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House prices

Discussion in 'Alley of Dangerous Angles' started by Harbourboy, Apr 26, 2005.

  1. JSBB Gems: 31/31
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    Do you mean that your fixed rate mortgages have their rate fixed at the same level for the full 30 years? There is no way we could get a 30 year term on a fixed rate mortgage.

    I think the longest term I have seen here is seven years although most people who take a fixed rate mortgage typically go for either a three or five year term.
     
  2. Bion Gems: 21/31
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    Some more macro info in case anyone's interested:

    Apparently, 42% of recent first time homeowners took out a mortgage with no money down.

    Perhaps because housing prices have far outstripped income.

    A Forbes columnist calls this un-real estate.

    Former Fed Chairman Paul Volcker thinks it's unsustainable.

    Morgan Stanley chief economist Stephen Roach blames the Fed.
     
  3. Aldeth the Foppish Idiot

    Aldeth the Foppish Idiot Armed with My Mallet O' Thinking Veteran

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    Yes. I imagine that's why they call it a "fixed rate". Unless if it's a 15-year or 20-year mortgage. Then they're fixed for 15 or 20 years respectively.

    @ Bion - one thing I completely agree with you is that this is not sustainable. Many areas of the nation have real estate increasing at 12% annually. Given that's way more than inflation or cost-of-living increases, no one would be able to buy a home if it keeps up like this for another 10 or 20 years.
     
  4. JSBB Gems: 31/31
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    Again, amazing how different things are on either side of the border. In Canada a fixed rate mortgage has a fixed interest rate but it only lasts a portion of the total 20-30 year amortization period so after the length of the term it has to be renewed at whatever the mortgage rates are at that time.

    Thus you could eventually have 10 seperately negotiated three year term (or six five year term etc. etc.) fixed rate mortgages over a thirty year amortization. Accordingly your required payments could significantly fluctuate whenever you renew your mortgage.

    A Canadian variable rate mortgage has the interest rate fluctuate whenever the bank's prime lending rate changes so you could have any number of interest rate changes within any given period. In practical terms there is usually only one or two rate changes each year.
     
  5. Harbourboy

    Harbourboy Take thy form from off my door! Veteran Pillars of Eternity SP Immortalizer (for helping immortalize Sorcerer's Place in the game!)

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    Holy moly! You're joking, right? There's no way on earth that a New Zealand bank would EVER offer you a fixed rate for 30 years! The absolute longest term you could fix for would be 7 years, but the most common would be 2 years.

    So if interest rates go up in the USA, which they surely must sometime soon, the banks are stuck with income streams at low rates for the next 30 years!? Unbelievable.

    This thread is becoming very very enlightening to me.

    Bion - "unsustainable" is exactly the word that comes to mind.
     
  6. dmc

    dmc Speak softly and carry a big briefcase Staff Member Distinguished Member ★ SPS Account Holder Resourceful Adored Veteran New Server Contributor [2012] (for helping Sorcerer's Place lease a new, more powerful server!)

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    HB - just so you know, most banks sell off mortgages in packages and retain the right to service the loan for a small fee. (They are actually packaged as securities.) Thus, the banks are not taking a hit down the road. They sell off fixed rate loans perhaps for a little lower than variable ones, because the expected return is less. However, the likelihood of a default is smaller on a fixed loan as well, so that factors into the price.
     
  7. Harbourboy

    Harbourboy Take thy form from off my door! Veteran Pillars of Eternity SP Immortalizer (for helping immortalize Sorcerer's Place in the game!)

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    dmc - all I know is that no bank in NZ would ever commit to much more than 5% on their fixed rate mortgages. I always assumed this was because nobody would ever provide the bank with funding at long term fixed rates either so they have to balance up their net interest margin in the event of changes in rates. I'm still surprised that it can be so different in other countries given that money markets are international. And I still don't understand who is buying the US banks' securitised mortgage assets which provide such long term low fixed returns.

    Man, I wish I could get a 30 year mortgage at the current infeasibly low US rates.
     
  8. dmc

    dmc Speak softly and carry a big briefcase Staff Member Distinguished Member ★ SPS Account Holder Resourceful Adored Veteran New Server Contributor [2012] (for helping Sorcerer's Place lease a new, more powerful server!)

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    You think these rates are low, look back before the '70's when rates were absurd (2% fixed).

    Also, the rate of return on the security is just a factor in the price. Anything can be sold. Generally, even at a relatively low rate, a standard 30 year fixed mortgage will pay out, over the course of the 30 years, roughly 2.25 times the amount loaned (this includes repayment of principal plus interest). Thus, the bank lends X dollars and sells the loan for X+Y. The bank makes some money, and the buyer makes more over the long run, but has to wait for it. The price of it (i.e., the Y component) is based on rate of return, overall security issues (like loan to value of the underlying mortgages, neighborhood, etc.), and supply/demand concepts.

    Again, anything can be sold.
     
  9. Harbourboy

    Harbourboy Take thy form from off my door! Veteran Pillars of Eternity SP Immortalizer (for helping immortalize Sorcerer's Place in the game!)

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    It's not the fact that you'll make SOME money that is the problem. If interest rates doubled then somewhere along the line, somebody is having to pay out the 10% rates on short term deposits while only getting the 5% return on the fixed rate mortgages.

    Anyway, drifting back towards the topic, interest rates in NZ range from between 7.5% and 8% on fixed rates terms from 6 months to 3 years. Floating rates are currently at 9%.

    Median house price in the most expensive city of New Zealand is NZ$440,000. The median price in the cheapest city is about NZ$140,000. This equates to approximately US$360,000 and US$120,000, respectively.
     
