Swedish household debt soars

[wa3zrm]

Johan and Alejandra are the kind of Swedes the IMF has been warning about - piling up debt to keep up with an ever-rising property market and fund a lifestyle of travel, maids and nights out.
The couple plan to buy a flat in Stockholm for 5 to 6 million Swedish crowns ($724,000 to $869,000), initially with an interest-only bank loan, among other spending plans.
"I may travel, I may want to invest in a new business," said Alejandra, who runs a cafe in the city centre.
Less than a month away from a general election, there are no votes in campaigning to stop the credit flowing, but there are fears that such Swedes could be the Achilles heel of a country that boasts a coveted AAA score from credit rating agencies Fitch and S&P.
Four in 10 mortgage borrowers in Sweden are not paying off their debt, and those that are repaying the principal do so at a rate that would on average take nearly a century.
Swedish property prices have nearly tripled in just two decades. In July, home prices rose at a double-digit pace from a year ago - the first time in more than four years.
The IMF has warned financial instability in Sweden is an increasing concern and urged a comprehensive set of macroprudential measures to temper soaring mortgage debt. Nobel Prize laureate and economist Paul Krugman has chimed in, saying

(Excerpt) Read more at cnbc.com ...

[Frosted]

There's exactly the same problem in London right now. Interest only mortgages are insane. If there's a rise in interest rates - BOOM!

[Snusdog]

Johan and Alejandra are the kind of Swedes the IMF has been warning about - piling up debt to keep up with the ever-rising price of snus.

I know how they feel

[Thunder_Snus]

There's exactly the same problem in London right now. Interest only mortgages are insane. If there's a rise in interest rates - BOOM!

Do other countries not see this is exactly what happened in America?
Do they think they can do the same thing but it will be fine because they are not "as dumb as those americans?"

[Frosted]

What happened in the US happened here too as a result of the US.
House prices now though are crazy and I have no idea what's fuelling it. It's not wages for sure. There were supposed to have been measures put in place but it's only in the past few months they've done it.

[Snusdog]

I have no idea what's fuelling it.

Lower interest rates together with more accessible loans mean a market saturated with buyers.......thus driving the costs up

[Snusdog]

the bubble breaks because there is nothing undergirding all of this

interest only loans are now being made to folks who have less capital to put down, they build no equity in the house, and are living beyond their means (credit to debt ratio is beyond health)

The banks in turn are willing to expose themselves to the high risk because they are leveraging the loans against a forecast of continued rising resale prices.

But when there is a volume failure.....it will begin a domino effect

[Frosted]

I understand what you're saying Dog but it still doesn't add up here. Average wages in London are about £40,000 which I still feel is not representative of real wages. I think the average is brought up by the many people earning obscene amounts of money here in the capital, not representing the majority that are on about 25-30k. The starting home for a 3 bedroom family house/flat is 425K where I live - now you'll have childcare to pay for too if you've got kids. The figures don't add - Even if you're earning 40k and even if you get a mortgage 4 times your wage that's only 160k. Ok, I can hear you argue that there would be 2 wage earners (if you've got kids, almost all of that other wage will go to childcare) even without childcare that doesn't add up.
In addition, 2 bed house prices start at 300k for people just coming on the housing market - that means a first time buyer would need a deposit of 30k minimum deposit to get a mortgage. Who the hell has 30k knocking about spare cause if you're renting, which is more expensive, you've got no chance of saving that.

So if people are managing by stretching themselves to the limit, and I expect that is the case given the state of the interior décor of the houses up for sale, it's going to go terribly wrong soon. But your point of rising resale prices is correct, certainly in London which somehow has always weathered the storm apart from the time interest rates rocketed to 13%....which is the time to just walk away from the house and forget about it.

[Snusdog]

Whatever the cause........it doesn't sound good............and things like this...... when wide spread...... seldom end well......at least on this side of the pond

[trebli]

Chinese Investors Are Buying More Than A Quarter Of London’s New Homes

This could be one reason for the high prices.


Chinese Investors Are Buying More Than A Quarter Of London’s New Homes

"London property prices have surged this year—up 8.1% in June, compared with the same month in 2012. That’s enough to invite “bubble” talk among economists.


One cause of rising prices: Chinese investors. They bought 27% of new homes sold in London (link in Chinese) in 2012, according to a report by Chinese Weekly, a UK-based paper, quoting data from Savills, a UK-based estate broker. Chinese demand for new housing amounted to about 17% of total residential real estate transaction value last year, says the report."


http://qz.com/116748/chinese-investo...ons-new-homes/

[Thunder_Snus]

If you have an interest only loan i think it would make more sense to call that "renting"

[Burnsey]

If you have an interest only loan i think it would make more sense to call that "renting"

Not really. An interest free loan is perfect if there is a crazy hyperinflation situation like existed in the U.S. until five years ago. Buy, pay cheap payments, sell after a few years, make a profit.....simple leveraging. The problem comes when there is deflation and the property values drop.....ouch!

[Frosted]

Not really. An interest free loan is perfect if there is a crazy hyperinflation situation like existed in the U.S. until five years ago. Buy, pay cheap payments, sell after a few years, make a profit.....simple leveraging. The problem comes when there is deflation and the property values drop.....ouch!

I take it you mean an interest only mortgage.
It still doesn't make sense.......It would only make sense if you wanted to move out to a cheaper area, otherwise you lose. I bet that there's a heck of a lot of people on interest only over an extra long term though.

[Thunder_Snus]

While a few will benefit from the interest only loan several will suffer when they try to do the same thing as the bubble builds.
Tulip bulbs don't double in value every day and houses don't have their values increase by 25% a year...a lot of people are about to lose everything.

[Burnsey]

I take it you mean an interest only mortgage.
It still doesn't make sense.......It would only make sense if you wanted to move out to a cheaper area, otherwise you lose. I bet that there's a heck of a lot of people on interest only over an extra long term though.

Yes, an interest only mortgage is what I was referring to....if the borrower makes interest only payments for a period of time and the market value of the property climbs, as in the crazy times of of the 90's and into the new millennium in the US housing market, then the difference between the purchase price and re-sale price would be profit after deducting the cost of borrowing the money and ancillary costs.
So, a $100,000 loan at 4% interest only would cost $ 333.34 per month, after ten years (120 months) the cost of owning the property would be $ 40,000...in the hyper markets of the last twenty five years, it was possible for a property's value to double or triple in 10 - 15 years.