Does the concept and use of mortgages keep property prices high?
I was recently discussing this question, and the answer is: of course!
Anytime a buyer has the ability to borrow money for a purchase, the ultimate price of the purchased item will be inflated.
We can compare real estate prices in countries that do not offer low interest rate loans, like here in the US. These countries have significantly less expensive living opportunities, as the option to finance is either not available or very expensive.
For example, much of Latin America has a minimum home loan rate of 1% per month – 12% a year. This expensive cost of borrowing money makes home prices cheaper.
On the flip side, here in the US, we can borrow money for almost 3% a year, making most US real estate markets very expensive.
In the US, we think of how much house we can afford by how much per month we can spend.
In foreign markets, buyers look at the total amount they can spend.
Very different mindsets. I’ll avoid the conversation of which one is the ‘right’ way to think…
Instead, let’s look at what the US market is going to do.
***As a side note, the Federal Reserve has backed itself into a corner by not raising interest rates. This, in my opinion, will result in low interest rates for a very long time, or until a significant financial crisis occurs.
So, with the assumption that interest rates will stay low, we can assume that housing prices will continue to climb. It’s all about how much money someone can pay per month, not how much total money they can spend.This leaves us with two options:
1. Leverage yourself as much as possible to purchase as much US real estate as you can.
2. Not partake in any money borrowing and avoiding any future debt burdens.
Now… before I go any further, what I am going to suggest is very unpopular with ‘traditional’ investors.
Here is the part that many people hate: You should borrow as much money as possible to purchase real estate.
Well, not really.
The obvious risk is that real estate prices collapse and then you will be unable to pay off your loans. However, the real estate you should be buying is rental real estate… homes that you are renting out to tenants who will be paying off your debt.
If housing prices crash, it is very unlikely that rent prices will crash… the market is too thick with owners who’d be underwater. The rental market would most likely stay the same.
But, let’s just say that rental prices do crash. That you become completely unable to pay off your debts that you have agreed to pay off…
You’d have to foreclose on your properties. You’d go bankrupt. Your credit would be ruined.
But, guess what? That would make you one of millions.
And, as many learned from the 2008 real estate crisis… the ability to crawl out of that predicament is extremely easy.
The point I’m making here is that we are in a very rare time. Real estate prices are not crazy high (except for some markets like San Francisco) and interest rates are at historical lows. Now is the time to put your money on the line to create lasting wealth.
There is one more thing that adds to the argument of why you should go into as much debt as possible… and I’ll talk about that next time… it’s all about inflation…