5 ms·

I'm assuming that $80k/year is gross? Given Sweden has high income taxes, borrowing say $800k on a $40k net salary (for a house!) seems like extremely bad finan

I'm assuming that $80k/year is gross? Given Sweden has high income taxes, borrowing say $800k on a $40k net salary (for a house!) seems like extremely bad financial management. Which sane person who is good with money does that? That sets you up for a life of misery (and not unrealistically, an underwater house during your lifetime).

alkonaut 9y ago
Yes gross. $80k gross is around $53k net (depends on where you live but roughly). Now, remember that reason we are in this mess is because interest rates are so low. We still have pretty low living costs. Our $1M house at 80% is pretty cheap, due to low interest rates. Now, everyone knows interest rates can and will be higher in the future, but people have to buy on the current market regardless (And everyone seems to accept to have less spending money when interest rates double or triple). The calculation now for our couple with $100k household net income isn't all that bad. The monthly "rent" for the house is between $2k and $3k of which $1.2k is down payment ($24k-36k year). Double the interest rates from 2% to 4% and it's $3k to $4k/month. I think spending over 50% your net income on living costs is proabably a limit to look out for - and that will certainly happen to these people should interest rates go north of 5% or there about. We also need to remember that in Sweden people generally don't save up for a rainy day. I'm not saving for retirement, kids edication, risk of being ill etc. So in a nanny state the equation is slightly different than in say the US. > Which sane person who is good with money does that? It doesn't matter so long as it is at least one person in the auction for each house does it. If there are no homes to rent and nothing is built, there will be competition for the existing homes on the market. > not unrealistically, an underwater house during your lifetime This is definitely a risk. And banks are now lending less and less. With a 25% down payment the bank will know the hose can take a 25% correction and still be over water. But the scary bit is of course that if there is a 20% correction, no one can move, and no one will consume anything for a very long time, which will lead to pretty significant economic fallout.
- xbzbanna 9y ago
  You're talking about these interest rates as though they can just move around - are these adjustable-rate mortgages? In the US, the standard mortgage has a fixed rate. So people with those mortgages would benefit from increased interest rates and/or inflation in the wider economy.
  - mijamo 9y ago
    Rates in Sweden are adjustable. Recipe for a future desaster and huge pressure on the Central Bank should they move up their rate... As a French living in Sweden,this system seems sooo fucked up but everybody seems to think it's normal.
  - alkonaut 9y ago
    Yes, many homeowners have all or a large part of the mortgage at a rate adjusted several times per year. Right now these variable rates are around 2%. So a lot of people will see their interest rate expenses double if (when) rates normalize at say 4%. I have my mortgage split between 5year fixed, 2 year fixed and the 3month rate, in order to limit my exposure to variations somewhat. The general consensus is long fixed mortgages are a poor economic choice for those that have the economic margins to be on the variable rates, since the banks margins are so much higher.
    - marvin 9y ago
      Of course, most people who borrow 80+% can't _really_ afford the risk of an adjustable-rate mortgage, but they think they can because rates are always low and will never go back up ;)
      - alkonaut 9y ago
        Banks do stress tests at 7% interest rate which was a reasonable "high" interest rate 10 years ago, but now it seems almost unimaginably high. So I think people (and banks) have calculated with higher rates, but there is always illness, divorce, unemployment... Lots and lots of people would have a pretty miserable economy if interest rates go over 6% (i.e triple) - spending most of their money on mortgages. So this creates the risk that rates will be self sustaining at a low level because even a 2% increase will reduce consumption and halt inflation pretty quickly.
- akoncius 9y ago
  "And everyone seems to accept to have less spending money when interest rates double or triple" another angle to look at this phrase would be "people don't see other option". Another option could be renting, but then there are many downsides - you are wasting rent money on temporary living instead of paying for your own house. Another downside at least in my country is difficulty to live normal life in rented apartment - usually there are restrictions (from landlord) to not own a pet, or they refuse to rent apartment for young family with babies. So people are kind of forced to purchase apartments, and ususally the need is to live in city where employment is highest, otherwise you will be unemployed or your expenses on commute will be the same as difference in loan payment which you saved with cheaper purchase. I am waiting (and renting) for "good time" to purchase apartment, and it's more than five years like that and I don't see any signs for hope anytime soon, and you realize that time goes by and you are getting older and your timeframe for which you can take loan is shrinking anyway, so situation becomes a bit desperate I would say. So decision making with real estate is not only rational but emotional too.

