Economic bubbles are often mentioned, especially in the housing market. And there’s certainly a fair reason, as prices have been going up for decades. Our housing spending is rising steadily, and there seems to be no end to the price increases.
The housing bubble was already being talked about in the late 1990s, not knowing that prices would continue to rise for decades. And with this in mind, it is easy to conclude that prices will always go up. It’s not a bubble; growth is eternal.
But at the same time we know that bubbles always burst, prices can’t go up forever*, it’s an impossibility. The only question is when?
Personally, I have avoided mortgages for the last 10 years. At one point I sold everything I had and moved to a cheaper country where I could buy a house without a mortgage. This gave me a sense of security against the market. If the bubble burst and the value of the house went down drastically, I wouldn’t be stuck with a huge mortgage.
If the housing market crashes hard, the amount of the loan may eventually exceed the value of the house, and then you’re in real trouble, because the loan has to be paid back regardless of market fluctuations. Add to that rising interest rates and expenses, and the situation becomes untenable. If one person cannot pay their mortgage, it is a personal problem; if many cannot pay, it becomes a social problem that can lead to a deep crisis.
Economists have been warning about this for decades, but we have never got there. The stability and success of the West is based on the fact that house prices always go up. A major downturn in the market would result in chaos, as people are over-leveraged and have little margin left, so the housing market must be saved at all costs.
In recent years I myself have started thinking in terms of taking out a mortgage, putting the house up as collateral, and buying a holiday home. It would be a nice and useful investment, which could benefit the family and at the same time guarantee a kind of security for old age.
At the same time, I know I’m always too early or too late to the ball. My timing is lousy. I bought bitcoin too late, when it started to go down, and I left the housing carousel way too early, while housing was still going up by 10,000s of € per year.
So, logically, when it starts to itch for me to take out a loan then I’m probably screwed. Then it’s probably best not to. Then the crash is imminent.
*The housing bubble is extraordinary in Sweden, where prises has gone up since the 1990ies.