[Shalle135]

Fact is though, it doesn’t matter much where in the world you’re looking to buy. If it’s a capital you’re expected to pay close to $1m or more for a house, even in places like Beirut where the houses don’t have central water, electricity/internet infrastructure is extremely poor. Prices are the same. This in a moment in time when the majority of people barely can afford food due to the pandemic and financial meltdown that has occurred.

The main reason behind it all is the low costs of taking on debt, which in some scenarios is totally insane. Italy for example that has been bailed out several times can get rates around 1%. What kind of entity would accept the risk of default when the profit is close to none after inflation?

The world is obviously in a debt bubble - the question is only when it will pop & how dramatically it will happen.

[ethbr0]

When the world is awash in debt, pricing turns into a game of future-mortgaging chicken.

Who's willing to promise more of their future to buy an asset?

[317070]

That is actually really insightful! I cannot believe this is the first time I see the issue stated so clearly.

So the whole thing comes down when you run out of other chickens.

[ethbr0]

It's essentially a distillation of underwriting standards, low/zero central bank interest rates, and consumer behavior.

Underwriting standards for mortgages are typically based on loan to value (LTV) and debt to income. In that calculating, value is traditionally defined as "what the market currently values comparable assets at" (aka comps). For debt, providers of credit (banks and the central mortgage agencies) are more concerned with ability to repay, rather than absolute debt. Consequently, monthly payment >> total price.

Therefore, in business as usual (moderate to high interest rates), there are caps on how much individuals can leverage with mortgages (i.e. eventually their LTV or debt to income will exceed standard limits and they'll be denied a mortgage).

Unfortunately, both of those key components are heavily influenced by central bank interest rates. If the Fed decides to plunk the rate at 0%, mortgage rates decrease as well.

Because mortgage rates have decreased, my resulting monthly payment for the same total loan value decreases. Or, conversely, the total loan value I can assume for a given monthly payment increases.

Because it increases, I can pay more for a house. And either I, or someone else does!

Now, a few months later, someone else wants to buy the 2nd house on the block. They call out an appraiser, who turns the crank on their standard process, looks at comps in the neighborhood, and values the 2nd house in light of the 1st home sale. Because that 1st sale was inflated (inasmuch as we can judge), the valuation on the 2nd house is likewise inflated.

Ultimately, both of these have the end result of raising the cap on how much borrowers can "afford" to pay (assuming static income) for the same asset. Whereby the financial system previously capped their effective leverage at one level, now it's allowing greater leverage (albeit greater leverage that "looks" like the same value, because the underlying inputs have changed).

Tl;dr - The financial system used to impose a cap on how much I could pay and qualify for a standard mortgage. Because of actions taken by central banks and consumer behavior, that financial system-imposed cap has effectively been lifted. Now, the consumer themselves is the primary brake on overpaying. And average consumers? They don't math too good.