The real estate market doesn't make sense to me.

71 posts in this topic

On 1/13/2017, 10:16:30, Smaug said:

 

I agree with you 100% you but I'd like to expand on that thought.

 

In the typical situation you describe you are only richer "on paper". Your standard of living is the same and if you moved you wouldn't be able to cash in on any capital gains because you'd have to spend those gains on your new home anyway. However, house inflation makes home owners wealthier in relation with renters. In practical terms, homeowners keep their residential "status" (the quality of their housing stays the same) but renters become poorer because as purchase and rental prices goes up, their purchasing power (the quality of the housing they can afford)  decreases, assuming all else stays equal.

 

In a way, house inflation acts a wealth redistributor, moving wealth from the poor (which own less or no real estate) to the rich (which own more real estate). 

 

There are also many examples in which house inflation actually makes home owners richer. I am going to use the UK as an example because it's a country with historically spectacular house inflation. In the UK, it is quite common for home owners to keep refinancing their property and increasing the size of their mortgage to generate loans that they treat as income. I''ll illustrate this with an example:

 

Mr and Mrs. Smith buy a house for 200K. Let's pretend their mortgage is 180K.

After a few years their mortgage has decreased to 150K but their house has doubled in value to 400K, so now they are sitting on 250K  (400 - 150) worth of equity. Note that when they bought the house their equity was only 20K (200-180)

They decide to borrow another 100K. The bank is happy to lend them the money as their house (which is its security) is worth 400K now.

Now the Smiths mortgage is 250k and their equity is 150K

They use 50K of their newly acquired cash for home improvements (e.g. a conservatory). Maybe their house is now worth 450K as it has a nice new conservatory attached to it.

They use the other 50K to buy a new car, go on a cruise and buy new clothes.

Notice how the Smiths have actually become "richer" and not just on paper simply because of house inflation: They have an improved house, a new car, new clothes and they went on a cruise. These things weren't bought with income--house inflation paid for them.

 

In the meantime renters have become poorer, because with the same salary, more and more properties are now out of their reach. If properties have doubled in price they can only afford "half" of what they could afford before.

 

Now lets fast forward to the Smiths' retirement. After 25 years the Smiths' house is now worth 1,250,000 million quid. They have a 250K mortgage and 1,000K equity. They haven't paid off their mortgage in all this time because they discovered that they could buy stuff they couldn't ordinarily have been able to afford with their income by borrowing against the house. Because the house kept going up and up and price, these debts were cancelled out by their unrealized capital gains and the bank has all too happy to keep playing this game.

 

Still, renters keep getting poorer and poorer.

 

When they retire, the Smiths decide to sell the house. They pay off their debt of 250K with the proceeds, buy a house in Greece for another 250K and are left with 500K cash. Notice I say "Greece", because the Smith's have now moved from a place with high house inflation (UK) to a a place with lower house inflation (Greece), they've now become richer, purely riding property inflation spread between the UK and Cyprus.

 

This is a dangerous game to play because it's success solely hinges on the house inflation. But we all know property cycle, at some point the economy will contract and we'll have a bust. Our U.K. couple might borrow against the equity of their house, but immediately after that the property bubble busts, leaving our couple with negative equity.  

Even when they are lucky and they manage to sell the house at highly inflated rate, they'd have to move outside the inflated system to afford a new residence. As you wrote, Greece, which means leaving family, friends, grandchildren, health system and familiar environment solely for affordable housing. That is a cost in itself.

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It is quite problematic comparing "Germany" to "Ohio". Both are very large markets with large internal differences. There are different reasons why some German cities currently have low rental yields: In Frankfurt, Munich and other cities with affluent populations and strong, well established economies, the investment is considered "safe" and so buyers will pay a higher price relative to income. In Berlin and Leipzig there is hype and strong price momentum so investors will accept a low current return in the expectation that this momentum will continue. 

 

In places that have no recent momentum and weaker local economies the rental yields on properties are as high or even higher than what you describe in Ohio.

 

On a national level, interest rates in Germany are lower and credit is more easily available, which will always drive prices higher. Rents, however, are unaffected by interest rates. 

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On 1/15/2017, 10:51:55, desdemona said:

This is a dangerous game to play because it's success solely hinges on the house inflation. But we all know property cycle, at some point the economy will contract and we'll have a bust. Our U.K. couple might borrow against the equity of their house, but immediately after that the property bubble busts, leaving our couple with negative equity.  

Even when they are lucky and they manage to sell the house at highly inflated rate, they'd have to move outside the inflated system to afford a new residence. As you wrote, Greece, which means leaving family, friends, grandchildren, health system and familiar environment solely for affordable housing. That is a cost in itself.

 

Not only that but also that the pound drops and suddenly they're struggling to pay the bills rent and/or mortgage. Healthcare becomes an issue and suddenly the idea being able to make an appointment in English becomes really appalling!

