Saturday, July 2, 2016

Home Sweet Home: when to ask for a mortgage?

Last time, in the Home Sweet Home series,  I wrote about the mortgage issue nowadays, ie that when the interest rate that a bank asks for your loan falls, it is convenient to stay on rent for some time, waiting for the interest to reach a "floor", a minimum, before buying a house.
A person may argue that if interest rates are falling, then more people are willing to buy a house, to real estate market is going to raise, so the benefits coming from a reduction in the interests are completely wiped out by a raise of the house price.
You may have a point on that, theoretically, but you have also to consider that:
1. The real estate market depends on the possibility for ordinary households to get into more debt: if your wages are stagnating, and taxes are raising because there is no growth but the government has to pay to keep the welfare system alive, and confidence in the future is low, not many families are willing - or can afford- to buy a new house and the stay at the window waiting for better times. The bust of 2008/2009 is still vivid in our memories.
2. Elderly people are getting older in nice districts and sometimes they die, often leaving vacant expensive houses. Many migrants are coming, but their wages typically are very low, so they tend to live in bad disctricts and poor outskirts. So, good mansions are raising less, or not raising at all, than low level houses.
3. Rich people abroad invest in hi-prestige mansions in the centre of important cities, not in the outskirts or in small town close to Amsterdam or Rotterdam.
4. Due to Amazon and internet selling and improved logistics, many malls are dying, so freeing further cubic meters for renting or selling. This is a very long term process, but it is going on right now.

The key point, here, is that households are deep in debt. My opinion is that in the near future (within 1 year from now) interest rates will be lower and house prices in the Netherlands will not raise that much. I guess that a good time for buying a property will be in the first quarter of 2017. Why? because at that time the market might already start to price the end of Mario Draghi's Quantitative Easing (QE), ie there will be less liquidity in Europe for banks and house prices will fall again, while the interest rates will still be very low, close to zero. I also think that there will be a new QE in USA, which will further drain liquidity from Europe to USA. So, less cheap money for banks to be invested in real estate for "buy to let".

Many analysts foresee that another world crisis is looming. Well, for sure there are important banks in very bad shape in Europe (Deutsche Bank in Germany and Unicredit in Italy, notably), China is slowing (maybe it has not grown at all last year), and USA are tightening their imports: remember, if the USA stop buying, the world collapses. It is not the exporters who make the world a decent place for a living, it is the importers. Because if everybody is exporting, and there is nobody to buy stuff, your investments and your factories, go bananas and the bank system that financed those investments go bananas too. And if workers in factories are fired, then the property houses fall. Everything is connected.
You should also consider that, differently from a family who has a ceiling on the debt it can tolerate, a country with a Central Bank, that is a lender of last resort, can always create money from thin air, by means of securities issued by the Treasury that its Central Bank buys.
In other terms, unless a Country owns debt in a foreign currency (for example like Argentina or Brazil that are full of debt nominated in USA dollars), the Treasury can always issue debt that is bought by its Central Bank and whose profits are then turned to the Government. Zero cost and lots of credit around. I know, it is a bit complicated, but I will explain this point another time(see Money Series in this blog)

If a crisis will strike this Summer 2016, well, it is even better if you have a secure job and some cash to buy a house. If you don't, save money and improve your financial QI in the meantime. Your best asset to invest in is between your ears.

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