So if you buy a 1.25m house and take a 1m mortgage 5% is of that is 50k, so your salary has to be 150k.
Point 3) is wrong, they make still a lot of money with loans, a lot of people still take 10 year loans for somewhere between 0.6% and 1%.
This can be resolved any time cities want to build a lot more housing: https://www.theatlantic.com/ideas/archive/2021/01/anti-growt.... Outside of Tokyo: https://news.ycombinator.com/item?id=16704501, no or very few cities in the Industrialized world have chosen to simply build lots of housing, which will tend to bring prices down towards the cost of construction.
Similarly for Zurich, there are significant hills around and most flat space is already built up.
There are cheap houses available outside those areas, but getting a loan for them can be tricky since their value is too low and there's no money to be had from lending the money.
Furthermore, most people have their homes as security (not sure if it's the right word in English) for their loans. If the property value drops then many will be forced out of their homes. Also a lot of landlords and real-estate agents, will be out of a job, but that's probably a smaller issue.
I haven't looked it up, but from what I've been told a lot of it also has to do with investment laws for Pillar 2 and 3 retirement accounts (a certain percentage has to go into Swiss assets). Taking 1-1.5% over LIBOR/SARON or whatever the SNB rate is makes sense, but the fall-out in a couple of years if and when rates start to move up again isn't going to be pretty.
Owners generally keep a mortgage on their property (~65% of the property value) to off-set wealth and property taxes. Residences are taxed by their estimated rental values, which is treated as income. Interest payments are tax deductible, while the principal on the mortgage lowers the amount owned for wealth taxes.
The other issue is that most primary mortgages don't allow for early repayment, meaning that the principal either has to be payed off in full or refinanced once the payment period is over. Owners become conditioned to continuously roll over the principal on their primary mortgage.
To answer your question, because the expectation is that residential property will be mortgaged through out the entire ownership period, banks have to make sure that someone who can afford the payment on a 1% mortgage can also afford the payment on a mortgage refinance if and when rates eventually go up.
Government has just allowed first home buyers to get a mortgage on a 5% deposit. While that sounds great, it's obviously just encouraging more debt to flood the market and drive up prices.
And of course the government doesn't give a shit about housing affordability. The standard practice here is to get at least two mortgages: one for the house you want to live in, and one for an investment property that you'll eventually sell to pay off your other mortgage.
Sounds stupid right? Well, not when the government gives massive tax benefit handouts to property investors:
1. 50% capital gains tax discount.
2. Negative gearing: basically the losses on your investment property can be claimed as a tax offset against your other income.
[1] https://en.wikipedia.org/wiki/Capital_gains_tax_in_Australia
[2] https://en.wikipedia.org/wiki/Negative_gearing_in_Australia
Yes and no. This is also true in all markets. No one really buys a house based on the price. They buy it based on the monthly payment (price - down payment and interest rate). The price alone is mostly irrelevant for the buyer.
This means that for most people, the best time to buy a house is when interest rates are sky high since falling rates are easy to take advantage of in the future. High rates also mean the original principal is likely low.
Sorry but wow. This is not the kind of comment I expect on HN, but rather from my uncle:
“We got this new Lexus, it’s only $500/month!”
“Yes, for 200 years”
You're implying "worrying about" or wanting to know what the monthly payment is on a loan is a bad thing and I don't understand why.
I believe what he is actually saying is that most people _only_ care about their monthly payment.
Caring about the monthly repayment is important.
But so is caring about the interest rate and the principal.
I stopped into a car dealer to look at a vehicle a couple years ago. I liked how it drove, could pay cash, but wasn't opposed to taking out a loan if I could get a better price overall (sometimes possible with fees banks pay to used dealers for getting a loan originated).
In my experience, they brought out a sheet of paper with a range of what the monthly payment would be. I asked about interest rate, and the sales guy had no idea what interest rates the payments equated to - but he could get me an exact payment after doing a hard pull on my credit. They resisted negotiating on the total cost of the vehicle, but were very willing to extend the loan out to make the payment exactly what I wanted/could afford.
