I decided to write this article because many people mistakenly think that house prices are more expensive today than they were last year. That is only the case if you pay cash. But if you borrow to buy a house, as 99% of home buyers do (not surprisingly with rates so low) you should look at house prices differently. Let’s look at one example:
If a house price costs 300k today and 341,8k next year, you’re tempted to say that the house is now 14% more expensive. However I believe this is the wrong way to look at it – at least from the buyer’s perspective. You need to look into mortgage interest rates to get the real picture.
Money is getting cheaper by the day, so what truly matters is how much you’ll end up paying the bank over the 30 years in both interest costs and principal repayments. By that measure, house prices are now lower than at any point in the last 15 years.
Let’s pick the Netherlands as example: 30 year fixed mortgage rates were around 5% a year ago and 3,6% today (assuming 100% LTV). As you can see from the table below (last line), the total cost of buying a house remained the same even though the asking price went up by 14%.
In both situations, you’ll end up paying the bank 532,500 EUR over 30 years. This means that buying today at 342k is essentially the same as having bought last year at 300k.
Want to know where house prices will move? Then you must form a view on where interest rates are likely to go. I’m a firm believer rates will keep coming down in the years to come. They have to. It’s the only way households, governments and corporates will be able to service their monstrous debt loads and keep up with interest payments. What this means for real estate prices is that they’ll keep moving up and up. Now, this is excellent news for home owners but not necessarily bad news for buyers (as demonstrated in the above example).
But what happens if & when mortgage rates go negative?
House prices will keep going up as mortgage rates drop into negative territory. Denmark is the classic example, they’ve had negative rates for 3 years now and guess what: House prices have gone up 40-60% since 2012! We’re just a few years behind in Western Europe and US, but that’s where we’re heading. That raises other questions such as why would investors be willing to lend at negative rates for 30 years? Probably we won’t get there but we’re heading close. Sweden is also a classic example of what negative rates have done for home prices:
If you’re a buyer and assuming you can borrow 100% LTV, ignore how much house prices have gone up in the past. Look instead at how much you’ll pay the bank over the next 30 years. That is the true cost of your house, not the value today. Home owners should be thanking Draghi, Yellen, Kuroda for printing fiat currency at unprecedented levels. They’re capturing all the upside of these non-sense policies. But if home owners win and prospective buyers don’t lose .. who’s on the losing side of this? The young generation who’s forced to rent at ever higher prices .. and pensioners & savers who are indirectly funding the debt binges of home buyers – and see their pensions / returns diminish dramatically … This gigantic wealth transfer from savers to indebted home owners has made the latter rich at the expense of the former. What happens when rates drop below zero? Then we enter murky waters and it’s hard to predict, but everything seems to suggest house prices will keep creeping up until the system eventually collapses. When will that happen? That is the million $ question.
Have different views? Would love to know why. If you want to play around with the numbers on the excel sheet.. let me know and I’ll send the sheet