Housing company loans - Ticking bomb - Who gets hurt?
Finnish version of subprime - All bubbles eventually burst.
We had tremendous years for the housing market; sales were booming, and construction companies were making a killing—lots of funny anecdotal stories:
My mother owns an apartment, and the housing company invested 100k to plan “pipe repairs,” now, the board of directors canceled everything “We cannot afford”, mostly grannies living in this house.
We were sold the idea of how to get rich with minimal effort.
Back in 2015, my wife and I needed a larger flat, and we found that taking out a housing company loan was a very attractive option. Despite the fact that my wife was pregnant and unemployed at the time, she was still able to obtain a quote for a loan of 150k without any income (being graduated was enough). Looking back, we realize that this was a crazy proposition.
Currently, these housing loans are typically 70% of the property's value. Back in the time, these used to be a lot higher, almost 90% - One example of these new houses on the current market.
We were looking for a lovely townhouse with a small yard, asking price of around 300k. We would need to pay 30-45k (10-15%) down. Why was this viable for us? I was just starting to run my business (low salary), and my wife was unemployed and pregnant.
Interest rates were zero, and the loan payments in these housing loans would start after five years.
The monthly payments to live in that house would be very low for the first five years. Just pay the 30-45k down payment loan and monthly management charge.
We were living in a two-room rental flat with a rent of 950e/month.
With this bigger and better townhouse, the costs would have been 600-700e/month.
“We would be financially lot better in 5 years and have no problems with the payments then.”
→ There were no background tests. Pay the downpayment of 5-30%, and that’s it. No questions were asked after that.
We were very conscientious. We had one small salary, and that’s it. It didn't feel natural or comfortable to us. Yes, we are “sheeps” here in Finland.
→ Only a tiny amount of capital is needed to invest in real estate, and no background check - lots of beginners in the market.
We are just fine housing companies never go bankrupt!
What if some families cannot afford the loan payments after five years?
Investors leveraged to tits cannot handle rising interest rate fees?
Mortgage
We were also looking for 250-350k apartments with the classic mortgage model. 10% down and loan payments start immediately, then our monthly cost would have been similar to our rent, and we would have more space! (Interest rates were zero).
This meant we had to look for older apartments in the suburbs.
There was no price difference if the property was on rental land or own.
Little to no difference were the most extensive restorations done or just coming.
All the housing companies we went through (around 10) were poorly managed.
The mentality to save money through loan payments and buy a better one after 2-5 years!
I bought my first one-room house in 2005 (I was very young), and I consulted my friend’s dad, who was a realtor. He said this is one of the best-managed properties he had ever seen, so take this - I was undecided about whether to buy the apartment, but ultimately I didn't care either way. One of the primary reasons for my decision not to purchase was that someone had left a note on my car when I first checked out of the apartment, indicating that I was not supposed to park in the visitor parking area.
These gentlemen are vital to finding a well-managed property. They hustle and take care of the property extremely well. They are a dying breed. They take pride in how well-managed their property is. They harness it. My generation does not give a fuck.
I remember when I was a kid, there was a vast neighborly help mentality. Big meetings every now and then to clean the yard and discuss any significant issues. Everybody knew each other. This is rare nowadays. Today you have your few grannies picking up trash, and the rest continue their life. When was the last time you participated in these? Do you know anybody you live with?
Fundamentals have changed
The townhouse was not our “dream house,” The idea would have been to sell it after a few years to pursue our “dream house.” Prices were rising all the time!
There has been one significant change in owning a house. It is more like living in a rental nowadays “what kinda monthly payments can we afford to pay” - Everything else seems irrelevant.
I don’t care how the property is managed - I move out anyways in 5 years.
Everybody now has a price - There are no “dreamhouses”. If I get more than I paid for my old apartment, I get bigger and better!
The easiest way to get rich is - House prices up only.
This amount is for the middle-class family, both parents earning 3 333€/month, 2-kids, and a car. Location in Espoo.
How many houses are listed currently, with a max price of 300k in Espoo?
10-houses! And all of these would need a minimum of 100k renovations to make them somewhat livable. No, this is not a joke. Link: Here
Today banks require a lot more information: Where is it located? How much is the house management cost? (1)
There will also be excruciating meetings during spring 2023 when these housing companies start their annual meetings. House management costs have risen substantially.
→ The prices will come down.
→ Management costs will rise significantly.
People are incredibly resilient in the housing market, and they will do whatever it takes not to have to sell. They will live with just oatmeal if it comes to that.
Previously, advertisements promoted zero downpayment boats at bus stops. However, due to people cutting their spending significantly, the current advertisement focuses on reducing heating bills using wool socks…
Everybody had that false feeling of wealth when prices increased, and covid fueled this. Suddenly we had some extra money in our pockets. What did the majority do? Bought better cars and acquired summer cottages, maybe even boats…
Finnish people love banks
I understand if you have the sickness that you love some old weird car brand like SAAB, but what is even more fucked up is to love and worship banks. Finnish people love banks:
They do everything that banks tell them: Let’s take variable rates! Because my bank teller told me so! Bankers are the smartest and brightest on the planet. I love and worship them!
What is the biggest company in Finland by market cap? A fucking Bank (Nordea). This alone is depressing if you think about what’s happening in the Finnish economy.
Another factor contributing to Finnish people's high level of bank trust may be that we receive virtually little financial or economics education.
Finnish consumers completely missed the memo on what happened in 08 - and forgot the early 90’s banking crisis?
Banks in Finland are in great shape and regulated to the teeth, but personally, I would love to see consumers would demand a little bit more and be more critical.
Do these institutions serve the best interests of their customers and the broader society?
In the end, things are not so bad.
Despite the potential for moral hazard, average Finns have shown themselves conscientious and unlikely to abuse the system. Banks are heavily regulated and robust, which helps to prevent significant issues.
We also have massive subsidies - General housing allowance, for eg pays out 2,2bn in subsidies. Almost 400k Finns receive this subsidy (2). This also helps to prevent a major crash in prices.
Although some signs suggest that there may be a housing bubble, it is unlikely to result in a massive crash.
However:
If the purchasing power of the middle class continues to decline.
Interest rates keep rising.
Unemployment increases.
→ The housing market will be in big trouble.
Buying a home during a recession can be a great idea, but let's face it - not everyone can pull it off. Can you even get a loan? And what if your spouse just got hit with reduced hours? Are you hearing whispers in the break room about a big announcement of massive layoffs coming? A few of my friends think that they can pull it off.
I will keep my minimalist approach and cope that it is the right decision. I don’t have any desire to own a house.
Sources:
https://www.hs.fi/koti/art-2000009367759.html (1)
https://www.is.fi/taloussanomat/art-2000009411621.html (2)
https://roniarvonen.fi/suomen-oma-subprime-himmeli-vaarin-kaytetyt-taloyhtiolainat/