I could see it wasn't going anywhere, told them to call me if they get serious about reducing the price, and left. I found a great car on the private market a short time later.
I did my house shopping the same way. For some reason realtors are a lot better about negotiating the actual sale price than car dealers are. I never really had a realtor try the "So, tell me about your maximum monthly payment!" pitch on me, probably because you're expected to have your financing lined up before you shop.
If you're going in to buy something with a "max monthly I'm willing to pay" in mind, you are setting yourself up for a really bad deal.
Then again, we basically didn't go to a dealership other than for test drives. We e-mailed every dealer within an hour and a half of us with "This is exactly the make and model we want, these are the options, this is the color (but we're open to substitutions), what's your best price?" We took the lowest bid, and if there was any funny business (there was with one), we walked.
Most dealers now have online sales departments that are setup for these low-overhead but low-price transactions (this was a rarity when I bought mine in 2009). Apparently the sales guy we bought from sells 3x more cars than the next-best sales guy at the dealership, because he knows how to price the cars to move online and then acts straight & efficient when the buyer comes in.
He held up his end of the deal, paying 18% interest on a massive truck loan for 3 months.
The sad thing is many people would do the same thing without the ability to pay it off in full. At that interest rate and a ~7-10 year loan term, you'll be upside down on the vehicle until the very end of the loan. And most people wouldn't keep the vehicle that long because something else changes in their life...or they just want a newer vehicle.
Another example is most people never pay off their mortgage. Some refinance, often several times, resetting the term. Eventually they'll sell the house, pay off the mortgage as part of that transaction, and keep the change (if they're lucky.)
I haven't owned a car and i'm almost 30, and have always enjoyed public transport so far.
When I'll decide to buy a car, I'll just f-ing pay it in full and be done with it.
That's what I did, and as such I agree, but just be aware that you might very well end up paying more overall that way (assuming you're buying a new car from a dealer).
I saw this vividly when I bought my first house. It cost $61,000. My mortgage was at 9%. Two years later, mortgage rates had dropped to 7%, and my house was worth 90,000 (state appraised value). If I had bought the exact same house two years later than I did, I would have had the same monthly payment. That stayed constant, and the interest rate change drove a change in total price.
Part of the reason is: What is your alternative? Typically, renting. What's rent? A monthly payment. So if you're looking at a buy vs. rent decision, a big part of the decision is monthly expense of renting vs monthly expense of buying.
> is monthly expense of renting vs monthly expense of buying
Note: "monthly expense of buying" is very different than "monthly cash flow of buying".
The "monthly expense of buying" is the monthly interest paid, taxes, and maintenance.
The "monthly cash flow of buying" is the monthly mortgage paid (principal and interest), taxes, and maintenance.
When deciding to buy a space, you need to use the "monthly cash flow" to ensure you don't default on the loan. When comparing buying vs renting a space, you need to use the "monthly expense".
Houses are nothing like cars. I haven't had a car payment in many years. I'm still a long ways from never having a house payment.
This means that car payments are more of a cost of ownership and house payments are more of a reoccurring investment.
As long as the house is actually a good investment, being able to afford the down and monthly payments is the most important thing. Rather than spending vs saving/investing, the trade-off becomes more of investing in real estate vs investing in something else.
Where "stop playing the game" means get out of hot housing markets :/
Salesmen, well auto sales, are trained on the four square method to get you to buy. You could attribute the mortgage crisis a decade back as falling into this situation.
The barrier to buying a home used to be the down payment but creative financing is what got a lot of people in over their heads. It all about that cost per month.
Now people who over reach tend to forget all the other costs that come with auto and home ownership, namely insurance but owning a home has long term costs too.
https://www.consumerreports.org/consumerist/dealerships-rip-...
House prices are defined by demand. If your uncle wants to buy a house with a 40 year mortgage of half his salary, then I'll have to pay more to match it.
The price is certainly relevant when it comes time to sell, and a high price due to low interest rates leaves you more vulnerable to price shocks in the event rates need to rise.
