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In support of those about to lose their homes

Yesterday afternoon I headed out to a demonstration — the first time I’ve taken part in the Saturday afternoon demonstrations for almost a year.

Those of you who have been reading for a while may recall that in the midst of the meltdown in 2008-2009 there were demonstrations every Saturday, that eventually morphed into the Kitchenware Revolution.

Soon after the government collapsed in January of last year, the demonstrations ended. Last autumn, they started up again. This time they are organized by an association called Hagsmunasamtök heimilanna — an interest group fighting for the rights of families and households — for ordinary people who are in deep sh*t as a result of the kreppa, or just those who are furious about the absence of real measures available to help those whose mortgages and other loans have skyrocketed.

I’ll make a confession: I’ve been really quite sheltered when it comes to this aspect of the kreppa. EPI and I were amazingly fortunate in that we bought our apartment in 2002 — just a few months before the real estate bubble started to inflate [and inflate and inflate …]. At that time, property values were much lower than at the height of the [artificial] boom — our home more than doubled in value during that six-year period. In other words, the mortgage we took out was relatively small, compared to what it would have been if we’d bought when real estate prices were at their height. Of course our mortgage has increased in line with the rise in interest rates and the [ridiculous] indexation of loans, but only a relatively small amount. An amount that is quite manageable for us.

So, because we have not  been so adversely affected, and because the issue is complicated, and because the kreppa is so multifaceted and complex, and because coming to grips with it all is just TOO MUCH and can easily result in massive burnout if one isn’t careful … you tend to pick your battles and focus on the things that hit closest to home.

And in our case, coping with massive debt has [fortunately] not been a huge problem.

But that is not the case for many, many people. Young people who, for example, were starting families during the boom, who were buying cars and property because they weren’t able to wait [the rental market is not very big in Reykjavík and certainly was not during the boom] — they of course had no choice but to take out large mortgages in order to be able to purchase a home. And because the prices were so high and the state mortgage fund only loaned out a fixed amount, many families had to bridge the gap with bank loans — and many chose currency basket loans because that’s what the banks were pushing.

And now, after the crash, they are suddenly faced with the grim fact that their mortgage has skyrocketed while the value of their property has taken a nosedive. Meanwhile, many people have lost their jobs, so one and sometimes two family members are without an income. They’ve got a debt burden that they can in no way cope with.

Here in Iceland, we have extremely high interest rates and loans are also indexed to the rate of inflation. Meaning that when inflation rises, so does the principal on your loan. And everything is taken into the index. For example, the government has been raising taxes on everything from gas to alcohol to tobacco to biscuits — and this causes inflation. Those tax hikes automatically mean that our loans increase.

Meanwhile, most people have had to take pay cuts, our spending power has decreased substantially, and savings are being eaten up by inflation [although somewhat offset by the high interest rates].

It goes without saying that the system of indexation is grossly unfair. When someone goes to apply for a mortgage, the lending institution measures various criteria that determine the borrower’s ability to pay. However, with the economic crash — resulting from the incompetence of our authorities [*cough* Independence Party] to run the economy — those criteria were suddenly turned upside down. — So why should the borrower be solely responsible for repaying the debt, when his or her ability to pay was deemed OK at the outset — and then circumstances beyond his or her control changed so drastically? The borrower takes ALL the risk for anything that may happen in the future – even 20 or 30 years down the road. It’s ridiculous.

Soon after the crash, the government froze mortgages — meaning that people could delay their payments until a later date. However, that freezing runs out next month, at which time there is likely to be a tidal wave of people losing their homes.

The demonstration yesterday was an eye-opener. It was poorly attended — only about 100-200 people standing around in the wind and rain, but the speeches were passionate and the organization exemplary. There was fire in the people there, and a very evident sense of unity. I suspect a lot of people haven’t been going because, like me, the issue doesn’t hit close to home — but I plan to start attending, just to show my support. It’s a worthy cause and affects us all, whether we are losing our homes or not.

