Germans, Cash, and Debt
This article tries to explain why Germans strongly prefer to keep cash and avoid debt. Oddly, the explanation they offer suggests the opposite behavior:
This reminds me of stories I heard about US mortgages in the late 70s, with interest rates topping 15%. While it might sound like a great time to take on a mortgage (high interest rates mean low house prices, and when rates fall you can refinance down) in practice people tell me that no one took out mortgages so no one bought houses unless the owner offered financing.
If anyone knows the real reason for German preference for cash, and/or US mortgages in the 70s, please let me know in the comments.
But, of course, their attitudes toward currency must owe something to Germany’s tumultuous monetary history. During the Weimar-era hyperinflation that peaked in 1923, prices rose roughly a trillion-fold, as Germany attempted to pay its onerous war reparations with devalued marks.Wouldn't hyperinflation mean you would not want any cash at all, and would want to take on debt (as it's real burden would just be inflated away?)
This reminds me of stories I heard about US mortgages in the late 70s, with interest rates topping 15%. While it might sound like a great time to take on a mortgage (high interest rates mean low house prices, and when rates fall you can refinance down) in practice people tell me that no one took out mortgages so no one bought houses unless the owner offered financing.
If anyone knows the real reason for German preference for cash, and/or US mortgages in the 70s, please let me know in the comments.
posted by winterspeak at
1:57 PM
3 Comments:
Hyperinflation means that you can't service the debt, because your *income* is being deflated away faster than the debt is. Now, if your income is in USD instead of Weimar marks, that's different.
But that's clearly not the case for most German households.
Similarly, for US mortgages in the 1970s, you had to have the income to service the mortgage until you could refinance down. That was often difficult to do.
Here are my decidely non-expert guesses.
Housing prices are pretty sticky, so they probably wouldn't drop enough in price to really get you the low prices that would compensate for the high interest rates. So from the point of view of a buyer, it may not look attractive from an economical standpoint.
From a more behavioral standpoint, wanting to get a 15% interest loan feels really counter-inituitive.
Also, since a lot of folks view houses as an investment rather than the more appropriate view as an alternative to renting, a bear housing market would lead to lower trading volume which would be expressed in folklore as no one wanting to buy.
ERIC: In general, peoples income goes up dramatically in hyperinflationary times. So your ability to service the debt would be the same (assuming you could stay employed).
Remember, one person's spending is another person's income, so if prices are rising, and transactions are happening, income must be increasing (all else being the same).
DEAN: Yes, if house prices are sticky downward, then you might not get enough of a price drop to compensate for the higher interest rates (which fits with Eric's point earlier).
Trading volume is a big one. I can see transactions drying up, and then it's unclear what "price" really is.
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