Of course we haven't seen any major price depreciation due to rate increases in the last few decades :)
https://fred.stlouisfed.org/series/CASTHPI
https://fred.stlouisfed.org/series/FEDFUNDS
But you're right in the sense that we haven't seen the drop in home values (or any high capital asset) associated with the increase in interest rates of the 60s through 80s.
Unless we're willing to go negative, that cycle is coming to an end.
From a HN perspective, this means it's hard to buy a house and do a startup; you'll never accumulate enough savings to reduce the risk.
In the inflation-adjusted past, you had the option to save up $100k or get a $5k/month mortgage; now you have the option to save up $1M or get a $5k/month mortgage. The monthly payment hasn't changed but the space of options and (and their risks) certainly have.
But I'd definitely rather be buying a house in a high interest rate environment... don't like the tail risk given how low rates are.
If you view homes as day trading then yeah, there's risk in interest rates. But it's a home - a place to live if it's a primary residence. Ultimately if interest rates go up I don't really care since I don't plan on selling anytime soon. It doesn't change MY monthly payment. And if I did want to sell, well I'm staying in the same market - housing. So prices would drop across the board. So yes, maybe I can't sell my home for much profit or even a loss, but my home isn't the only one affected by this. Because you're in the same market, whatever you trade it for will have suffered a price drop as well.
Likewise if you buy a home while interest rates are high and they fall. Your home will have gone up in value but so will any other home you want to buy. So you're in a similar situation.
So I'm not worried about tail risk here. You do expose yourself to risk, however, if you buy more home than you can afford and we run into rough market conditions which put your income at risk. If you can't cover until things improve then you end up like the many people in 2008/2009 that lost their homes due to being over leveraged (mortgages are leverage, after all). This isn't unique to homes, however. Margin has its risks.
Here's how I see it, and I realize I'm fortunate: If interest rates begin to rise considerably over the next decade, reversing the trend of the last 40 years (!!!) then I'd consider pulling a portion of cash from certain investments to buy a home with cash after selling my current home for whatever p&l I get - if I want a new home. Or I'd just continue to live in my home and not worry about it. After all, I view my home first as a place for my family to live comfortably and then secondly as something I could make a return on one day maybe. But that isn't my primary concern.
If anything, I'd probably stay in my current home and then buy a second home (a vacation home, rental, etc) with cash.
Don't forget the tail risks of inflation.
The risk of not buying a house in a low-rate environment is that inflation takes off, the price of the house goes up 10x to match the price of everything, your rent goes up alongside everything else, but the people who bought still have the same payment as before. Interest rates went up to ~18% in 1981, but that still didn't take average prices down from the $47K in 1980 back to the $17K they were in 1970. A real estate bear market is usually 10-20%, not the 3-10x that home prices go up in a high inflation environment.
It kills any idea of getting a real return on your house but frankly that was not a real thing through most of history anyway.
IMO, for primary residences you did the right thing (if you want a house of course).
Another nice thing about owning a home is you can improve it (additions, adding bathrooms, etc) and certain additions more or less pay for themselves in terms of "getting your money back" over enough time. Again, probably not going to outperform the market, but you get to live in it. So even if the market tanks for a few years, I still get the benefits of whatever I've invested in my home.
The trick is to not overspend on a home. Too many people use all their savings to make a downpayment and then use too much of their income to pay for it. This can not only get you in trouble but also puts you at a serious disadvantage in terms of accumulating wealth.
All things degrade due to entropy. Things cannot truly become more valuable by themselves.
I think raw land is one thing that can become valuable on its own. Of course billions of years from now it will be gone.
Where I live the land is very much a big part of the cost of the home. The structure is worth what it would cost to demolish plus rebuild it minus existing wear and tear/needed repairs I figure. The value of the structure doesn’t appreciate as fast as the land it is on due to degradations as you’ve pointed out and materials/labor usually not increasing as fast as appreciating assets which the land itself is. Of course in many locations the structure is worth more than the land it is on.