 

Canada is in the midst of the most insane property market in the world, people who have followed it for years are scratching their heads trying to figure out what is going on. In the midst of a pandemic, sky high unemployed and every the housing market has just gone nutso, beyond crazy. Even the cottage market (Barrie and above) has just gone nuts, places that might have taken 2-3 years to sell suddenly getting multiple cash over asking bids! It's like the lockdown has made everyone insane. 

 

One aspect of the German housing market I've never seen discussed is the price difference between new and re-sale. I don't know if it's just Frankfurt or what but prices for apartments vary massively, much more than could be explained away by people desiring new.

 

Generally speaking hochhausen  have the lowest value at around 2000€ per sqr mtr, your  typical standard German eigentumswohnung run around 3500€ and a new build is well over 5000€ per sqr mtr. Considering the cost of buying here it strikes me as crazy anyone would buy new. Buy a run down resale drop a 100 grand into renos and you're still ahead by at least a 100 grand if not more

 

Nuts

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Just heard in the news that buying houses and appartments is often done to launder money.

So, basically, people who want to do this don't care whether the m² costs 5000 or 10000€

 

" Buy a run down resale drop a 100 grand into renos and you're still ahead by at least a 100 grand if not more "

..and you still habe an old building. You would hear cjildren jumping on top of you or the neighbours heaving sex on the other side of the wall.

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1 hour ago, Rushrush said:

It's like the lockdown has made everyone insane.

Many may well have been before lockdown. ;)

30 minutes ago, AnswerToLife42 said:

You would hear cjildren jumping on top of you or the neighbours heaving sex on the other side of the wall.

Sounds painful. I hope you mean that the children are jumping around in the flat above.

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1 hour ago, Rushrush said:

 

Not only that but also that the pound drops and suddenly they're struggling to pay the bills rent and/or mortgage. Healthcare becomes an issue and suddenly the idea being able to make an appointment in English becomes really appalling!

 

Canada is in the midst of the most insane property market in the world, people who have followed it for years are scratching their heads trying to figure out what is going on. In the midst of a pandemic, sky high unemployed and every the housing market has just gone nutso, beyond crazy. Even the cottage market (Barrie and above) has just gone nuts, places that might have taken 2-3 years to sell suddenly getting multiple cash over asking bids! It's like the lockdown has made everyone insane. 

 

One aspect of the German housing market I've never seen discussed is the price difference between new and re-sale. I don't know if it's just Frankfurt or what but prices for apartments vary massively, much more than could be explained away by people desiring new.

 

Generally speaking hochhausen  have the lowest value at around 2000€ per sqr mtr, your  typical standard German eigentumswohnung run around 3500€ and a new build is well over 5000€ per sqr mtr. Considering the cost of buying here it strikes me as crazy anyone would buy new. Buy a run down resale drop a 100 grand into renos and you're still ahead by at least a 100 grand if not more

 

Nuts

 

Turn key properties are appealing for people that don't have the time or inclination for renovations - people with young families, starting in a new job etc. 

 

Having said that, I know a couple who want to buy a new build because for them, the standard of older houses is not good enough. They turned down a lovely house on the outskirts of our neighbourhood because they want underfloor heating. I would have bought the house in a heartbeat.

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7 minutes ago, pmd said:

 

Turn key properties are appealing for people that don't have the time or inclination for renovations - people with young families, starting in a new job etc.

I have a colleague in Munich that bought a house in bad shape to renovate it and move in. He bought it really cheap. After almost 3 years, he is still not able to move in and the renovation work made the house more expensive than buying in proper shape.

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26 minutes ago, pmd said:

 

Turn key properties are appealing for people that don't have the time or inclination for renovations - people with young families, starting in a new job etc. 

 

Having said that, I know a couple who want to buy a new build because for them, the standard of older houses is not good enough. They turned down a lovely house on the outskirts of our neighbourhood because they want underfloor heating. I would have bought the house in a heartbeat.

 

Knowing the Germans that absolutely makes sense! There's also the fact that Germans tend not to move, you buy one house and live there for 50 years, no buying a starter home and then after a few years move into something nicer. Still the price premium from resale to new is still pretty extreme.

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39 minutes ago, MikeMelga said:

I have a colleague in Munich that bought a house in bad shape to renovate it and move in. He bought it really cheap. After almost 3 years, he is still not able to move in and the renovation work made the house more expensive than buying in proper shape.

 

You can be unlucky alright..I know a couple who hired a family friend (warning bell!) who was a builder to renovate their bathroom - well he made a complete pig's ear of it and they had to hire someone else to redo all the work.

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3 hours ago, AnswerToLife42 said:

Just heard in the news that buying houses and appartments is often done to launder money.

that's because germany is one of the most corrupt countries in the world. the fact that it's in the West makes it more so.

 

"One problem for us is that the prosecution of money laundering in Germany isn't traditionally well established," FIU head Christof Schulte told the Tagesspiegel.

 

But, download a movie or cross the street against the light and the full weight of the german law befalls you.

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