This chart show the price evolution in the US from 1890. If one lesson should be taken from this chart, is that the price, overtime, is stable adjusted to inflation.
Although it is clear that we have episode of boom and bust, which always bring the value back to the average level (100-120 in this index).
The only period where house price were relatively cheap was between first and second world war. Even during the depression, house were rising, albeit at an historical low.
Conclusion:
-Price stability is of the essence for housing. It's is a target for speculation during only short time (10 years) then goes back to average. This has a very similar pattern with the Finnish housing market.
-It's quite impressing to see that we have not yet seen the bottom in the U.S. Housing Market since its peak of 2006. Most probably a "bottom" will happen, maybe in 2010-2011, so 4-5 years at best.
Translating that to the Finnish market, we will probably see a bottom in 2008+(3-4 years) = [2011-2012] which is the period I would recommend people to purchase a house (according to today analysis, which might still change (due to political intervention-non-sense law, self interest, greed, corruption or sharper than expected correction in 2009-2010 )
6 comments:
For 2009 it is quite clear, buying housing is better than rent.
Simple calculation, for a decent 4 room apartment.
1) rent 1200 Euro. I really doubt you can get it this cheap.
2) Buy, 300K Euro, current interest rate 4% (can only be less), this make 1000 Euro interest/month, + 200 Euro maintanence fee, total 1200.
So if you have 100K cash, and taking less than 200K loan, it is still much better to buy house than rent. Another option is
1) invest 100K cash in stock market, and become 50K at the end of the year,
2) pay 1200 Euro rent per month to live.
In the past year 2008, the biggest losers are stock market investors, on average suffer 50% loss. Housing price has decreased, but not so much.
your assumptions are clearly flawed...
If your 300k house price fall by 5%, you are effectively covering you yearly rent... since you are saving about 15 000 euro just by watching -not buying-.
In the meantime if you had put this year as i recommended few time in this blog, in 5% term account you would get 5000 euro minus tax. Which will cover quite few month of rent...and you can easily find between 700-1000 euro rent (which i think will go lower since that's pretty big relative to Finnish salaries and coming recession).
*I think I already told you that when stock market fall, everybody is a loser as government, pension liabilities are impacted.
As a matter of fact, no one will ever put 100% of his wealth in the stock market, usually people diversify in other assets (Bonds, housing, gold etc...). And common sense will tell you when rates are at 5%, risk free to choose that option (and diversify banks this time, just in case you had a complete meltdown of the banking system).
The other part that you forget is the "Sleeping effect"... If you have 100k in cash in the banks, you can sleep well, no stress about recession or about losing your job or seeing the carrot or meat price going higher by 20 cents ;->.
Not even talking about the loss of freedom while contracting debt..it's true in a rising market you don't to forget that and concentrate on the wealth effect...but now we are clearly starting a downturn...
Rui
You are not thinking about the recovery.
The ECB is currently lending in an unlimited amount to support the economy. At some point all of that money will have to cooled down with higher rates and removed from the market.
Rates can easily double or even triple from here in a matter of about 5 years. That is why there is so much uncertainty now. There are no magic solutions.
Yes you are likely to be able to lock in a low fixed rate maybe for 5 years at historicly low interest rates but you have to believe you will still have a job to pay the mortgage when it resets to whatever is the new market rate in 5 years time. The economy will have survived today but it will be barely alive even so. Will you have a job??
Not surprisingly more and more finns are now worried about jobs and social security and what kind of society they will be living in.
By all means be optimistic but also be realistic please.
Personally I don't believe in a quick recovery or either in the hyperinflation theory...on the contrary.
Europe will not recover quickly as opposed to the US. The US is a formidable machine that readjust when it need and quickly. Their housing market has had it readjustment (-20% so far) already 2 years ago and so did the banks (merging or disappearing) and company (firing or going bankrupt or cutting agressivley costs).
On the over side, you have Europe with almost oriented socialist country that want to rescue anything that moves and make things worse than good: touching gold and transforming it into lead.
Voices are rising from construction sectors & co to ask the government to put tax payer money upfront because those people want to keep price the way they are and want to continue enjoying the same type of profit...Mother nature doesn't think so: gravitation law is telling that what goes up, goes down the same way.
The strange thing is that almost everybody around is buying a house not because it's natural but simply because they are afraid to lose money or else to gain money- a speculative, capital oriented tool.
Like the tulip bulbs, in its own time, it has high value as long as buyer believe it so...or until the music stop. I think the music has stopped, I'm hearing another tone, maybe a deep silence from the buyers that undoubtedly let "the chairs empty" and put a stop of a 10 years party...
It's a natural part of a cycle that some don't want to see or never though about its existence. Now the question will be about hard or soft landing...I'm in the camp of a hard landing with regard to housing in almost all European countries...
hard to say Europeans are socialist country when USA is communist and Russians most capitalist on earth. :-)
The biggest thing Rui is missing the equity risk on the home--it is only downside risk at the present time.
Even Rui has to admit that it would be better to have 100K in the bank than having in home equity which will only head south in the coming year.
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