The speeches from yesterday are now available on this website [along with a bunch of others]. The one I found most impressive is by a young man who has decided to move to Norway in the spring. For some reason there are no permalinks, but the speakers from yesterday [January 23] were Jóhannes B. Lúðvíksson, Atli S. Guðmundsson [the young man I was referring to] and Andrea Ólafsdóttir. They can be found by scrolling down in the left-hand column. [Obviously they are in Icelandic.]

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  • Jim Saunders January 25, 2010, 12:00 am

    As always, a great read Alda.

    Do you have any indication of exactly how many people will be affected? How many young people bought property? How many could be without a home next month? 10 people? 50? 100? More?

  • sylvia hikins January 25, 2010, 12:51 am

    It breaks my heart to read how so many young people are having their expectations shattered just by being in the wrong place at the wrong time. The result will be a brain drain, the best and the brightest walking away from the mess.
    sylvia from viking wirral

  • D_Boone January 25, 2010, 7:37 am

    There is no simple solution to this issue. What a mess. Banks essentially act to intermediate between borrowers and lenders. In Iceland’s case before the bubble between typically older people with savings and younger couples to buy their home i.e. inter generational lending. The banks get a fee for this work. The banks and the government have made a complete botch of this task (even if we omit the overseas borrowing and lending component). Lets be clear they are at fault as much if not more than the borrower and lender. The government has guaranteed deposits i.e. the lenders but has left the borrowers mostly on the hook. Others have suggested and I agree the only “fair” way out is for the banks to take equity shares in the assets of the *distressed* borrowers based on their servicing ability. When the property is sold the banks gains (or losses) are crystallized. This means both the borrower and the bank equally shoulder the risk. Whether this is now possible I am not sure with the bank recapitalization and sale but it should have been in the mix from the outset.

  • James January 25, 2010, 7:54 am

    An unfair situation. It reminds me of the British scandal when many financial institutions sold endowment mortgages in the 1980s whose eventual value didn’t cover the mortgage debts; the government forced the institutions to pay compensation to millions for mis-selling the mortgages.

    However, in Iceland, the banks are now nationalised, so any write-offs/compensation would effectively be a wealth transfer from those without mortgage debt to those with mortgage debt. It’s not obvious to me whether or not that’s fair.

  • Michael Lewis January 25, 2010, 9:16 am

    Currency basket loans, I’m sorry but anyone taking
    out such a loan was taking an FX risk. In essence making
    a carry trade, borrowing currencies with low interest rates
    to invest in higher yielding assets.

    Whilst I may work for an investment bank,
    I find it very hard to beleive that people couldn’t
    understand the product they were buying.

    Also, spare a thought for those Icelanders that
    were more prudent and didn’t take out high
    risk mortgages – should they now bail out
    the profligate?

    No, they should be buying homes that are
    on sale for market value.

    Same here in the UK, people don’t want to face up
    to reality of their own speculative investments.

  • Michael Lewis January 25, 2010, 9:22 am

    If you ask banks to forgive mortgage principals – it would force up the cost of banking. Savers would get less of a return. That is, prudent pay for the profligate. That is a moral hazard – you can only do that for so long. Witness the UK in the 70s, when thousands left a profligate socialist country for Australia, Canada, New Zealand an other parts of the Commonwealth.

  • Bromley86 January 25, 2010, 9:48 am

    An emotive issue for many, and understandably so. Dadi over on EDA has posted a lot of good stuff on this subject.

    The core though is that for every krona that goes to BTB’s money heaven, a krona needs to be supplied by the government. In other words by you. So it’s always going to be a hard issue to solve.

    That said, it’s pretty pathetic that the government hasn’t nailed this one yet. I’d guess all the bickering and shameless party-political point scoring over Icesave is to blame.

    BTW, I’m not convinced that Iceland has high mortgage interest rates (which is what you seemed to be saying). Less than 5% when the Central bank rate is double that looks to be a good deal, although it looks pretty horrible with the indexation added on.

