Friday, April 16, 2010

Bubble oh you sweet bubble

It will hold, no needle can penetrate it!

There are two things about housing and home ownership they don’t normally tell you. They want you to think about borrowing and spending, and not making rational decisions.

‘They’ in this little exercise are real-estate brokers, banks, central banks, politicians, economists and lots of other criminals.

The first thing you should ignore, according to our enemies, is actual disposable income versus the prices (and level of borrowing) on housing. Historically speaking the price of a home have been about three times that of peoples annual income. This line of about three times our annual income, on average, has been true in every country and regardless of time in history. The ONLY time this hasn’t been true is during times maddening bubbles.

The second thing they want to shrug your shoulders at and go ‘mah’ about is the correlation between the prices of housing versus the price of renting.

You see the cost of renting should never be cheaper than that of a bought home. If it is, you can automatically assume something fishy and very smelly is going on. Sadly this correlation has been distorted through government housing projects, taxes, complex building regulations and so on. But as a general rule of thumb this is still true.

Let’s say you can rent an apartment for $1000/month. Next to that apartment is another one with similar size and standard that you can buy. If the total cost per month for buying that other apartment is, including mortgage and other costs such as repairs, exceeds $1000/month, why would you buy? A rational person might do it anyway if there’s some additional value such as independence in owning or a better view. But even then it is a bad way of spending your money.

So there is only one reason to buy such a home that is clearly overpriced from the start, and that is to speculate on it. Prices never go down on a home, right? Always go up, up, and away…

These two facts have all throughout history always been true, only a fool would think it isn’t true also today. But as usual Einstein’s definition of insanity holds true.

Lately in Sweden there’s been a debate over whether or not a housing bubble has been in the making.

Let’s first look at the basic fundamentals and then go back to the two truths above.

A) Housing prices have risen with over 150% since 1997. This is one of the highest increases in the world and it’s a bigger increase than in the US before their minor crash ( a bigger one is about to follow).

B) To put it in other terms, the price increase has been an average of 8% every year since 1996.

C) The few countries with a bigger rally such as Spain and Ireland have already experienced a decrease in pricing -although not really a crash just yet. The main reason why those countries haven’t crashed yet is partly government madness and partly banks have been buying housing from themselves to keep prices up (watch out for Spain…).

D) Swedes debt ratio to income is at a record height. We’re more in debt today that we were before the 1990-crisis and it’s higher than the American equivalent.

E) Swedish interest rates are lower than European counterparts, and keep in mind almost everyone have been trying to keep interest rates down, and in this mad race for bubbles Sweden is in the lead.

F) The Swedish Government owned lending institute of SBAB (think Fanny and Freddie on steroids) has been fueling the market with increasingly generous lending and very low interest rates. It is not uncommon for the lender to borrow close to and sometimes over 100%.

G) The central bank has thrown hundreds of billions of freshly printed money at the commercial banks. They don’t use all of this money; most of it actually goes back to the central bank with interest which you, the taxpayer, are paying for. But some of it is used and the amount that hasn’t been propping up the stock market goes to real-estate and housing.

H) During the worst crisis since the 30’s prices haven’t just been going up in Sweden, they have reached record heights.

Before we continue, there are some additional facts you should know before making the judgment whether or not there’s a housing bubble. Since the government in Sweden practically runs, controls, subsidize, tax and regulate every single part of the Swedish housing market it isn’t always easy to see what fundamentals are a problem and what is not. For instance the black market of renting is massive and make up 40% of the renting market. This makes renting more expensive, and it makes some of the problems less visible.

And normally (maybe about to change) renting costs is set in central negotiations because in Sweden socialism is what matters. This means that renting a flat in a rundown town out in the wilderness has about the same cost as a flat of the same size in the centre of Stockholm. This in itself is enough to cause distortions and bubbles.

Now, let’s go back to my two basic statements:

Swedish median annual income: SEK 225 000 ($ 31 500)

Average price for a home: SEK 2 million ($282 000) – a new record

282000/31500 or 2M/225K = 9

So the average home cost about 9 years worth of income today. Or, as said above, 3 times as much as it should be.

And do I even need to show you the ‘owning’ of a home versus renting one? All I can say is, if you’re buying with this rent-to-buy ratio which is 1:1 at the very best, and normally about 1:2 – well then you’re an idiot.

So does Sweden have a housing bubble?

Well, with all I’ve just said and during a time of high unemployment (officially 9%) and within a recession (in reality a depression). With companies doing pretty badly and the world is still in a shaky condition. Country after country is closing in on default and there are still wars raging in oil producing countries.

What do you think?

We already know what the central bank, politicians, the commercial banks, SBAB, several economists and lots of other con-artists are saying. And those folks are never wrong, right? Nooo, just keep on borrowing, buy it all, and keep increasing your debts. No worries. The Doctor will protect us from the intergalactic clockwork androids from the future who wants to use our brains to power their spaceships…

1 comment:

  1. Bygg- Bank- & Mäklarmaffian har samma intresse. Bygga för lite, låna ut mycket, inte amortera. Mäklarna står för statistikfiffel, annonsmonopol och journalistsmörjning. Hyresvärdar hejar på, gör så gott de kan för att få bort hyresregleringen, det enda hindret för den ultimata tumskruven på ett folk med bostadsbrist. Avsaknaden av buy-to-let = fattigdomsbevis, knapphetsintyg, boendemaktlöshet. Inflation (den nya tidens amortering) kommer att segla upp som huvudproblem, trots alla kamouflageförsök.