Debt is good (in a weird world)

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liberty
Posts: 117
Joined: Mon Nov 21, 2016 2:01 pm
Location: Oslo (Norway)

Debt is good (in a weird world)

Post by liberty »

I kinda regret that I didn't buy a house 8 years ago. Main reason for not buying:
- High housing prices (in Norway) based on P/E
- Bad diversification. Putting 5X your net worth in one single object is pretty risky
- Risk related to buying something you didn't know about (like cockroach or noise from neighbors).
- Possibility to easily move

But the good side of owning is that you get money for free with the current negative real interest rates.

Currently the interest rate on mortgages here in Norway is around 2.0%. We get 22% of that returned on the tax, meaning 1.56% net. Then the inflation target is 2%, so in real terms the interest rate is around -0.4%. If you borrow 1,000,000, you actually earn 4,000. Of some weird reason, I was not able to see this 8 years ago... Now I'm on the edge of FI. I apply for jobs, my last attempt on getting a fun job, and if I find one, I will probably work 2 - 3 more years. In that case I think I will buy a house and get a mortgage. What do you think? Here in Norway it's said that you throw money out the window buy renting. That's not really true in a normal economy, but in a weird economy, where you get paid for borrowing money, that statement is actually true... Or what do you think?

Riggerjack
Posts: 2906
Joined: Thu Jul 14, 2011 3:09 am

Re: Debt is good (in a weird world)

Post by Riggerjack »

I think the homeowner vs renter decision is primarily a certainty preference statement.

So people like the uncertainty of renting. They could change locales pretty easily. If property values drop, they don't care. When wear and tear results in maintenance, their only headache is to put up with it, or move. For this, they pay a premium to their landlord to handle it.

Others prefer to know where they will be in the future, and like the idea of some control over that. They still don't get control over taxes, HOAs, or the neighbors, but they lock in what they have, and often most of the price they will pay through fixed rate mortgages.

Having rented, owned, and been a landlord, I would say you are best served by making your housing situation match your temperament. The difference in price between options, is often one of accounting.

Forskaren
Posts: 184
Joined: Sat Nov 07, 2015 4:04 pm

Re: Debt is good (in a weird world)

Post by Forskaren »

Curves like this scares me about speculating in real estate with debt.
https://4.bp.blogspot.com/-e4eOdk6WuJY/ ... -2017p.png

The first 120 years gave close to zero real return. Than real prices increased over 400% in 20 years. Real estate always goes up! sure...

benrickert
Posts: 24
Joined: Sat Apr 25, 2020 11:34 am
Location: Oslo

Re: Debt is good (in a weird world)

Post by benrickert »

@liberty I admire you for having stayed out of the Norwegian housing market when everyone’s been telling you to get in. Should the house purchase decision depend on in what economic climate you buy?
When capital has been freely available for many years, people don’t remember prices going down, fear of missing out is present, nobody’s talking about rental yield and everyone is up scaling as fast as possible, probably not a good return on buying vs renting? When banks have lent freely for many years, debt levels are peaking, a coronavirus evolves into a recession, recent buyers gets underwater on their mortgages, many loose their jobs, people panic and hold onto cash, banks lend to few, and capital gets scarce - could prove to be a good time to buy fairly soon?

@Forskaren a tailwind of interest rate declines coupled with stable Swedish economy has seemed to be the recipe?

liberty
Posts: 117
Joined: Mon Nov 21, 2016 2:01 pm
Location: Oslo (Norway)

Re: Debt is good (in a weird world)

Post by liberty »

@Forskaren Also this graph screams bubble:https://www.finansnerden.no/wp-content/ ... ustert.png From 2015, but has just continued rising.

@benrickert That's right. I think from an investment standpoint and expected return, it's probably not a good idea to buy. And I would feel quite bad if the housing prices went down the 3 years until I want to sell (I don't think I will stay in Oslo in retirement).

Also there is a psychological aspect here: I would probably be stressed by having a mortgage. There would be more cash flowing out every month, which would be more risky if I went into freelance work (which I consider). In addition to the risk of housing prices going down.

benrickert
Posts: 24
Joined: Sat Apr 25, 2020 11:34 am
Location: Oslo

Re: Debt is good (in a weird world)

Post by benrickert »

@liberty yes, agree, much better optionality. Looks like capped upside, large downside if buying now.

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ScrewTheAverage
Posts: 22
Joined: Tue Jun 09, 2020 6:33 pm
Location: Continual long-term travelling since 2016 (4 continents, 26 countries, ~80 cities)
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Re: Debt is good (in a weird world)

Post by ScrewTheAverage »

Since we're fortunate to be able to travel and house sit full time ('digital nomads') we effectively have a very low monthly out of pocket housing/Airbnb/lodging cost (i.e. in 2019 we spent less than $300 in lodging for the year).

We’ve done a financial analysis where we compared buying a home and all of the ancillary costs, to renting and investing the subsequent savings. Based on historical returns on the stock market and the Case-Schiller Housing Index we’ve concluded that if we’re diligent about investing regularly (which we are), renting is by-in-large the better investment. This is taking into account all costs and savings such as tax savings, maintenance, property taxes, appreciation, and so on.

There are of course other emotional and practical reasons to either buying a home or renting. For example, there’s pride in ownership or when renting there’s simplicity in someone else taking care of building and land maintenance.

Like most things, and especially in something as personal as home ownership (and as @Riggerjack mentioned), it should ultimately come down to what works best for your lifestyle and pocketbook.

We know house sitting full time isn’t something we’ll do forever, nor do we think it’s a lifetime solution to lowering lodging costs, but for now it's a great way to travel and dramatically lower housing costs.

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