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  #61  
Old 11.01.2019, 15:49
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

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I had no downpayment, and given that I shortly after bought a new car I highly likely would just have bought a bigger car If I had extra money spare (raising my monthly expenses )

You can believe all you want, but including taxes, maintenance and whatever you can think of buying for those 9 yrs including the loss on selling was still cheaper than renting an equal object. I did my math afterwards with all costs known.
Ok, 0% downpayment and low interest rates is quite a rare combination and thumbs up for you taking advantage of that.

But with the 20% minimum down payment, the opportunity cost is quite high in CH. Also when calculating opportunity cost, a lot of people neglect the accumulation phase and only calculate from the time of purchase of the property. What I am saying is that, to accumulate the 20% down payment, most people save for 5-10 years while that money earns 0% interest.

For example: say you save for ten years for 20% of a 1Mil apartment. Since you intend to buy, you don't invest it as you will soon need the money. With a 7.8% historical S&P return, you already loose 50% of the down-payment as opportunity cost, by the time you buy your apartment. OR the other way around, you need to calculate with an opportunity cost of 30% even if your down payment is only 20%.

If you only need 5 years to save up the down payment, you still start with a 25% oppo. cost of the accumulation phase.

The reason I emphasise this is because I often hear it from people who invest in real estate: "rather than buy some fund every month, I better keep accumulating money and when I have enough I buy a cheap apartment to rent out every few (e.g. 5) years".
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  #62  
Old 11.01.2019, 16:05
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

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For example: say you save for ten years for 20% of a 1Mil apartment. Since you intend to buy, you don't invest it as you will soon need the money. With a 7.8% historical S&P return, you already loose 50% of the down-payment as opportunity cost, by the time you buy your apartment. OR the other way around, you need to calculate with an opportunity cost of 30% even if your down payment is only 20%.

If you only need 5 years to save up the down payment, you still start with a 25% oppo. cost of the accumulation phase.

The reason I emphasise this is because I often hear it from people who invest in real estate: "rather than buy some fund every month, I better keep accumulating money and when I have enough I buy a cheap apartment to rent out every few (e.g. 5) years".
The same argument applies for people who try to time the market. I know several people who have admitted they have larger sums of money collecting dust on their bank accounts, just lying around unused so they can buy oodles of ultra cheap stocks when the next crash hits (October 2019 being the latest popular prediction).
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Old 11.01.2019, 17:38
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

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I think thats a foolish assumption, anyone who rented a house 25 years ago will be paying a similar rent to when they moved in, it probably did go up 10% but with interest rate falls the rent will have fallen since. Then salaries are not very different, in IT or Banking probably less.
That 25 year old property will need a significant refit soon.
Salaries are driving rents not IRs.

house prices are driven by IRs and also liquidity and relaxed loan availability.
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  #64  
Old 11.01.2019, 21:33
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

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Salaries are driving rents not IRs.
I think FatMan is talking about the “Reference Interest Rate” that the Swiss rents are linked to. This has led to a lot of rents falling over the last few years (if you ask your landlord)
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  #65  
Old 11.01.2019, 23:59
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

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The problem from a debtor's POV is the absence of inflation. With mild inflation (2-3%, say) the debt that is nominally unchanged automatically loses value accordingly. Absent inflation you have to reduce the debt's nominal value to actually reduce it, something that's much less often done.
Very interesting observation.
I'm assuming that mortgage repayments and new rents (existing rents are regulated) are determined by salary levels in the long term. From salary levels and interest rates one can derive the corresponding long term house prices, or, except for recession or boom shocks the mortgage interest and capital repayments are commensurate to renting costs and salaries.
So yes, it looks very probable that in low inflation environment there might be nasty surprise that with a decreasing income at older age more mortgages might become unaffordable than it used to be.
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  #66  
Old 12.01.2019, 19:55
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

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I know, 20% here (of which 10% must be "cash")

I even could get way above 100%, and legally allowed was 125% Good thing they brought that down, but just last yr it became 100% Plenty off Dutch who had problems with the overrated mortgage values when the prices dropped.
Agree, there were several of our friends in the Netherlands around that time who had a higher mortgage than the actual value of the house. In a situation where house prices were in freefall. The banks never made a problem of that because they would be cutting their own hand. The houses were only sellable at very low prices (if at all) and these mortgages were still on the balance sheets of the banks that were being bailed out by the government.