  • Bromley86 January 25, 2010, 10:50 am

    Anyone interested in the Icelandic indexation aspect (as opposed to the currency loan mortgages) might want to read Mike (UK Nordic analyst)’s second comment in the article below:
    http://www.economicdisasterarea.com/index.php/editorial/dead-horse/

    Likewise, anything on that EDA site by the reader Vilhjalm A. is worth a read. A relatively recent article by Dadi drew it all together:
    http://www.economicdisasterarea.com/index.php/editorial/the-icelandic-household-debt-dilemma-and-the-governments-useless-permanent-poverty-solution/

    Don’t be put off by the bickering in the Comments section – skip to the end and read Vilhjalm’s response.

  • Joerg January 25, 2010, 10:55 am

    There is a English translation of one of those speeches available on EDA:

    http://www.economicdisasterarea.com/index.php/news/johannes-bjorn-speech-at-austurvollur-23-1-2010/

    One statement is, that “currency loans, paid out in Icelandic kronas are absolutely illegal”. Is this true for Iceland? I would be inclined to doubt.

    But to me it seems to be grossly unfair that people with household debts are supposed to take all the burden and risk, particularly with respect to consumer price indexation.

    Of course, I would make a difference between those, who acted reasonably within their financial means (as of pre-2008) and young people, you are talking about, who didn’t have another choice as opposed to those, who where overstretching themselves financially by taking high risks already before the crash.

    My understanding is that the household loans are the biggest assets of the new banks, backing the deposits of others. I think, the whole matter is pretty complex. But the government would be well advised to provide some sustainable solution instead of concentrating on bickering about Icesave forever.

  • Michael Lewis January 25, 2010, 11:00 am

    ” the wrong place at the wrong time ”

    errr… don’t you mean, making the wrong decision. Or, simply, borrowing too much money?

    ” the only “fair” way out is for the banks to take equity shares in the assets of the *distressed* borrowers ”

    No , the only fair thing is that they sell their homes and take the loss. Unfortunate, but fair. There may be families waiting to get on the housing ladder, rigging the market would be unfair on them.

    In the UK most people were conned over the last decade. Rather than notice the wool pulled over their eyes: earnings were stagnant for a decade: rampant house price speculation made people believe that they were wealthier than they are, this was encouraged by Labour government. It was obvious it would end in tears.

    My own view, and I’ve made plenty of investment mistakes and taken losses along the way: you can’t beat compound interest. Dividend paying blue-chips is about the only way I’d consider for saving for my retirement. My son is now two and I’ve started investing for him. In the UK and elsewhere, people abandonded pension planning in favour of house price speculation.

    Tough, governments can try and bail out people.

    However, as Maggie Thatcher once said about socialist governments: “They always run out of other people’s money”, time’s up in Iceland, almost up in the UK. And that’s a good thing.

  • alda January 25, 2010, 11:40 am

    Thanks everyone for the input.

    Jim – At this moment, the banks reportedly have 400+ properties scheduled to be put up for auction. I haven’t seen any concrete figures for what may happen next month, though.

    Bromley – thank you for those links – very interesting. I hadn’t seen them before, and I must say I find it hilarious that a good part of the whole thread in that second link was given over to heated complaints about THIS blog! Seeing this for the first time. Amazing how some people can get their knickers in a twist. And thank you for your valiant attempts to defend me! 🙂

    However, that is trivial in comparison to the actual subject of the post and, as you say, the comment by Vilhjalm.

    Joerg – thanks for the link to the translation of Jóhannes Björn’s speech.

  • RLJ January 25, 2010, 11:42 am

    I too find this very difficult. People have a right (a human right) not to be made homeless; but they do not have the “right” to own their own home and part of the problem in Iceland is that everyone thought they could have everything immediately. What are 20yo undergraduate students doing with mortgages and car loans? What are they doing with CARS?

    The people invisible in all this are those who were always at the bottom of the pile – the renters – who got little help then and nothing now. Any mortgage bailout that does not direct itself ONLY to people’s first homes (and only to reasonable homes, i.e. one room per family member) will end up further benefitting all the greedy people who bought 4, 5 and 10 properties to rent out, exploiting those who could not get a foot on the housing ladder (especially foreigners, those in precarious employment and long-term disabled).

