

MY COMMENTS ON RealEstate RISKS & PRICES, AND FUTURE InterestRates


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I think you should ignore interest rates for the last 11 years in any calculations as they were lower than in the previous 350 years.

Anyone with statitics know-how would typically attach higher weight on the most recent periods in order to predict the future. For example, life expectation is calculated not based on last 350 years, but on the last 25 years average with a correction to account for the ongoing increase in avg life. Ask underwriters/actuaries (there are many in ZRH!)

Economy is a different story, agree. But still the most recent periods are a good predictor of the near future. And in this case, I would take a holistic view to predict longer term:
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1. We all know WHAT DROVE IRs (so much) DOWN: the financial crisis.
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2. But do people know WHAT KEPT ULTRA LOW IR for so long?


There are multiple reasons. And it's not simple. :

1. "easy spending" of governments in southern EU (France+PIGS).
These historic tradition of undisciplined spending --many of us know it first hand--, in the past was corrected by national banks devaluations (did we forget such word?).
>>Devaluations do NOT seem possible now. (that's why I claim last 25Y are best predictor for the future)

2. I cannot see any socio-economical change to correct the above behaviours. See: (a) the huge reaction by GilletJaunes when a step towards "fiscal discipline" was taken in france; (b) the crackdown of Spaniards when its disciplined & productive national minority (Catalons) wanted to dettach from the undisciplined rest(*); (c) the populist turn in Italy, with elected govmt keen on spending above budget.
>>Does anyone have / see a magic solution in this front?

(* undisciplined, take the billions spent building airports without traffic, high-speed trains without passangers)

3. Potentially EU could force fiscal discipline in EU budgets (with an impact on exporting countries, eg. Germany). And raise interest rates. And see what happens. ...I think that was the plan in 2019.

As of now, the IRs rise planned for 2019 seem to be frozen: Germany just entered recession (technically), and Italy too... Hence, Swiss IRs will likely stay flat (seems confirmed by late-2018 trend of IR going downwards).

If southern EU economies are "little-sustainable" as of now (see deficits here: france, spain, italy, portugal,) try them to absorb an IR rise.

Actually EU "disciplined: Greece, basically as an experiment (better to test on small country with little consequences for big players, rather than trying on France, Italy or Spain). Your greek friends will tell you how the experiment went, and how his country has fared ! Greek consumption went down non-stop...
>> I cannot imagine replicating the same in (PIGS+France). And changing EU southern countries socio-economics also seems mission impossible to me.
(forcing the avg. italian/spaniard to acquire calvinist/saxon mentality? joke?).

CONCLUSION:
i) EU reference-IRs will stay low for as long as we can imagine (structurally cannot be increased without fatal consequences).

ii) CH reference rates to stay low, as a consequence. Higher swiss IR would mean: expensive CHF, expensive swiss products / lower exports, bad for CH economy.

The above is an essential part of my current assessment of RE risks. And I am currently willing to get exposed to RE with its risks/reward profile for my case.


DISCLAIMER:
Economics is not an exact/predictable discipline (like engineering/physics), hence there is room for (significant) deviation in my views above.
All good economists should acknowledge this! (I am a "financial scientist")
Yet it is a most likely prediction ("best estimates" account), given the current situation. Your input & comments are highly welcome and can help improve the "best estimate.
Everyone's personal situation is different. This is not financial advice either.

Last edited by ch1015; 03.02.2019 at 16:05.
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