Wednesday, October 2, 2013

Warning To First-Time Home Buyers

There are a lot of smart, young people out there who are finishing their studies, starting in their first jobs - and buying their first apartments. Buying your first apartment as soon as you have a salary slip to show to the bank is an important ritual, especially in Norway. Like I mentioned in my recent post, only students and other people who can't afford to buy are thought to be on the rental market. It's always smart to buy. Why would you pay back someone else's mortgage? Real estate is a safe and sound investment.

This is something that very few young people question nowadays. And I don't blame them for that. Their parents don't question it, having lived through the 20-year (so far) bull market in house prices. The Norwegian media doesn't question it - neither do most of the experts they interview. And neither do the politicians question it: the new government wants to reduce the 15 % equity requirement connected to purchases, just to help first-time buyers to get on the market.

But if you are one of these young people, I want you to think of the following.

First: If you rent, most of the money you pay to your landlord goes to pay the interest on her mortgage and the monthly common costs - exactly the same costs you would pay as the owner of the apartment. In many cases this can be close to 70-80 % already, perhaps 90 % at extremes, as the rental prices have not been following the overall house price appreciation.

Second: If - and no one in their right mind can deny the possibility - there is a price decline in real estate in the coming years, you might very well be a lot better off by waiting, renting and saving equity for the future purchase. In the worst case scenario, where house prices would decline by 30-50 %, you would be making the costliest economic decision of your life by rushing to buy now. So the 15 % equity requirement might be there also to protect you. And the people who say they want your best by taking it down might actually end up hurting you. This includes people like Erna Solberg and Christian Dreyer who say they are concerned about you not getting on the market. I consider them idiots for saying that, and it makes me really angry when I see this nonsense repeated time after time in the media. The whole idea of helping people to buy is based on the assumption that house prices will keep on rising significantly while young people are renting and saving for their first home. This is so 1995-2012. It's not the case anymore. You can afford to wait. In addition, house price bubbles are made of this shit - helping people to buy. It happened in the US around 2000-2006, and a lot of the people who were "helped" to buy actually got hurt.

Third: A possible house price bubble will hurt the first-time buyers the most, always. Not just have the older generations "robbed" you by awarding themselves generous pension plans that you're going to pay. They are trying to rob you - and most probably have already succeeded - by selling their overpriced homes to you, having themselves bought them cheap decades ago.

Fourth: If you can overcome the stigma related to renting (you need to be strong), you should be able to look at all the positive things that come with renting. Possibilities to test different parts of the city before settling down. Freedom to move abroad on a whim and not look back. And no financial risk if something goes wrong with the house.

I'm living in a rental apartment and saving for my own first home. And I'm concerned about you. Not because you might buy, but because you are not getting the balanced advice you deserve. Because all these more experienced people are taking the risk that they might actually end up hurting you.

Sometimes it's smart to rent. If you agree, why not give it a try - you have very little to lose.



I will continue my list of "idiots" after reading this article:

Michael Tetzschner, Christian Tybring-Gjedde, Ola Elvestuen, Hans Olav Syvertsen, Peter Batta, and once again, Christian Dreyer. I find this disgraceful, politicians teaming up with real estate agents to help people with limited means buy homes so that there would be no "class differences". This brings to my mind the infamous case from the US where Mexican strawberry pickers got to buy a house for $720,000...

If the government really wants to help first-time buyers, it should fund a building program - lower prices, not bigger loans, are what these young people need. There is of course a big risk that this would deflate the bubble and lead to a recession... So better keep on granting bigger and bigger loans and hope the bubble will never burst? Unfortunately it will always burst in the end.



“I don’t think that we have too large of a private debt problem in Norway but we will create tax relief on savings,” Erna Solberg, leader of the Conservative Party and incoming prime minister after winning the Sept. 9 election, said yesterday in an interview after agreeing to form a minority government with the anti-tax Progress Party. “The policy will be to get more people saving for the future.”

Thank you, Erna! 


  1. Bra du er tilbake etter ferien! Gode artikler. Og her er nok et, litt mer humoristisk, men langt fra ueffent, argument for å leie: "The fellow that owns his own home is always just coming out of a hardware store."
    (Frank McKinley Hubbard)

  2. Thanks, Tarjei!

    That's a good one :-) I referred to this with "no financial risk if something goes wrong with the house", but Mr. Hubbard put it better.

  3. These are a few things that every potential home buyer should keep in mind. That information that you've provided were very useful. Thanks for sharing!

    Purchasing or buying your first home