Reader's statement: 'You have to buy real estate when the mortgage interest rate is high'
In the Netherlands I have always said that you should buy real estate when the mortgage interest rate is high and sell it when the mortgage interest rate is low. Many times I was looked at as if they saw water burning. Why?
In principle, my statement applies to every country where mortgage loans are granted for the purchase of real estate in general and housing in particular. With this statement I want to make the (prospective) buyers of particular homes, also in Thailand, think.
My vision is that the purchase price of homes is directly related to the amount that can be borrowed. The more one can borrow, the more one is willing to pay for a home, the higher the asking price will be. This will be further promoted if the number of candidates increases as a result of this situation.
If the mortgage interest rate is low, people can borrow more on the basis of income than if the mortgage interest rate is high. A low interest rate therefore offers more opportunities to borrow more. This drives up the price of homes. A high interest rate, on the other hand, limits the borrowing possibility, the number of prospective buyers will then fall and the asking price will fall accordingly. So that lowers the asking price.
If you buy with borrowed money while interest rates are low, you will have to pay more when interest rates rise, while the value of the home will show a downward trend. Buyers with high financing will then run into problems. The house will then eventually be “under water”, as it is called. The debt will then be higher than the value.
If one buys with borrowed money while the interest is high, the interest will almost only be able to fall and the housing costs will actually be lower. I have followed this vision for the last 40 years and it has done me no harm, while in the Netherlands alone more than one million homes are currently “underwater” due to excessive debts. Lending conditions have now tightened in most countries, but interest rates have been kept artificially low for some time. As a result, relatively high loans can still be taken out for homes with a purchase price that is too high. As soon as the national banks stop with the (too) low interest rates, people will get into trouble again.
My statement also applies in Thailand, although foreigners will not be able to borrow money so easily in Thailand. But there are also foreigners who take out a mortgage loan in the name of their partner. My statement also applies to foreigners who do not need financing. After all, with a low mortgage interest there will be more demand and therefore higher prices.
In America and Europe we have pretty much left the “bubble”. In Asia, this is yet to come. Just look at China. If that "bubble" bursts, it will also have consequences for other Asian countries, including Thailand. In 2007 I spoke to an Englishman living in Hua Hin who already advised against coming to Thailand. If I now look at the asking prices in Thailand, they have hardly changed in the past 7 years. So there is already a fitting in place.
If you agree or disagree with my statement, please comment.
Yours faithfully,
French Nico
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Dear Frans Nico,
Your statement/reasoning is correct.
lung addie
That is why a quarter of all owner-occupied houses in NL are now “under water” = a higher mortgage than the value of the house.
Two CARDINAL errors in your reasoning;
1) “My vision is that the purchase price of homes is directly related to the amount that one can borrow” yes, but to a very minor extent. The confidence to be able to pay the costs, but much more: the idea that IF things go wrong can still be sold for a profit, so psychological effects, are MUCH stronger.
2) “If the mortgage interest rate is low, people can borrow more on the basis of income than if the mortgage interest rate is high”. Here too… ceteris paribus or “if all other factors remain equal. When banks get the idea that there has been over-lending (NL in the present day) the hype dries up. tap on, and instead of, for example, 8 x your income, you can only borrow 4 x in annual income. So argument gone.
What I have seen so far from the Thai condo (because there is no other one for farangs – buying is not the problem, but trying to sell it again, especially if, for example, a work or residence permit is not extended. Your only right is that of leaving max money in TH.
Please note: your stay in TH is for a maximum of 365 days. After that it's adventures again: your income remains constant, Thai (or EU-NL) law does not change, you run into health problems (need care, so one-way NL Soos for nursing home)
In itself, what is being argued is completely true. However, a large number of variables play a role beyond the level of the interest rate. The picture is somewhat more complicated than is argued here.
As an example the situation in NL. House prices have fallen significantly while interest rates are still low. In my contradictory opinion based on the argument, I think it's still a good time to buy. I wouldn't want to wait for interest rates to go up again. By the way, I don't live in NL so I don't buy anything there.
It is not a law of the Medes and Persians.
With this I want to indicate that an essential point is not mentioned.
The interest rate is linked to the level of inflation. This means that with high inflation there is most likely a high interest rate and therefore also a high mortgage interest.
