My friend who is an economist was terrfied when he bought a private condo. He and his wife were thrifty penny pinchers whoi paid down the housing loan as fast as possible. Why was he so fearful? Being an economist he knew a lot of economic history and knew that many things can go wrong when one has a large debt. Somehow these few years, people don't think too much about borrowing half a million or a million to buy a home - sometimes they do it because others are doing it. Sometimes they think they are okay as long as they stay employed.
15 years ago a friend of mind show me the terrible situation got in with his housing loan. He computed that he paid a total of $200K in instalments but the oustanding loan decreased by only $60K. How is this possible? During the Aisan crisis interest rates went up to 6-8% depending on which bank you got your loan. 8% on a 800K loan is a whopping $64K a year roughly $5K a month on interest alone. Not to mention the depreciation of the property during that time.Interest rates today are artificially low. They may be low for many years but if you look at a window of 2 decades chances are you will hit a duration of extremely high rates.
If you read the story below, it talks about housing loans in Hungary with interest of 13% and 6% in Switzerland. Because Hungarians can borrow from Swiss banks at 6% to buy a home in Hungary, many did so because many others have done so in the past saving plenty plenty of interest. Guess what went wrong for these Hungarians? /..read the story below. Think twice before taking a loan in a foreign currency.
Another situation that can arrise is negative equity. When the price of the home falls very quickly, the market price of the home can fall below the oustanding loan you have with the bank. When this happens, the banks can ask you to pay down part of your loan immediately so that you get back to positive equity. This clause I believe is found in all housing loan agreements today. It didn't happen in Singapore but home buyers in Hong Kong got hit by this during the Asian Crisis and were at the mercy of the banks that had the right to foreclos on the property,
During boom times, there is always this tempting strategy of buying a home then taking loan with a long tenure then servicing the loan with rental income. I've seen a number of people who get into trouble with this strategy - they can afford one condo but buy two thinking the 2nd property can pay for itself via rental income. To get into real trouble buy 3 condos. when you can only afford one. If your timing is perfect perhaps you can get away with it but many people do this during the boom time when poperty prices are high. When rental yields fall, they end up slaving away to hold on to the property.
Austrian Banks Face Hungary ‘Debt Slave’ Revolt
QBy Boris Groendahl and Edith Balazs - Dec 14, 2011 7:01 AM GMT+0800 inShare0More
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Austrian Banks Facing Payback Balint Porneczi/Bloomberg
Hungarian forint notes. because it may have to inject capital into its banks. Hungary’s banking association last month proposed a plan of its own that would include further losses for the banks of as much as $2.2 billion.
Hungarian forint notes. because it may have to inject capital into its banks. Hungary’s banking association last month proposed a plan of its own that would include further losses for the banks of as much as $2.2 billion. Photographer: Balint Porneczi/Bloomberg
When Hungary’s former central bank governor was buying a house two months before Lehman Brothers Holdings Inc. collapsed and the country sought an emergency bailout, he received an offer he couldn’t refuse.
Peter Akos Bod, now an economics professor at Corvinus University in Budapest, was given a choice of mortgages by his bank. The 60 year-old could select a loan in Hungary’s currency, the forint, at 13 percent interest, or one in Swiss francs at less than 6 percent. After crunching the numbers on a spreadsheet, he picked the cheaper franc loan.
“It was rational,” he said of his 2008 decision in an interview in the Hungarian capital. “I put it into a model.”
Three years later, Bod and about one million compatriots who took mortgages in francs are faced with a debt pile that has swelled to 4.9 trillion forint ($22 billion). The currency’s 40 percent slump against the franc has raised repayment costs, pushing mortgage arrears to a two-decade high and prompting Prime Minister Viktor Orban’s government to brand the loans “debt slavery.”
To help homeowners, Orban imposed currency losses on banks including Erste Group Bank AG and Raiffeisen Bank International AG (RBI) that may total 900 million euros ($1.2 billion). Faced with the risk Orban would impose further measures, lenders have offered to accept $2.2 billion of additional losses if the government promised to take no further action. If it doesn’t, banks are threatening they may withdraw from the country.
“Against the backdrop of a potential western European financial crisis, this raises the risk that western lenders will just pull out of Hungary because it’s just too risky, which would be disastrous,” Neil Shearing, senior emerging markets analyst at Capital Economics Ltd. in London, said in an interview. “Hungarian banks are incredibly dependent on their western European parents for short-term credit lines. At the very least it means credit is going to remain very tight.”