Hence location being the most important part of the equation as any real estate agent will tell you.
The land doesn’t become “valuable on its own”, it’s just used to extract value from other things.
> In that original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labour belongs to the labourer. He has neither landlord nor master to share with him.
> ...
> As soon as land becomes private property, the landlord demands a share of almost all the produce which the labourer can either raise, or collect from it. His rent makes the first deduction from the produce of the labour which is employed upon land.
Wealth of Nations
They can stay high or low for quite a long time...
If interest rates go up to 6-7-8%...double digits, the housing market would be a bloodbath.
Mortgage rates: https://themortgagereports.com/61853/30-year-mortgage-rates-...
Housing prices: https://inflationdata.com/articles/inflation-adjusted-prices...
Inflation-adjusted housing prices went down about 20%. Nominal home prices basically stayed constant for about 2 years, then resumed marching upwards.
Also note that the actual bloodbath happened from 2006-2012 (when the housing crash took prices down about 35%). It does not correspond to any major increase in interest rates. The primary driver seems to be foreclosures, which in turn was driven by ARMs and poor lending standards. Conclusion might be that interest rates just don't matter that much as long as a majority of people are on fixed-rate mortgages, while they can matter a lot if folks are on ARMs they can't afford. (Interestingly, we may get a similar crash of multi-family housing in the near future, since all the tenants not paying rent now is having a similar effect on mortgages.)
My mom was a teacher and said that when she graduated in college (late 60s), teacher salaries were maybe 20-30% below engineer/lawyer/professor salaries. By the time I was born (early 80s) her classmates in those professions were making 3x what she was.
It's possible we hit a point where inflation ticks up due to recent stimulus/printing, and the Fed is forced to raise rates suddenly. The recent change to allow inflation to run past 2% indicates they're likely to let it run for a bit, though.
So either one of us has some miscommunication, or things are different where you live.
On the other hand, where I live a reasonable small house is £150,000 and senior developer wages are about £30,000 (net). People need mortgages.
The price could fall for any number of reasons: a market crash and country-wide depression widely impacting many people, or an individual owner who simply did no maintenance/upkeep over a period of years and the property is in disrepair. The disrepair scenario is common among elderly homeowners in the US.
Home mortages are recourse loans in all but 12 states (Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah and Washington).
I know several people in Denmark that were “stuck” with the house they were in after the price drops from the 2008 crisis until prices rose above the mortgages again.
You can probably make a deal with the bank somehow at higher interests, but they’ll want there money back.
You can also declare bankruptcy, but that is not simple and not without long term consequences I think.
My brother was hit too, though I can't recall the exact year.
He ran a small profitable business in the Copenhagen area but was hit badly by the downturn in the economy. He eventually ended up selling at a loss (I think) and moved north with his family so now they also live in Norway.
After five years, the agreement ends and the debt is cleared. Each person can only apply once in their life. Any future runaway debts cannot be cleared without the consent of each creditor, which probably won't happen. Unsure how this is done in the rest of Scandinavia.
Having such a severe punishment is probably more of a deterrence against risky behavior in the upper 5% of society, rather than a burden on the impoverished.
Without knowing anything about it, I would assume that the politicially-negotiated subsistence amount is probably quite lenient to lower-income folks.
I don't know how our delinquency rates compare to the rest of the world, but there's quite a bit of it. My take is that these laws are due to somewhat unflattering protestant cultural heritage, rather than a deliberate decision to encourage financial responsibility. I struggle to see how the possibility of lifelong debt slavery is moral.
It's just - I do have a bit of a problem with the underlying morality of this system, and our (Norway's) culture is so homogenous that few locals ever question these things. It's refreshing to share this on a forum where lots of people are curious and have an open mind.
It's not like this is a massive social problem. People who end up in this kind of misery still have a roof over their heads and get to eat and have good healthcare access. But they wouldn't really expect to ever get back on their feet status wise, and that's sad.