alkonaut 9y ago

Yes gross. $80k gross is around $53k net (depends on where you live but roughly). Now, remember that reason we are in this mess is because interest rates are so low. We still have pretty low living costs. Our $1M house at 80% is pretty cheap, due to low interest rates. Now, everyone knows interest rates can and will be higher in the future, but people have to buy on the current market regardless (And everyone seems to accept to have less spending money when interest rates double or triple). The calculation now for our couple with $100k household net income isn't all that bad. The monthly "rent" for the house is between $2k and $3k of which $1.2k is down payment ($24k-36k year). Double the interest rates from 2% to 4% and it's $3k to $4k/month. I think spending over 50% your net income on living costs is proabably a limit to look out for - and that will certainly happen to these people should interest rates go north of 5% or there about. We also need to remember that in Sweden people generally don't save up for a rainy day. I'm not saving for retirement, kids edication, risk of being ill etc. So in a nanny state the equation is slightly different than in say the US. > Which sane person who is good with money does that? It doesn't matter so long as it is at least one person in the auction for each house does it. If there are no homes to rent and nothing is built, there will be competition for the existing homes on the market. > not unrealistically, an underwater house during your lifetime This is definitely a risk. And banks are now lending less and less. With a 25% down payment the bank will know the hose can take a 25% correction and still be over water. But the scary bit is of course that if there is a 20% correction, no one can move, and no one will consume anything for a very long time, which will lead to pretty significant economic fallout.

xbzbanna 9y ago
You're talking about these interest rates as though they can just move around - are these adjustable-rate mortgages? In the US, the standard mortgage has a fixed rate. So people with those mortgages would benefit from increased interest rates and/or inflation in the wider economy.
- mijamo 9y ago
  Rates in Sweden are adjustable. Recipe for a future desaster and huge pressure on the Central Bank should they move up their rate... As a French living in Sweden,this system seems sooo fucked up but everybody seems to think it's normal.
- alkonaut 9y ago
  Yes, many homeowners have all or a large part of the mortgage at a rate adjusted several times per year. Right now these variable rates are around 2%. So a lot of people will see their interest rate expenses double if (when) rates normalize at say 4%. I have my mortgage split between 5year fixed, 2 year fixed and the 3month rate, in order to limit my exposure to variations somewhat. The general consensus is long fixed mortgages are a poor economic choice for those that have the economic margins to be on the variable rates, since the banks margins are so much higher.
  - marvin 9y ago
    Of course, most people who borrow 80+% can't _really_ afford the risk of an adjustable-rate mortgage, but they think they can because rates are always low and will never go back up ;)
    - alkonaut 9y ago
      Banks do stress tests at 7% interest rate which was a reasonable "high" interest rate 10 years ago, but now it seems almost unimaginably high. So I think people (and banks) have calculated with higher rates, but there is always illness, divorce, unemployment... Lots and lots of people would have a pretty miserable economy if interest rates go over 6% (i.e triple) - spending most of their money on mortgages. So this creates the risk that rates will be self sustaining at a low level because even a 2% increase will reduce consumption and halt inflation pretty quickly.
akoncius 9y ago
"And everyone seems to accept to have less spending money when interest rates double or triple" another angle to look at this phrase would be "people don't see other option". Another option could be renting, but then there are many downsides - you are wasting rent money on temporary living instead of paying for your own house. Another downside at least in my country is difficulty to live normal life in rented apartment - usually there are restrictions (from landlord) to not own a pet, or they refuse to rent apartment for young family with babies. So people are kind of forced to purchase apartments, and ususally the need is to live in city where employment is highest, otherwise you will be unemployed or your expenses on commute will be the same as difference in loan payment which you saved with cheaper purchase. I am waiting (and renting) for "good time" to purchase apartment, and it's more than five years like that and I don't see any signs for hope anytime soon, and you realize that time goes by and you are getting older and your timeframe for which you can take loan is shrinking anyway, so situation becomes a bit desperate I would say. So decision making with real estate is not only rational but emotional too.