As a result, house prices generally rise sharply during this period (partly due to inflation).
So you have fallen with your nose in the butter for the past 35 years. In 1982 we had a mortgage interest rate of only 12% and then there was a crisis because many homeowners were left with an unsold home.
Dutch house prices have generally risen faster than neighboring countries because of the mortgage interest deduction.
In 2004 I emailed a political party to address the interest deduction. The 10-year interest rate then stood between 4-5%. No, the interest deduction had to be maintained and then the NL government will tackle it 8 years later in a moment of crisis, which caused a sharp fall in house prices.
Most homeowners with a house “underwater” or with a huge residual debt will never buy a house again.
Given the fall in house prices and the low interest rates, you should now buy a house in NL, but people are afraid. The economic outlook is too gloomy, especially with regard to employment.
Whether this story applies in Thailand I dare not say. It is mainly farangs, entrepreneurs and "wrong" Thais who buy houses. However, Thailand protects the market too much. As soon as the farangs can buy houses in their own name, the market will pick up.
I will continue to rent, so that I can immediately pack my bags in the event of calamities (in the broadest sense).
PS I've also done well buying and selling houses for the last 30 years and sold the last one on time.
I bought a house in Thailand in 2006. (of course the ground could not be in my name, but it eventually came to my Thai partner, to whom I have been happily married for many years and she gives me the freedom to sell it if I want to. The chanot also says my name…..)
I bought this land and a house to be built for 3.7 million baht….
Now, the land alone is worth almost 5 million baht and on top of that comes the house of course, so you can roughly calculate what I want for it…
I thought and think it's a good investment that I made and now want to sell it .. Mind you I'm in no hurry .. but will certainly get almost double for it.
Of course I paid for the house in cash, so no mortgage…..
I think this statement skips the fact from the question. I am now talking about Belgium. There are more and more people who want to buy a house and so the price rises, it's as simple as that.
I bought a house in 2010 and sold it a year later with a 15% mark up. Simply because more and more people want less and less available houses. Has nothing to do with interest rates and inflation, etc., just: more demand and increasingly limited supply.
Here in Thailand I have the impression that many condos are bought, but not lived in. There are many empty where I live, for rent or for sale - but it seems you can't lose it to the paving stones.
Have a look at DD property: it's incredible what's on offer, both for sale and for rent.
And you really shouldn't buy a condo in the hope that the value will increase over time: it's more like a car: as soon as a new model comes out, the value drops enormously. How much is a condo worth after 10 years? So not a good investment in my opinion.
I disagree with the statement.
The prices of homes are determined by supply and demand, so with high demand and few owner-occupied homes, prices will only go up. Added to this is inflation every year, so building becomes more expensive, so existing homes go along with the price increase. Also think about what the government always does with the VAT increases, which is directly related to the final price of the homes.
In times of crisis in NL there was too much supply, there were buyers but too much uncertainty about the government wanting to abolish / limit mortgage interest. Remember that many have been laid off, so uncertainty and lower income. The housing market is all good again in NL, think that NL is growing in population numbers, old people who have to stay at home longer, the many refugees who are pouring in and the many single people. In addition, the rental sector with a maximum income limit, so earning too much is renting in the free sector, then buying is actually the best option.
Interest rates are important for determining in which budget you are looking for a home, especially for first-time buyers.
In Thailand it makes a difference where your house is. But here too they want to raise wages again because of the high private debts, so building will become more expensive here too, so house prices will also rise. What is happening in China is of a completely different nature with regard to the housing market.
Completely agree with Barbara.
Condos are being built and the old models cannot be lost on the paving stones.
The money you invest in Thailand is money that you can consider lost.
By that I mean that it is not easy to think that you can buy property and then sell it for a profit and then bring the money back to Europe. The operation will most likely be closed with a negative net closing balance.
The motivation to buy real estate in Thailand seems more useful if you intend to spend your days there. As an investment for rental or sale, it seems to me risk capital.
Further:
The statement that low interest rates rise does not necessarily apply if you borrow at a fixed interest rate.
And indeed, it is the supply and demand that strongly influences the price. The interest rate seems less relevant to me.