    Personally, I think that recognising the right to housing means that the banks should simply call-in on any unpaid mortgages that are on people’s additional properties (not their family home); with family homes, some adjustments might be made (e.g. up to 20% of the loan) but only up a fixed ceiling, to stop rewarding the super-greedy who bought an 8-bedroom house in 101 Reykjavík. If that is inadequate, then the bank (which IS the state right now) should take over ownership but allow the family to rent it back at the market rate. The market rate was once higher than mortgage repayments – hence why people didn’t bother to rent and why there was such a huge buy-to-let market. I expect that has been reversed now and if that has not been reversed (i.e. if it is STILL cheaper to buy than to rent) then we are banging on the wrong drum and need to take direct action to support continuously exploited renters.

    (BTW: I own)

  • alda January 25, 2010, 11:52 am

    What are 20yo undergraduate students doing with mortgages and car loans — Who said anything about 20yo undergrads? We’re talking young people with families – say from 28-32 yo.

    the renters – who got little help then and nothing now. — Um, since 1998, renters have been able to apply for Rent Benefits from the government: http://www.felagsmalaraduneyti.is/media/acrobat-enskar_sidur/Rent_Benefit_Booklet.pdf (PDF)

  • RLJ January 25, 2010, 12:33 pm

    Ooo, Alda, I count as a “young person” (just!) You’ve made my day. But I know plenty undergraduates who own (mortgaged) homes and those without their own car are a minority. I couldn’t understand it when I first came here.

    Yes, the renters can get rent-support, but that is just more taxpayers’ money going in handouts to the owners; they still pay the vast proportion of their rent straight into the hands of the owners of the property and have little security (e.g. it is very easy to evict even a tenant who has behaved impeccably and always paid on time) . The buy-to-let market has been the bastion of greed for the last decade; I don’t think those people should expect taxpayer bailouts because their investment turned sour.

  • hassan January 25, 2010, 12:40 pm

    This is just my story.

    My wife and I lived in a rented one bedroom apartment in Reykjavík with our two children aged three and one in 2006, we wanted to buy our own place but the most we could borrow from the State Mortgage Fund was 12 million kr which was not even enough to buy the tiny apartment we lived in. We decided to buy a house in the country, a small town in the east where property prices are lower. We bought a house for 10.5 million kr, using a 9.5 million kr mortgage and a 1 million kr loan from Landsbanki.
    Our mortgage repayments were 40 000kr each month and bank loan 20 000kr.

    I have now been unemployed for one year, food prices have increased by at least 35%, the bank loan is now 28 000kr and in default, the mortgage is 65 000kr and frozen, but keeps going up, and we now owe 14.5 million kr.

    Each month we have to beg the power company not to cut our power and heating, each month we have to juggle which bills to pay and which ones to leave, and every one that gets left increases the next month. Each day our mail arrives with more bills and letters from debt collection agencies that we can’t possibly pay.

    Our house is now for sale, if we’re lucky it might sell and cover the mortgage, if not, then it gets repossessed and then my wife and myself and now three children lose our home, and still owe money on it. We have to sell our furniture to pay off debts and pay to move our personal belongings like our kids toys back to Reykjavík to move in with my wife’s mother.

    We didn’t have any foreign currency loans to buy fancy cars, flat screen TV’s, exotic holidays, we didn’t borrow more money than we could afford to pay back.

    Now we lose everything and the people that caused it get away with it.

    And to top it all, I’m British and have to cough up for Icesave.

  • alda January 25, 2010, 12:47 pm

    Hassan – that is a harrowing story. Thank you for sharing it.

    RLJ – it is very easy to evict even a tenant who has behaved impeccably and always paid on time — Interesting. I hear very different stories from landlords. One of my cousins, who rented out an apartment downstairs in her house (to help her pay off her mortgage) wound up with drug dealers. It took her almost a year to get them out, they were allowed to default for many months before any action could be taken, and in the end she had to forcibly evict them, i.e. personally carry their belongings out and into a storage space that she had rented. Not so easy, in that case.

