Monday, May 01, 2006

Inevitability

As I mentioned before, Estonia is going through a housing boom right now. The reason for it, or rather for it being quite this wild, is said to be the overall growth of the economy and the related confidence of people taking out loans.

Now, the economy certainly has a lot to do with it, but it doesn't really have much to do with confidence. Estonia has been independent for the last fifteen years, and for barely twenty before that. Now, we certainly don't intend to be conquered any time soon, but it does make it rather silly to have any sort of faith in the next thirty years.

I've found that one's big decisions are often enough not hard at all. I've got friends who admire my ability to advise on matters with rare clarity of vision, but really this is nothing more than a habit of analyzing factors from an objective standpoint. If you can be objective, you will often see that one of the choices is obviously better than the others.

A studio apartment in a new building in Tartu currently costs around 700,000 EEK/45,000 Euro. With the required 25% down payment*, a 25-year loan gives you a monthly payment of around 2500 EEK. (Magic number!) This is what I now pay for my studio apartment in a Soviet-era building, unrenovated. I've actually got a good deal, too. Under these circumstances, as soon as one has the cash for a down payment, one really has no choice but to go out and get a mortgage.

Of course, prices in Estonia are currently more or less insane. (We also pay $4.30 per gallon of regular, on an average national net salary of 650 bucks.) I've explained why I'm shooting for a new building, but a similarly-sized apartment in a Soviet block, slightly fixed up, will actually cost more or less the same. Still, with a mortgage margin of half a percent (plus inflation, represented by the EURIBOR index)**, you have the option of either putting a sizeable portion of your salary into your own equity, or putting it into some guy's bank account. No matter how overpriced the apartment, it still makes infinitely better sense that renting.

Under existing circumstances in Estonia, the fact that house prices are inflated is irrelevant.

The down payment of 25% on a 700,000 EEK flat is 175,000EEK. A monthly mortgage/rent payment of 2500EEK means 30,000EEK per year. If you want to invest the down payment to cover your rent, you would need a return of 17% annually. Now, my pension fund apparently grew by 33% last year, but that's still got very little money in it (I'll be 22 this Sunday) so I don't really care. There is no secure way of investing your money with a guaranteed 17% earnings. For most people, their down payment is likely to come from selling the family real estate and splitting it among siblings; it has a very real chance of being the last time they'll see this sort of money, at least for a very long time. Risky investments are unacceptable.

Estonians are highly territorial and domestic. Owning your home is fundamental. It's something that you absolutely must do if you can at all.

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*Muppet recently bought a house with 5% down. In Estonia this couldn't happen. OK, fine, you can buy a home with no money down whatsoever if you've got additional collateral that's worth at least 25% of the place, but otherwise it's simply banking rules. This has the fortunate side-effect of avoiding a situation where house prices drop and you end up owing more on the mortgage than the value of the property. You start out owning at least a quarter of it. If prices drop that much overnight, you've got bigger problems to worry about***.

**And remember, you get 23% of all the interest you pay back from the government.

***Despite negative population growth, Estonia's cities have a very real deficit of supply in living space. Now, we seem to be past the most ludicrous point and the prices are levelling off, dropping a bit because the speculators want their investment back. But even if the economy stops soaring, people will not easily trade in their new apartments for cheaper ones. Cheaper means smaller, and at the discussed price point it doesn't really get much smaller. There simply isn't enough cheap apartments for people down on their luck to move into. Tallinn's ghettos have largely been yuppified. Since for apartment prices to drop rapidly, you would need a large amount of people - significantly exceeding demand - to panic and drop their property on the market, taking anything anyone would offer, this scenario can only be caused by the economy getting comprehensively fucked. Estonia's economy is oriented at the world economy in general, we work for Europeans and Americans. If we can have this sort of growth in decades of market crashes and oil wars, the only thing that can kill our economy is an actual, proper shooting war unfolding on our territory. Which is when the size of your mortgage becomes an utter non-issue.

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