Reply to comment

There is vibrant debate over strategic defaults of homeowners worldwide. I will address specific case of Czech Republic. The country has been affected by property bubble for numerous reasons.

There is vibrant debate over strategic defaults of homeowners worldwide. I will address specific case of Czech Republic. The country has been affected by property bubble for numerous reasons. Debt levels of residents were very low back in 2000, they were low after 1998 banking sector collapse, but they were relatively low even before, because most of troubled loans that time were corporate loans. In fact years around 1998 can be seen as strategic default of entrepreneurs, some made huge fortune buying back their own debt at distressed levels. Since then country has undergone path of bailing out banks, selling them to international groups (in explicit hope for better management), tightening of bankruptcy laws (especially for individuals), followed by lending spree. After the joining of EU, foreign creditors were even more generous. The country economy, was more and more dependent on car exports into EU, which was supported by government subsidies on fixed asset investment. Government sector was bloated along with property bubble, one whole new elected level was added.

Local real estate bubble

To make an estimate of how big the property bubble here is, I'll pick up the example of Prague (capital). Good high estimate of average salary here is $2000/month, but basic condo (one room 45m2) in high raise building casts you $180k it is seven years of whole salary, not counting taxes. But that condo is enough just for one or 2 persons. Decent family flat is double that. After crisis outbreak prices doesn't collapse so much (developers are trying to mask it as other incentives), but transactions did. There is approximately 50precent plunge in mortgages given and corresponding plunge in property sales. Biggest developer ORCO is now under creditor protection and there are no signals of relieve. If he goes under, properties at fire sale prices will hit the market.

Strategic defaults

I don't know about guilt concept of strategic default over residential real estate, but most of it is probably caused by the fact, that predominant mentality now is “it is better to pay mortgage payment than rent”, which is not true if there is no future appreciation (rent for flat above will be max. $800 and trend is down). Right now defaults are around 2percent and they are not strategic. Cheerleaders make an argument, that average LTV is 70 percent, but it is hugely distorted, because what counts is number of 90+ percent mortgages which is considerable high and most of them were given at market top.
The country was supported by cash for clunkers in Germany, but it has ended, and we are slipping towards next leg down. We might not make it despite financially we are one of the strongest in CEE block. The Erste Bank, no1 here, is raising capital because of Balkan looses, and doubt it will stand further looses here. If CEE region will not stand it, there is visible collapse of Baltics, Ukraine and Hungary, Europian banks will have a huge looses.
I believe just in gold.