  • Michael Lewis January 25, 2010, 1:13 pm

    Hassan – serious question, did you take out unemployment insurance? Don’t they have that available in Iceland?
    “1 million kr loan from Landsbanki.” Didn’t this mean you bought a house you couldn’t afford? Didn’t that indicate that Icelandic property was in a bubble if people were taking out loans in addition to mortgages?

    Similarly, in the UK we had people drive up home prices by taking out ‘interest only’ mortgages, essentially a vehicle for banks to speculate on housing.

    The fact is that taking interest only mortgages and loans on top of mortgages should have been stopped. Goes back to my comment in an earlier post: in the UK (and probably Iceland too) the government were happy to encourage house price inflation, it covered stagnant growth in real wages. What many people didn’t realise is that this situation wasn’t ‘normal’ I myself left uni in ’95 , it was boom time in UK real estate, but it doesn’t take a genius to look and think “throught history, when has any asset always gone up for more than a decade and not corrected”, I was lucky, I bought and sold Jan 2007, pretty much at the peak of the UK bubble. Rented ever since 2007, there is more pain for the UK.

  • kevin o'connor,waterford ireland January 25, 2010, 2:44 pm

    Bad story from Hassan there, I notice that to rent a place in Reykjavik it costs 100,000 krona a month =555 € which is sort what it costs for a 2 bed place here in Waterford. But without the krona collapse it would be double 1110 € a month which is quite simply insane sort of like Dublin. How can it be that your piles of rubble called residential housing got up to such high prices,I mean there are only 300,000 of you there whats happening,running out of bricks and land are we. Any Icelander that gets kicked out should come and squat in the 300,000 empty homes we have here in Ireland NAMA estates and the such like, in fact as my rent assistance has been cut I am kind of hankering after it myself ha ha. 🙂

  • hassan January 25, 2010, 5:25 pm

    Michael Lewis – it must be great to work for and investment bank and be able to show such arrogance to anyone that falls upon financial difficulties.

    As for the 1 million kr loan from Landsbanki, this was for the 10% deposit as the State Mortgage Fund only covers a maximum of 90% of the purchase price. This is the same as in the UK – do you think that people should only be able to buy their own home if they can save up 10% of the price themselves?

  • Michael Lewis January 25, 2010, 8:40 pm

    Hassan, I have not displayed arrogance. And yes, my god, people should put down 25% of the house cost at a minimum. That is basic
    prudence, and common sense. In NZ 25% is pretty much standard and in the UK – if you go to a proper building society, they’d ask for the same and some history of saving too!!!

    Countries are in this mess be because of relaxing lending standards and encouraging speculation and people should take rwponaibiliry or borrowing more than they could reasonably afford.

  • Michael Lewis January 25, 2010, 8:44 pm

    Blackberry went a bit funny, my post should have read “responsibility for”.
    Frankly, if you buy a house without putting down about 25% of the cost you really need to ask yourself if you are not borrowing too much.

  • Lino January 25, 2010, 9:38 pm

    Hassan,
    I will not comment on your situation, though I’d like to start from your question “do you think that people should only be able to buy their own home if they can save up 10% of the price themselves?” to make a note on how crazy/rotten bank were/are in Iceland, it’s not directed to you.

    Here we have someone who has no initial capital, no collateral other than his job. This person goes to the bank and says “I’d like to buy a house, the mortgage covers 90% and I’ll loan the remaining 10%”.

    What I find astonishig is that the bank accepted to finance that mortgage!

    Unless they immediately resold away the mortgage (american banking/lending crisis 2.0 with icelandic subtitles), they were endossing a sizable risk with a borrower with no other collateral than the house itself and his job.