> Norwegians tend to be more financially responsible
I'd say that's being responsible, period. A lot of Americans aren't
You can ask a court to declare you bankrupt, but there are many requirements and rules. And the court may reject your application.
https://www.financialsamurai.com/non-recourse-states-walk-aw...
Banks would never turn away borrowers even if there is 0 percent mortgage or even slight negative (where they have to pay borrowers for the loan). That's because these loans are then sold to investment banks and are packaged as CDOs (and swaps and synth CDOs and so on ad nauseam) .
This was the whole subprime mortgage credit crisis. The stock market goes up as there are now more 'SPEs' (https://en.wikipedia.org/wiki/Special_purpose_entity) being listed and more money being poured into stock markets.
Banks usually don't keep the loans. They are sold off quickly for a higher profit.
Banks can and do routinely turn away higher grade borrowers with no other relationship angle (ie no short or long-term profitable cross-sell) because those loans are unprofitable for them and they can only make money on riskier credits.
More broadly, sub-zero base rates are a real problem for banks and may actually hurt rather than help credit creation (since banks are likely to do less of something which is less profitable).
The reason they're a problem is that most banks have a large portion of their funding in the form of deposits and passing on negative rates to depositors is very very hard - in my experience only the very largest (billions of dollars) overnight deposits get charged negative rates.
All this does contribute towards the search for yield phase of the credit cycle (CDOs were just a part of that - everyone likes to blame them but they didn't cause the credit cycle which is really a "natural" phenomenon, although they did act to obscure the amount of leverage in the system and thus the likely size of the damage when the bubble burst). Everyone across the board wants to take more risk because they can't make their numbers stack up with the less risky part of the credit spectrum. As a result over the long term some credit becomes mispriced and when there's a wave of defaults credit investors wind up losing money overall then we start the cycle again.
It's been quite some time Switzerland have negative rates and the threshold for charging the customer are getting lower and lower, closer to 100k than to 1B (base fees have also increased as a result of negative interest rates, easier to increase the banking fees than charge negative rates :))
This doesn't make sense for Americans because they use a single currency for everything, but in Europe, there is a benefit to having a revenue stream in a desirable currency which is appreciating relative to the Euro.
To the buyer, the loan looks like 0% because the buyer pays back the loan in Franks or whatever. The bank, meanwhile, gave out a loan of X Euros, and is receiving payments in a currency whose aggregate value is X+Y Euros. Their profit is Y. There's also the opportunity to make even more money selling options backed by these payments.
This is a completely valid means of making money, but it carries substantially higher risk than single currency lending. Which is probably the reason most banks don't want to carry too many of these on their balance sheets.
If I purchase property in Switzerland with a Euro denominated loan, I have to convert my payments from CHF to EUR. If I'm depositing into a CHF denominated bank account that is owned by the bank I'm borrowing from and they charge me currency exchange fee, ok, but if I'm savvy enough to go with a foreign currency denominated mortgage, I'm also savvy enough to find a cheaper way to convert CHF to EUR. Otherwise I have to take on the onus of arranging the currency exchange myself, in which case the bank I'm borrowing from doesn't have a chance to benefit from the exchange fee.
If I'm a European bank and I want to engage in currency speculation, like the other people said below, there's no reason for me to have to go through the administrative hassle of making the loan in the first place.
You can hedge against the performance of CHF by keeping proportional revenue streams of EUR.
* https://ca.investing.com/rates-bonds/netherlands-government-...
Commercial bonds may not be too far off, so the spread may be enough for them to make a profit.
Bonds are created and then sold to share holders and you may even have a bond with your own mortgage in it.
Depending on the class of bond, you get paid more or less (this is the CDO)
The profits are from the bonds on the loan in the stock market.
As long as the loan is 'conforming' (which the majority of loans on the up-and-up are) then Fannie or Freddie will guarantee it. Conforming loans must meet a number of criteria (Debt to income, income versus home value, etc.) to have a level of trust that the borrower will repay.
Edit: And yes, if you get caught selling a non-conforming loan to Fannie/Freddie (i.e. underwriting discrepancies) you can get fined and forced to buy back the loan. In fact sometimes they will go on fishing expeditions and companies will have to prove their innocence, almost like an IRS Audit.