  10. Llandon Gems: 13/31
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    Well, I'm the Broker in Charge of a real estate company, and a real estate appraiser. The market here where I live is absolutely out of control. Prices for ocean front property have increased over 40% a year for the past few years, and seems to be increasing even more this year.
     
  11. Harbourboy

    Harbourboy Take thy form from off my door! Veteran Pillars of Eternity SP Immortalizer (for helping immortalize Sorcerer's Place in the game!)

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    Llandon, when will it end?
     
  12. Sydax Gems: 19/31
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    Catalunya (Spain) is the most expensive place to have/rent a hose; last year prices went up to 25% and this year is still going up: 13% in 4 months: 65 mt2 went up to 60%; govermment still can't stop the rising.
     
  13. Aldeth the Foppish Idiot

    Aldeth the Foppish Idiot Armed with My Mallet O' Thinking Veteran

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    @ JSSB & HB

    Actually, I can't believe that you have non-fixed fixed rate mortgages. I find the idea of that odd. It seems that regardless of whether or not you get a fixed or variable rate mortgage, your rate is variable. So what's the difference?
     
  14. Harbourboy

    Harbourboy Take thy form from off my door! Veteran Pillars of Eternity SP Immortalizer (for helping immortalize Sorcerer's Place in the game!)

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    Aldeth, the variable mortgage can move at any time, in response to changes in the Reserve Bank of New Zealand's Official Cash Rate. At the moment the variable rate is higher than fixed rates because we are in a period of rising rates. In a period of falling rates the variable rate would be lower then fixed rates.

    Fixed mortgage rates are only fixed for a certain period. At the end of the fixed rate period, you have to choose what to do with that loan. You can re-fix for the same period or if you think there is a better rate at different term you can shift it to that term.

    Why do we not use 30 year fixed rates? Because these are not offered in this country (for the reasons I outlined in a previous message)

    Why would we choose to have part of our mortgage at floating rates? Two reasons:
    1) To take advantage of any potential interest rate decreases
    2) To take advantage of the revolving credit nature of this account to have all our money working for us to reduce our overall mortgage balance (and interest bill)

    Why would we choose a 2 year fixed rate over a 5 year one? Because the 2 year fixed rate might be cheaper than the 5 year one.

    Imagine a situation where interest rates were around 10%. In that case, there's no way you would want to fix for 30 years and be stuck paying 10% when the rates fall back down to 2% again.

    For anyone who really is interested in seeing what sort of mortgages are offered in NZ, refer to this page: http://www.bnz.co.nz/Rates_and_Fees/1,1184,20-184-485,00.html
    which shows that the longest term that Bank of New Zealand will offer a fixed rate for is 7 years at 8%. Because I think rates will fall in a couple of years, I would not take out a mortgage for 7 years at 8%. I'd rather take the 3 year term at 7.8% and then re-fix at the end of that term at what will probably be about 7%.

    [ May 03, 2005, 02:48: Message edited by: Harbourboy ]
     
  15. Llandon Gems: 13/31
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    LOL

    If I knew when it was going to end I would be a rich man.

    However...I'm going to play it safe and sell the 2 condos I purchased last month right away and take advantage of the boom.
     
  16. JSBB Gems: 31/31
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    That is the way it works in Canada too.

    Let me give an example. If you go in to get a mortgage today you can get a three year term variable rate mortgage for 4.25% or a three year term fixed mortgage for 6%.

    If you take the fixed rate then you will be paying 6% interest for the next three years.

    If you take the variable you don't know how much interest you will be paying. You will start off paying 4.25% but next week the prime lending rate could change and your interest rate could go up to 4.5% or it could fall to 4.0%. Your interest rate will change over the term of the mortgage as often as the prime lending rate does. It might never change or it might change twenty times.
     
  17. Harbourboy

    Harbourboy Take thy form from off my door! Veteran Pillars of Eternity SP Immortalizer (for helping immortalize Sorcerer's Place in the game!)

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    I know from experience that the UK and Australian mortgage systems work in a similar way to Canada and NZ.

    I wonder why the USA is so different.
     
  18. Aldeth the Foppish Idiot

    Aldeth the Foppish Idiot Armed with My Mallet O' Thinking Veteran

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    Doesn't that make budgeting extremely difficult? Especially in the early parts of the mortgage I think it would. Say you get a $250,000 mortgage at a given interest rate, and a year later, it goes up a full point. One point on a substantial mortgage could well equate to a couple of hundred dollars per month. Granted, the more you pay down the mortgage, the less interest rate changes will affect you, but in the beginning at least, I think I'd like to know what I'm paying from month to month.
     
  19. JSBB Gems: 31/31
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    With my variable mortgage the payments don't change, if the interest rate goes up then the amount of principle that I am repaying with each payment goes down.

    Also, while in theory the rate can change once per week in practice it normally only changes a couple of times a year.
     
  20. Aldeth the Foppish Idiot

    Aldeth the Foppish Idiot Armed with My Mallet O' Thinking Veteran

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    JSSB,

    You know, I think the biggest difference is that Canadians (and evidently New Zealanders as well) make efforts to pay down the principle of their mortgage because the interest is not tax deductible.

    The idea of paying a set fee with a variable interest rate is foreign to most Americans, because from our perspective, there would be no way to know when your mortgage would be paid off. While there are a decent number of Americans who do pay off their mortgage early, just as many feel that when they sign on for a 30 year mortgage, they will be paying it off for 30 years. However, the process that you describe could mean that if you only make the minimum payment each month, that your mortgage could theoretically end before or beyond the 30-year mark. However, since most people make an effort to pay down their mortgages in Canada, in practice this would only happen to a select few people.

    Also, here's a link I found to the current housing boom (and how it may be coming to an end): Bust Ahead?
     
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