Six of Hungary’s seven biggest banks have foreign parents, including Italy’s Intesa Sanpaolo SpA and UniCredit SpA (UCG) and Germany’s BayernLB. Only OTP Bank Nyrt., the country’s largest lender, is still domestically owned.
Almost 18 months after Orban was elected in April 2010, he passed a law allowing Hungarians to repay mortgages denominated in foreign currencies at discount of about 25 percent to today’s exchange rate. As long as a client applies before Dec. 31 and repays the entire loan before Feb. 28, the banks have to make up the difference.
“I paid it back last week,” Bod said. “I’m free of debt slavery,” said the former industry minister. The plan “is easy to explain from a political viewpoint. It’s cheap for the government, expensive for the banks, good for voters.”
While borrowers in Poland, Romania, Bulgaria and Croatia also took foreign currency loans, Hungary is unique because average household borrowing in overseas currencies is more than six times the region’s average, according to Barclays. In Poland, where more than half of all mortgages are franc- denominated, banks limited them to more affluent customers, and cushioned the franc’s advance against the zloty by cutting rates. Hungarian banks raised rates.
Every redeemed mortgage equates to a loss for the banks. Cristina Marzea, an analyst at Barclays Capital, said in a Nov. 17 report that banks operating in Hungary may lose 12 percent of their combined capital, or about 900 million euros, because of the early repayment plan.
Lenders responded by suing the government in the Hungarian Constitutional Court and asking the European Union in a Nov. 14 letter to take “urgent and immediate action” against Orban, adding they will need to reassess their commitments in Hungary. Erste and Raiffeisen, which signed the letter, have said they will cut lending in the country.
“Banks are having to make brutal decisions about where they deploy capital at the moment, and if policy makers make life too difficult for European banks, as in Hungary, then they will more aggressively deleverage in these markets,” Tim Ash, head of emerging markets at Royal Bank of Scotland Group Plc, said in an e-mail. It’s “obviously bad for credit and growth.”
Demand for franc mortgages rose from 2003, when Hungary’s government stopped subsidizing forint home loans. Foreign banks filled the gap, using their parent’s access to euros and francs to undercut OTP. (OTP) The profitability of the country’s banking industry soared, with return on equity jumping to between 20 percent and 30 percent annually from 2003 to 2007. When the government started to cut spending in 2006, Hungarians took out more loans secured on their homes to finance consumption.
By June 30, Austrian banks had lent $42 billion to Hungarian borrowers, Italians $23 billion and Germans $21 billion, according to the Bank for International Settlements.
Orban’s bank policies have especially irked neighboring Austria, which until 1918 was Hungary’s partner in the Dual Monarchy of the Hapsburg empire and which re-engaged with the region through its banks after communism collapsed in 1989.
Austria’s central bank Governor Ewald Nowotny in October described the Hungarian law as “brutal” as well as legally unworkable and “economically nonsensical.” Nowotny last month ordered the country’s lenders to limit new loans in eastern Europe to make their business “more sustainable.”
When Erste (EBS) set aside an extra 450 million euros for Hungarian bad debt in the third quarter, Chief Executive Officer Andreas Treichl pointedly referred to “irrational populist measures in EU countries” and predicted that Hungary’s government would “continue to take action that will not be positive for the Hungarian banking system.”
‘Biggest Event Risk’
Moody’s Investors Service last week said that Austrian banks’ exposure to the central and eastern European region is “the single biggest event risk for the sovereign.” Austrian banks are also the biggest lenders in the broader eastern European region. Standard & Poor’s said Dec. 5 it may downgrade Austria, one of the six remaining euro area countries rated AAA, because it may have to inject capital into its banks.
Hungary’s banking association last month proposed a plan of its own that would include further losses for the banks of as much as $2.2 billion.
“What we want in exchange is that the government accepts the package we submitted in its entirety and there won’t be new regulations on this issue for two years,” Daniel Gyuris, deputy head of the association, said in a Dec. 5 interview.
The banks may yet be helped by Hungary’s move this week to tap the International Monetary Fund for as much as 20 billion euros of aid after spurning its advice last year. The EU and the European Central Bank have already criticized the debt-repayment plan and the program may form part of Hungary’s negotiations with the IMF. The IMF’s mission chief to Hungary, Christoph Rosenberg, declined to comment on policy issues relating to the country when contacted by e-mail.
“Any further attempts to unilaterally restructure foreign currency debt is off the cards,” said Capital Economics’s Shearing. “I can’t see how the IMF would sanction that. Any restructuring will have to be approved by the banks and the government.”
To contact the reporters on this story: Boris Groendahl in Vienna at email@example.com; Edith Balazs in Budapest at firstname.lastname@example.org
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