    If they took such a risk, icelandic banks were managed not just by crooks but surrounded by idiots as well: I wonder if the crooks were more noxious than the idiots or the contrary…

  • idunn January 25, 2010, 9:47 pm

    Well, my Icelandic is really thin, but nevertheless quite obvious that Mr. Guðmundsson spoke with true passion. He is the kind of guy you need to retain in Iceland.

    I’m not of the ‘let them sleep in the streets or cave’ persuasion; I tend to think everyone should have a decent home. It need not be a palace, but decent in providing the basics of shelter, and not just one’s body but also for spirit and overall well-being.

    Here, in the old USofA, lots of people have and are losing their homes for much the same reason as in Iceland. Many people are ‘underwater’ in their loans, owing more on the house then it is currently worth. In the US this isn’t because they were indexed to currency baskets, but the result is the same.

    Many people obviously made unwise investment decisions. It is also obvious that many of them did so at the prompting of unethical banks, whether in the US, Iceland, or elsewhere. In short, there is plenty of blame to go around on all sides of this equation.

    As far as Iceland is concerned, it seems the question now is not so much in assigning blame but in finding viable solutions. The immediate problem being shelter, and where exactly people are going to call home. It is plainly obvious that many will not be able to maintain existing loans. Whether they can remain in the homes these loans are tied to is another question. One that I would think the government and greater society would take a deep interest in. Some places I will not name might be as happy to let many of these people fend for themselves. I have a bit more faith in Iceland as a civilized place that will seek a better solution.

  • Michael Lewis January 25, 2010, 10:51 pm

    idunn – in the US you have non recourse mortgages (at least in some states), this makes it easier for many people to hand in the keys and let the bank foreclose. I happen to think its a reasonable solution: it lacks the stigma and is much easier on people that house repossession her in the UK.

    What this means, people have limited liability on the mortgage debt. i.e No need to sell kids toys …

    You can in effect default, and that is something that should be more easily available in countries outside of the US. In fact for many people in Iceland its -exactly- the sort of thing that they should have the ability to do,

    There is a moral hazard though: what about say an Icelandic family that couldn’t afford a house – and are renting: should have their tax spent on keeping those that took out excessive loans in their homes? I agree providing housing is important – but you can’t have these bailouts.

    What we need in the UK and what you really need I guess in Iceland is for retail banks to go back to traditional banking that used to have here in the UK. Building societies rather than banks used to be principal suppliers of mortgages during my parent time of life – a mortgage would be offered after an interview, when the appliers could give 25% deposit and after a couple had banked with and saved with the building society for some time.

  • Sebastian January 25, 2010, 10:59 pm

    Great analysis, Michael Lewis! However, I’m willing to accept 20% as a minimum initial down payment.

    Currency loans are of course pure speculations. Acknowledge it, or continue to live in a fantasy land. Similar criticism goes for buying a home with 100% loan financing, or extremely high leverage. And yes, each citizen and bank customer needs to take responsibility for their actions, not being victimized.

    Regarding the indexation of loans, it’s important to remember Iceland’s long history of failed monetary policy.

  • hassan January 26, 2010, 12:08 am

    Michael Lewis – I assumed your spelling mistakes were down you getting worked up and irate and thinking of Maggie Thatcher.

    “The comfort of the rich depends upon an abundant supply of the poor.”
    Voltaire

  • Michael Lewis January 26, 2010, 12:43 am

    No Hassan. Typed on message on my Blackberry pearl which has a weird keyboard. I benefited from the housing bubble in the UK myself. And, I think I’m less impacted than many by the downturn.
    However, I have the most sympathy (here in the UK) for pensioners and very young families. Couples in their early or mid twenties say. These are people living on fixed incomes or saving for a house.
    Devaluation, has caused food and heating inflation for pensioners that can’t afford it. Quantitative easing, has taken money from young families saving for a home. These are just as equally victims of the downturn, and what was their crime? Worse than Iceland, in the UK we had 120% mortgages !!! We even had 4 or 5 times earnings interest only mortgages. People taking these products and borrowing excessively were in essence preventing others from joining the housing market – buy forcing up prices through speculation.
    In the long run, I think countries should aim for stable housing prices, with careful borrowing limits. The last decade: was out of the ordinary, so this would just be a return to normal. Thats good
    for everyone – borrowers are less likely to get into trouble and if they do – the market is less likely to be in a crash and therefore more liquid and possible to sell easier. Borrowers should have some ability to default if circumstances change radically and do so with some form of limited liability. Finally, I would say 100% mortgage is speculation, if your bank didn’t tell you about that, thats a shame, they should have.