There is also the 'servicing' aspect of a loan. Servicers basically collect payments for loans and forward them on to whomever backs the Mortgage. For Fannie/Freddie loans, what this means in case of a default is that the servicer will have to 'front' the money; this is what the housing industry was worried about at the start of COVID: before the guideline changes related to the virus, there were concerns about liquidity in that 'gap' between forbearance and (potential) forclosure.
Under Islam, loans are are strictly an act of charity. There can be absolutely no contractual obligation for the lender to receive any benefit of any kind (monetary or otherwise) from the borrower in return for the loan. The borrower is encouraged to return more than the amount he borrowed, purely as a show of gratitude, but it can in no way be part of the contract, and in no way implied one way or another (like "off the record" sort of thing).
True Islamic finance is pro risk sharing, with no exploitative and parasitic practices that we see today. Want to start a business? Pitch your idea to an investor willing to put money into it, you put in the effort and he (or multiple investors) puts in the money. If the business succeeds, all parties benefit, if it fails, investors lose their money, and you lose the time and effort you put into it. Fair across the board. Zero debt.
Applying actual Islamic finance rules, we would immediately rule out things like stock shorting, put and call options, margin and leverage trading, mortgages, interest bearing loans, selling debt for debt, and so on. Now you can bet that Wall Street won't be happy, but time and time again those practices have proven destructive to the economy, and further increase the wage divide.
> The Prophet (ﷺ) came to Medina and the people used to pay in advance the price of dates to be delivered within two or three years. He said (to them), "Whoever pays in advance the price of a thing to be delivered later should pay it for a specified measure at specified weight for a specified period."
Does that sale describe future contracts (without any other stipulations or clauses, e.g. no shorting, no leverage, etc.)?
Note that Islam places restrictions on certain sales. Currencies are to be traded hand by hand, on the spot. For example, it's impermissible to purchase gold using a credit card because the settlement does not take place immediately. So things are a bit more nuanced there, as gold and currencies cannot be bought using Salam sales for example.
Its interesting because advance sales are a positional bet similar to a short sell. Are you allowed to sell the Salam sale contract to a third party? Apologies for all the questions this is fascinating.
The same applies to more elaborate schemes that involve multiple parties or transactions. For example, it is possible to engage in a futures contract with the intention of gambling (buy oil or some commodity, and never take delivery of it and sell it immediately when the contract is due). This is gambling, your intention was never to actually possess the item, but only to immediately sell and either make a loss or profit.
Furthermore, goods for which the quality and quantity cannot be specified cannot be sold by Salam contracts, as per the Hadith in my previous post (e.g. gems or precious stones since each is considered different), and I've seen at least one source that also exempts stocks from being tradable in Salam contracts due to high uncertainty (called Gharar sales in Islam, also prohibited).
As far as selling Salam contracts before they are fulfilled, I do not know. What sorts of issues or benefits can result from selling such a contract before it is fulfilled?
Edit: I think it is prohibited as well, as now the buyer is selling something that he does not yet possess. So you have the same item being sold multiple times before taking delivery. This narration should be the basis of prohibition:
> The Prophet (peace and blessings of Allah be upon him) forbade selling goods in the place where they were bought until the merchants had moved them to their own location.
> Apologies for all the questions this is fascinating
No problem! I'll do my best to answer what I know.
[0] https://practicalislamicfinance.com/2020/02/17/short-selling...
Islam prohibits something called Riba. Interest and usury fall under it, but Riba encompasses more than just loans. The example about purchasing gold on credit falls under riba for instance.
These are the very foundations on which modern society is built and which drives the entire humanity forward. Sure, some people have managed to race ahead but on a whole we, as humans, have progressed from clubbing each other for food to arguing anonymously over the internet thanks to all these
I have no trouble accepting that these things co-occurred with the movement. I don't have a good reason/foundation to argue that they were necessary, or even beneficial, apart from artifacts that smoothen and/or amortize risks, insurance, for example.