I can imagine the same thing happening here if a big chunk of the market would go under water. I would not bet my house on it though..
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  #67  
Old 12.01.2019, 22:14
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

We got 100% mortgage in UK in 73 - and when we bought our next house in 75, again. Our Endowment mortage went up to 19.5% - a year after we bought our 3rd house! Scary times. Some of my colleagues at that time got 110% mortgages, and found themselves in massive negative equity in the 80s

Fortunately, things righted themselves and we made a healthy profit from that fabulous family home.
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Old 12.01.2019, 22:57
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

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Agree, there were several of our friends in the Netherlands around that time who had a higher mortgage than the actual value of the house. In a situation where house prices were in freefall. The banks never made a problem of that because they would be cutting their own hand. The houses were only sellable at very low prices (if at all) and these mortgages were still on the balance sheets of the banks that were being bailed out by the government.

I can imagine the same thing happening here if a big chunk of the market would go under water. I would not bet my house on it though..
Yep, I've known people who wanted to move but simply could not since they could not refinance the loss, so they in fact were a prisoner of their own choices.

Buying a house of 250K with 106% mortgage, and when they wanted to sell the prices had dropped with 20%, meaning 65K to find somewhere before the bank would allow a sell. I've seen people driving 400km a day back and forth to work since they could simply not effort to move and could not find a job closer to home.

I since of day one put some aside every month to avoid such and when it came to selling was very happy I did, since how to refinance such when deciding to emigrate the country with no job here yet, simply impossible.

My biggest fear here when buying would be if after 10 yrs it would turn out the interest has tripled or even worse when negotiating the new mortgage.
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  #69  
Old 12.01.2019, 23:39
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

Yep, friends divorced in very difficult circumstances (he realised he was gay and had always been- when their son ws 12 ...) and it was awful- they could not sell and could not afford to rent or buy a second property and had to live together in a small cottage mortgaged up to the hilt and more.

Last edited by Odile; 12.01.2019 at 23:56.
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Old 12.01.2019, 23:54
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

OP "I find the current low IRs for 10y mortgages (1.5%) " you can find a lot better than 1.5%? Apologies if that was already posted but 4 pages are too much to read through!

Whether you wish to remortgage to a better deal or are looking for the best mortgage solution for a new home, you’ll find the product to fit your needs at comparis.ch.

10-year fixed-rate mortgages available from 1.02%
https://en.comparis.ch/hypotheken/default
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Old 13.01.2019, 17:05
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

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We got 100% mortgage in UK in 73 - and when we bought our next house in 75, again. Our Endowment mortage went up to 19.5% - a year after we bought our 3rd house! Scary times. Some of my colleagues at that time got 110% mortgages, and found themselves in massive negative equity in the 80s

Fortunately, things righted themselves and we made a healthy profit from that fabulous family home.
I am really amazed that you got 100% mortgage in 1973 & 1975 before deregulation. Mortgages were severely rationed & normally you had to save with an institution for a few years before they would lend you any money.

It seems very odd that you would have not been expected to take any of the profit from your first property & reinvest it in the second, I can't believe that was possible in 1975.
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Old 13.01.2019, 18:08
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

I am surprised by how surprised you are - I can only tell you how it was. When we moved to Staffs, we were supposed to have a hospital subsidised house- but they had double booked- so they advised us to buy our own- so glad we did or we would have been 3 years further down the chain. The 100% mortgages were perhaps limited to certain professions with good prospects. We didn't have a penny saved - for sure- and very few bits to put into said house - apart from second hand stuff given to us- bean bags I made, and a bed made with slats. Happy days- when baby came, we had everything begged or cheap second-hand- as the mortgage was crippling us.

Of course we reinvested the profits from first house into second- but we bught a larger house each time- therefore needing more mortgage- typical in the UK. Then again a few years later. That was our ideal house, and we improved it and extended it over the 33 years we lived there, without adding to mortgage- and it paid off nicely.
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Old 03.02.2019, 11:27
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

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Good point, higher IR will likely drive up rents. But I believe the base mortgage rate for rents is calculated on the average value of all outstanding mortgages and due to the extended period of low IRs adjustments of the base rate will be slow. And will landlords be able to easily pass on IR increases to renters in a not so bubbling economy? Also, what is the base rate's effect on rents? It is probably not comparable with the impact on a loan when going from 1.5% to 3%, which doubles the IR payment to the bank.