  • Andrew January 26, 2010, 5:47 am

    I can see that if a large percentage of the Icelandic population is simply pushed out on to the street a revolution is on the cards! In any case, what will the banks do with all those empty properties? Who has money to buy!?

  • D_Boone January 26, 2010, 8:33 am

    I fully agree that the borrower for a house loan should contribute at least 20-40% down payment. They have to have skin in the game and also be able to withstand moderate “market fluctuations” without going into negative equity. The lender as well should not be in turn just be on loaning money from some overnight money market and scam the system to their own benefit. This is very obvious.

    The situation is Iceland’s government and banks really mucked up. Everybody knows that. The problem is not that they mucked up but what is now the best solution for a bad situation: not only for the depositors but also the borrowers. If you just tip people out of their homes if they are in default then you have a social problem and *somebody* has to pick up the tab for the long term down stream financial and social consequences. If it was a few % the system can handle it but 20 or 30% I personally don’t think so. At the extreme do you want a society where the dispossessed revolt and string up those with money and bankers from the nearest lamp-post? It has happened in the past and certainly is not in anybody’s “financial models” of the likely outcome. I don’t think the current problem solely rests with the borrowers, but they certainly should bear a considerable cost and also in no way profit from their poor (in retrospect) decision.

  • maja January 26, 2010, 2:40 pm

    I live in Perth, Western Australia, and when my partner and I took out an AUS$300,000 to buy our house we only needed about $20,000 cash up front. I think the bank wanted a 5% deposit to give us a loan. That seems to be pretty standard in Australia. We could have saved up 25% but it would have taken a few years and by that time the value of our house would have been $400,000 so that was hardly worth it.

    I must admit that we were very careful not to borrow more than we could afford on one of our incomes (just in case) though it would still be a struggle.

  • Michael Lewis January 26, 2010, 5:20 pm

    maja – you’ll need be careful. ‘The Economist’ magazine did a good article recently – and Australian property is about 50% overvalued by its metric.

    Australia a couple of year behind ?
    http://www.thebull.com.au/articles_detail.php?id=1372

    “First Home Buyers with the most vulnerable jobs, lowest incomes, and the lowest net worths, have thus been enticed into debt at a time when the rest of society is busy de-leveraging”

    That said, Australia has Commodities – China needs them, so that will keep Australia out of recession. Australia still has immigration of course.

    That said, Australia is in housing bubble, no doubt about that.

  • Michael Lewis January 26, 2010, 5:25 pm

    Here is an interesting chart maja:

    http://en.wikipedia.org/wiki/File:EconomistHomePrices20050615.jpg

    Now ask yourself one question. Will it be different for the UK, US and Australia ?

  • hassan January 26, 2010, 7:58 pm

    Michael Lewis – Here is an interesting page.

    http://en.wikipedia.org/wiki/Compassion

    Now ask yourself one question. Will it be different if you ever suffer any form of misfortune?

  • Michael Lewis January 26, 2010, 9:43 pm

    Hassan. I do have compassion, but being untruthful isn’t compassionate. I’ve said I think we should have non-recourse mortgages in Europe. If banks had lent sensibly, economies wouldn’t be in this mess. Its highly likely that if anyone had to sell their home: they’d have a modest improvement on their investment and a liquid market to sell into. I feel sorry for those that are forced sellers.

    However, borrowers should take some responsibility: put down a deposit and don’t borrow too much. As a rule of thumb, I’ve always been told – don’t borrow more than 3 times your income. So, roughly 25% down as a deposit (ok , you may have a little room here or there, but roughly thats a decent amount) and don’t borrow more than 3 times.