My plan is to buy a condo in Pattaya soon. It will be built from this year and will be ready December 2017. Then I have paid it off. I want to rent it out. And sell it later if the renting doesn't work out. question; is this wise to do, if I read all this here.
Great GOOD IDEA, you can enjoy it for decades to come.
FF a few comments:
TAT wants to turn Pattaya into a family resort. This would mean a 180 degree turnaround
The number of Russians will decrease considerably because the (T)rouble has fallen in value by about 50%.
For them, a Condo of 1 million baht has now become 1,5 million.
In addition, foreign holidays become a costly affair for them.
Tackling corruption by the Junta means fewer Thais can buy a Condo.
Conclusion: The demand for condos will decrease considerably in the coming year and then the political developments in Thailand.
So if the question arises whether you should buy, I would sleep on it for another year before deciding. Prices could drop quite a bit.
Gerrie, would you just sleep on it and pay attention to the so many condos that are still for sale and new condos that now have to be sold by the Russians because their currency has collapsed so much and the Russians do not bear the burden can pay more, those condos are already leaving for 20 to 30% below the price.
In addition, if there is still to be built, I will check everything regarding the financial reliability of the builder, if the builder goes bankrupt, you have lost your money. In that case, construction is not allowed until 80% has been sold, but investors buy 3 to 6 layers in one go, so in fact very little has been sold directly to private individuals.
A good acquaintance of mine does project management, they still have to build about 6000 apartments in Jomtien, so watch out.
Renting is not always easy either, then I speak from experience because I have several houses here for rent.
gerry,
Not built, not paid….
Jos, everyone has their opinion and that's how it should be. But the underlying theory is not entirely correct.
If you take out a mortgage for a home, this means that the underlying value of the home covers your mortgage. You will also receive a tax benefit on the interest to be paid in NL.
As long as you pay the interest there is no problem, of course there can always be circumstances that you can't or not everything, due to illness or dismissal. But you shouldn't assume that in advance, but take it into account. So make sure you keep money on hand to still be able to pay the interest in difficult times.
Now you are going to pay off some of your debt early, so less interest benefit from the government, so you pay more net. It's a bit different at the moment regarding the crisis, but normally it works that way.
Every year you have inflation, with inflation of 2% your outstanding debt also decreases by 2%, that is because wages also rise with inflation or sometimes even more. The underlying value (the home) also increases in value due to inflation. So double benefit. If you have money in the bank, that money becomes less valuable due to inflation, you can buy less for it because everything becomes more expensive.
It is very nice that you have repaid your debt in 17 years, but you have also shortchanged yourself because of it.
An example; I gave my son a mortgage on his purchased home, the government requires that if you provide your children with a loan or mortgage, a minimum interest must be paid for it of 6%, while it was lower at the banks.
Now my son pays a fixed interest rate for 30 years, he still falls under the old mortgage conditions that he must pay 50% after 30 years and for that he must save or invest.
My son is therefore entitled to a mortgage interest deduction for 30 years on his full mortgage.
Based on the gift exemption, I can give my son a minimum of 5200 euros tax-free every year.
Can I do this because I also receive a higher interest rate than at a bank.
My son's salary will increase in the coming years, but due to fixed interest, his mortgage expenses will never. Always get more than 1/3 of the interest paid back from the government and if salary increases or due to job evaluation, this can even increase to half. In short, my son but also my daughter live for almost nothing.
Last year, the government had an extra gift exemption of 100.000 euros for children if they spend that money on buying a house or renovating or repaying an existing mortgage. As a result of this measure, the government will earn money for 30 years, so they do not have to pay at least 30/1 of the interest paid for 3 years. Owners have less interest deductions for 30 years, which can be very harmful if you start to fall into higher incomes. A lot of people have done that, but have never seen the other side, it was better to give the free gift amount of 5200 euros to the children every year.
Mortgage rules have been subject to change for years and that is good, now it is mandatory to repay the mortgage, but the mortgage will become a lot more expensive as a result. The government does this because they don't want to go on forever with interest deducted. On balance, the house will now be net more expensive for the owners in case of full repayment, say after 30 years.
Now with the current crisis they just keep pumping money to get inflation back, government debt is now increasing very fast now that there is no or almost no inflation, with deflation that goes even faster.
But again everyone has their own opinion and also their own feeling about it, but not always good from a financial point of view.