And even for credit, I am not sure interest is needed. That leads to the world devouring growth that we have.
Just because we inherited a world where these things exist, the tendency to attribute them all to these things is not wise. I don't know what to call this fallacy.
Exactly. It's not needed. It causes a growth at all cost situation we see today (and one cost is debt slavery for a large portion of the population, increasing the wealth gap).
As a matter of fact, I would wager that these practices are a main driving force of the wage gap we see today, causing instability and unrest, inflation, and tons of other problems. We have better solutions, it's just that no politician I've seen so far is going to dare admit that the modern foundations are corrupt. Very powerful people are not going to be happy (note that I'm not arguing for socialism or communism either, they are destructive in their own ways).
Isn't this what is happening right now in the US, that the down-payment is one of the barriers, since less than 10% (forget 20%) down has huge penalties long-term?
This seemed to completely miss the point of a down-payment, but apparently banks were willing to go with it. They even offered the dual loans as a single product for convenience.
If you work the numbers out it can theoretically save money over the long term vs. renting long enough to save the 20%, especially if it means you can put more money into risky stocks with high returns, but it also increases your risk of financial disaster if the bubble for some reason ever stops inflating, but that never happens as we all know.
Personally I though it was too sketchy and went for a more traditional loan, but I know several people who took loans like that.
ironically because the loans where insured they offered lower interest rates on these loans, which meant they costed almost the same as 20% uninsured loans (you paid the insurance premium on-top of your mortgage payment).
even if you have a 20% down it made more sense to put 5% down and put the rest into the index funds or a HISA.
It's definitely not ideal but it's not an overall huge drag.
Sellers will heavily favor a cash offer, as it's faster and far more assured of going through. One strategy I've heard about people doing is to take a pile of cash, acquire the property, and then refinance it pulling out 80% of what they put in so that they can both have a mortgage and have a stronger buying position. Add in things like dropping inspection, no contingencies, etc... and it gets really hard for many first time home buyers to compete.
Additionally, coming in with an FHA 3.5% down, vs someone with a traditional 20% down - the sellers will favor the 20% as again it's less paperwork, easier, faster, and more certain to go through if the assessment is off by a few %.
I had no idea about this before trying to buy a property in New England. So much of traditional advice doesn't include these details.
What's weird about it to me is that this is one of the few places in US consumer markets where the seller cares deeply about your method of purchase and where the money came from. Buying a used car? They don't care if it's cash, credit, loan, etc generally. Hell, most car dealers want you to use a loan from them and would prefer that over cash in many ways. When you go to WalMart, they don't deny you buying something for using a credit card vs cash.
I'll also add that in competitive markets you also get into a situation where it's a bidding war and you're pushing what the property might appraise for. If you're doing 3.5% down, even though you might be approved up to X, the bank may not be willing to stretch the appraisal for the property. With 10% or 20% down, that's less of a concern.
Also FWIW, for new cars, how you pay does matter. The dealer makes money on the financing, so they will give you a different cash price vs if you go with their financing. The reason being is that they want to sell you a "zero percent" loan that effectively bakes in the interest up front, so their financing will look better, but the final price will be higher.
Often times sellers are trying to buy another home and have put a contingency offer (depending on the market) on another home, so they're heavily incentivized to accept an offer that moves quickly so that they can close sooner. A tiny bit more money may not be worth the risk of having multiple deals fall though, hence all-cash offers and traditional loans being more attractive.
With that context, it's no wonder why sellers care so much about the method of buying.
It's not weird at all. Buying a car or TV from Walmart with a credit card does not carry anywhere near the risk of the transaction failing that buying real estate does.
It's simply a function of the probability of the transaction succeeding (or "closing" as it's commonly referred to). With a loan, there are multiple parties whose requirements need to be met, from the lender, the home insurance, the title insurer, the seller, etc. The more entities you cut out, the less chance of the transaction failing. Underwriting a car is also much more simple and less risky for a lender than a house, which has much higher downside risk and unknowns.