A 2-3% IR increase will be a lot more felt for owners than renters. But anyway, you are right, it has to be considered. thanks!
Prices are not driven up/down by IR, but by offer / demand (ie. what tenants can/want to afford, considering cost of a replaceable commodity). It's risky to elaborate on financials/economy without knowing the basics...
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  #74  
Old 03.02.2019, 11:33
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

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Prices are not driven up/down by IR, but by offer / demand (ie. what tenants can/want to afford, considering cost of a replaceable commodity). It's risky to elaborate on financials/economy without knowing the basics...
Demand is the ability to pay & nothing else. As homes are generally bought with credit it depends on how stringent the banks are granting loans.
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Old 03.02.2019, 14:22
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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:
---------
1. We all know WHAT DROVE IRs (so much) DOWN: the financial crisis.
--------
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 17:05.
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Old 03.02.2019, 16:20
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

I'm a bit late to this and have not read all the comments, so apologies if I repeat what has been said.

A bank will loan 80% of the distress value of the property following their valuation. Typically this will then equate to 65% of the sale price. The 15% can the be financed with another mortgage but at a much higher interest rate, typically 2.75 - 3%

The they calculate your ability to repay the interest based on an interest rate factor of 5%, and they would expect you to earn 5 times that amount.

Ona chf 1m mortgage you'd have to come up with 800k and be earning chf 200k to get it, even though interest rates are currently around 1.35% on a 10 year mortgage.

The one big advantage though, that I can't see being mentioned, is that the interest you pay is tax deductible, whereas what you pay in rent is not.
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Old 03.02.2019, 17:32
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

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Demand is the ability to pay & nothing else. As homes are generally bought with credit it depends on how stringent the banks are granting loans.
Don't miss the "OFFER" side-of-the-equation.
Moderate price reductions have been recorded in many CH areas in 2018 and are expected to follow in 2019...
(in a friendly tone: I would not be so stubborn)...
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Old 06.02.2019, 00:57
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

There are ways to increase the cost of money (including mortgage interests) indirectly.
https://www.nzz.ch/meinung/wege-hin-...ung-ld.1450173

NZZ lists 4 of them available to SNB:
1. selling assets held by SNB (I didn't know they were buying company bonds) thus increasing demand to borrow money from other banks.
2. paying interest on banks’ reserve balances (FED is doing it now) thus decreasing incentive for banks to lend
3. "SNB bills" - short-term bonds that pay a certain interest so that banks park their money there at a cost to the SNB/taxpayer
4. increase the banks minimum reserves

From all the above NZZ article says the SNB bonds are the most likely as they have been already tried out, despite potential public backlash - banks earning money risk free.
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Old 06.02.2019, 08:30
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

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I'm a bit late to this and have not read all the comments, so apologies if I repeat what has been said.

A bank will loan 80% of the distress value of the property following their valuation. Typically this will then equate to 65% of the sale price. The 15% can the be financed with another mortgage but at a much higher interest rate, typically 2.75 - 3%

The they calculate your ability to repay the interest based on an interest rate factor of 5%, and they would expect you to earn 5 times that amount.

Ona chf 1m mortgage you'd have to come up with 800k and be earning chf 200k to get it, even though interest rates are currently around 1.35% on a 10 year mortgage.

The one big advantage though, that I can't see being mentioned, is that the interest you pay is tax deductible, whereas what you pay in rent is not.
That does not match my experience. I bought 3 years ago (680k) and have 2 mortgages amounting to approx. 90% of the property sale price with an average rate of approx 0.8% interest pa (I get some employee discount and the bank holds my pillar 3 as collateral). There was no interest rate premium above the 'first mortgage' level of 65%. My annual interest payment (on which I get tax relief) is approx. 4,700 CHF. I have approx. 15,000 added to my taxable earnings for Eigenmietwert, certainly no tax advantage there.
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Old 06.02.2019, 08:55
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Re: Low Low interest rates -housing bubble? - inevitable price correction?

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That does not match my experience. I bought 3 years ago (680k) and have 2 mortgages amounting to approx. 90% of the property sale price with an average rate of approx 0.8% interest pa (I get some employee discount and the bank holds my pillar 3 as collateral). There was no interest rate premium above the 'first mortgage' level of 65%. My annual interest payment (on which I get tax relief) is approx. 4,700 CHF. I have approx. 15,000 added to my taxable earnings for Eigenmietwert, certainly no tax advantage there.



....and you work for the company providing the mortgage ?
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