    If I were in a debt situation where it seemed impossible, I would do the following:

    i) Figure out the total debt.
    ii) Figure out what you can afford to pay, after reasonable living expenses.
    iii) Go to a citizens advise bureau (or Icelandic equivalent or cheap lawyer), ask them to present a plan to your creditors.

    You go to your creditors and give them a plan – it means you’ve taken the initiative and they are far far more likely to simply accept your proposal – its easier than arguing with you.

    You will get a -much- -much- better deal out of them, if you send them a plan. But I think they are more likely to accept your proposals (even if it means them writing off some debt) and move onto someone else, than they are argue with you.

    That would be my advice. Take the initiative – ensure you are calculating enough to live off – allow for emergencies etc – and then present a plan. In the interim, you could email creditors and say
    ‘Dear Sir/Ms,
    I understand I may be in arrears with my account. I’m putting together a plan to address this. You should have the plan by . Please bear with me in the interm.
    Regards,

    Job done. Then get onto the plan, get some help putting it together.

    You know thousands of companies go through ups and downs and have to restructure their debt, you’re just doing the same.

  • Daði January 28, 2010, 3:50 pm

    Michael Lewis, you obviously don’t live in Iceland do you? 🙂 If you do, sorry for my assumption.

    – Yes, companies are allowed to restructure their debt. Individuals are thrown into harsh bankruptcy proceedings.

    – Yes, you were told to put down 25% on any loans. In Iceland the message has been quite different. You could argue about individuals having to take responsibility for their own actions. But financial literacy in Iceland is scarily low. Therefore the message since 2002 has been to invest with as little as possible, otherwise you’d be missing out on something awesome. You might call Icelandic consumers gullible, I would call them people who have been brought up with a dysfunctional notion of money.

    – Correct me if I am wrong but isn’t it clear in the US that the position of the customer vs. the financial institution is considered to be uneven, that is that the customer is not supposed to be the financial expert, but the bank is, and therefore more responsibility must be directed at the bank? If I went into a bank and asked for a loan for my 12 year old in her name to buy stocks and the bank approved it, then no-one in their right mind would claim that the contract is a valid one. She is a minor and if I am oblivious to the fact that she is not allowed to collect debt, then the bank has the responsibility, it is supposed to know these things. (Oh, wait a minute, this happened at Glitnir/Islandsbanki and both parent and financial institution signed the contract)

    – I agree with you that there should be non-recourse mortgages everywhere. But the thing here is that the banks hold the winning lottery ticket on every mortgage through the consumer price indexation. They have actually in many ways benefited from situations which lead to rising inflation, strangely as it sounds.

    – Because of the CPI and the Icelandic Krona, the laws of personal finance taught in Europe and the US do not apply. A friend saw her mortgage rising rapidly in 2008, a safe, small CP-indexed loan in Icelandic Kronas. Having lived and studied in the US, she immediately brought out her savings. A few months later, no savings, no job, no severance payments because the company went bankrupt and … the mortgage back to where it was.

    – BTW, Hassan has to pay for Bjorgolfur Thor’s sea-cable, Jon Asgeir retaining Hagar, Olafur Olafsson retaining Samskip, IceSave and the small matter of billions upon billions in debt left over from David Oddson’s time in the Central Bank. In his position, I believe he and so many other Icelanders who have never posed as financial experts are allowed to ask, “Why Me?” and “What the hell just happened?”

  • Lino January 28, 2010, 9:44 pm

    >But financial literacy in Iceland is scarily low

    if you want to play as an adult, you have to accept the consequence as such… in winning or losing

    >You might call Icelandic consumers gullible, I would call them people who have been brought up with a dysfunctional notion of money

    it’s irrelevant: when you decide to trust, you forfeit duty of exam/skepticism, not of responsibility.
    Responsibility for the decision itself and its consequences, even if you cannot conceive them out of gullibility or ignorance.
    I could understand eventually “it seemed a good choice at that time…” but not “why me?”