Tales from the bubble

The bubble ain't just in the U.S., folks.

Intrepid foreign correspondent "M" writes:

I was talking to a French colleague who works in Madrid and bought an apartment in Madrid recently - he is moderately financially astute, but was given a loan by Bankinter in Yen rather than Euros, as a Euro interest rate of around 4.5% was considered too expensive. The currency risk is unhedged, and it bought back memories of the swiss franc loans in Australia in the 1980's.

I've heard 3rd hand that another Spanish bank (BBVA) are offering a 50 year mortgage, but I know that 40 year terms are now common for first home buyers entering a market that is so over-inflated, it makes Sydney at it's December 2003 peak look tame.

Loans in yen. That's a good one. You get a 1% or 2% interest rate. Never mind that the Economist just named the yen the single most undervalued major currency in its annual Big Mac Index ($)... 37% undervalued vs. the Euro. Imagine seeing your mortgage balance and payments rise 37% as exchange rates revert to norms.

As for 50-year loans, they are really a sign of desperation. For the extra 20 years of indebtedness, you really save very little on each monthly payment. A colleague asked me yesterday about 40-year loans. I showed him that in return for increasing his number of payments by 33%, he'd save less than 10% on each payment (from $4800 to $4400 per month for an $800,000 loan, which will buy you an average, not-so-nice house in the Bay Area. Figure in another $1000 per month in property taxes, then maintenance and utilities, and you're easily talking $6000 or $7000 per month for an average house!).