Not to mention the myriad laws resulting in legal liability and opportunity costs relating to real estate purchases, as opposed to a car purchase or a TV purchase where the worst that can happen is the seller takes it back and sells it to someone else.
Did you mean geographically? Or temporally? because if the second, I'm pretty sure that is a direct legal consequence of the 2008 housing meltdown that boned both sides of the lending equation.
The financing contingency means that if your financing falls through, you get your earnest money back. Assuming a 500k purchase with 1% earnest money, waiving the financing contingency means that the seller receives at least 5k.
Even with a financing contingency waived, if the buyer has 100k, and their financing falls through, there is no way for them to magically make 400k appear for the sale to happen.
If you are assuming that the buyer has the full purchase price in cash anyways, and are only taking a mortgage because rates are so low, then ya, your point stands (waiving financing contingency along with proof of funds). But lets not pretend that having cash to cover the full price of the property is the common situation.
Also not a guarantee for the seller - but they’ll get to keep the deposit
One important difference between Geneva and Denmark though - Genevas extremely expensive housing market (in both purchase and rent prices) is driven by its geographical location. It's surrounded by mountains on most sides and sitting on a lake. This means there's pretty much no space to build more buildings to accommodate the influx of people moving there to work in science and politics.
Geneva building prices were skyrocketing without those loans just because there was no way to build more.
What makes money for the bank is the difference of interest rate between money they buy and money they sell. Whether one or both are negative or positive doesn't really matter. Relative difference is what matters.
In econ-101 it doesn't matter what the spread is, it isn't in itself rational to lend at 0%. That is taking on risk with no gain.
There must be some strange contortions in place to make this work. Whatever a "loan" is these days is going to be a totally regulatory construct with little connection to what they used to be way back when.
But they do not have to buy the same quantity of money as to what they are selling. When making a loan money is created out of thin air.
They do not have to hold deposits in the amount they lend out, but they do have to have the money. They have to hold back a fraction of the deposits.
If money was created out of thin air (in consumer banks), any loan with any interest rate (even negative one) would be highly profitable.
I am not talking about central banks.
The bonds have a 0% coupon but the value is now 96.725: https://www.nordea.dk/privat/produkter/boliglaan/Kurser-real...
So the buyer of the house (seller of the bonds) would have to sell 3.3% extra bonds. And the buyer of the bonds gets a discount.
As for why anyone would buy such bonds: The system is considered very stable (no US sub-prime mess) so if you have a lot of money, do not want to take risks (stocks and forex) and your bank charges you negative interest, it might make sense.
As for the house prices. Yes they are going up. But you still have to pay back the money in 20 years. Or remortgage, but then it might not be at 0%.
Another thing to consider is that property taxes are based on a public valuation that have some correlation with what you would be paying for a house (valuations is big mess now, but it will probably be fixed in less than 20 years).
Banks fund themselves using a variety of sources - bonds and money market instruments (of various types), equity, deposits, past profits (which is really the same as equity) and various central bank mechanisms. Of those the only ones where there is a decent chance of funding at negative rates are bonds/money markets and central banks.
Bank profits have been squeezed by negative rates precisely because they've been forced to pass on more of the rate reductions to borrowers than they've been able to recapture for themselves.
- There's no shortage, rather the opposite, even in urban areas that are still growing in population.
- Housing value typically only depreciates over time.
In Switzerland, real-estate mostly belongs directly or indirectly to pension funds. This creates all sorts of wrong incentives.
Where Real part is down payment and Imaginary part is land price?
Seriously though, this has been the situation in the UK for a long time. Today the down payment is equivalent to price of the house in the 1970's.
1. House prices rise to the point where the down payment is essentially the price of the house. The house price itself becomes imaginary. What you are really worried about is the down payment.
2. Since house prices are now super high, only people who have saved up a big down payment can actually buy a house.
3. Banks turn away borrowers because they end up with too many loans on their books and no real incentive to get more.
I would be interested to hear from people with more direct experience on how this plays out.