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Background

In my country (Norway, though the same principles apply everywhere), there's a huge discrepancy between loans in terms of how much equity you need to put up when getting a housing mortgage.

Some of these private banks here are offering no-down mortgages, putting more and more buyers on the market, which seems to be artificially inflating housing prices. People are buying houses on interest-only loans, and re-selling for a profit when the loan is mature. Normally, I wouldn't think too much of this, but it seems to be becoming a trend.

I wouldn't call these loans subprime just yet though, because a steady income stream is pretty much mandatory, but I feel like tendencies are pointing to the idea that banks might start tapping into the subprime market sooner or later.

Investment banks enjoy these mortgages of course, because they set up mortgage-backed securities and earn tons from collateralized debt obligations, and the private banks earn fees from selling mortgages. I mean, it's only a matter of time before new bubbles arise right?

Question

From the standpoint of someone who rents, if I personally start to fear that a bubble is arising and might burst, what's a good plan of action in order to secure myself financially? Are credit default swaps something to consider on a personal basis, given that you can buy CDSs on obligations you don't really have a stake in? Does anyone even sell CDSs to the average citizen?

Thanks in advance for any and all insight.

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You haven't even mentioned whether you own property or not.

If you don't own property now then you don't have to do anything. If you think there is going to be a property bubble and it will soon burst just get your finances in order and be prepared to buy if it does burst (that is if you are interested in buying property).

If you do own property now, you would need to consider if you would be in financial trouble if the bubble did hit the fan. If you are fairly low geared and have a secure job then you should have nothing to worry about. If you are highly geared and think your job may be at risk then you might want to consider selling your propery now before the bubble does burst. Of course if this is the house you live in then you will also need to consider where you would live if you sold it and how much rent you might be paying compared to your mortgage.

Apart from that you have not provided much details about your current situation and your risk tolerance to give more detailed answers.

  • Fair point. I guess I didn't say it explicitly, but I was thinking in general terms. I personally rent, but I do have plans of buying. – Alec Feb 17 '16 at 21:33
  • Absolutely. Changes in housing price only matter directly if you're buying, selling, or borrowing against. If you already have a mortgage there's some chance a down-swing might help you by letting you drop PMI sooner. If you're buying, of course, lower prices would let you buy more and/or pay less. All of that is assuming that the premise is valid, of course,and that you don't react in panic. – keshlam Feb 17 '16 at 21:34
  • Edited into the question that I rent. I guess it helps not to have THAT broad of a question :) – Alec Feb 17 '16 at 21:35
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I think that I'm not going out on a limb to say that if you're asking a question about it here, then you should not even be trying to get into credit default swaps. If you can find someone who would sell you one at all (which I doubt), it will probably be in big sized lots (i.e. lots of money) and you really, really, really should know what you're doing very well. (If you know that well, then I go back to the point that you wouldn't be asking this question on this forum.)

As regards other options, a good plan might be just to keep renting and looking for the price to drop. Have yourself ready to go, and think about what price level you want to enter the market. If you've got money and risk tolerance for it, you might also start planning for whether you want to buy investment property in addition to a primary home. If so, where do you want it, at what price, how will you manage it, etc. These are all questions that you could answer, but they might take some planning and research that you could do now.

If you want to get fancier, then check for something like an exchange traded fund (ETF) or a mutual fund that invests in real estate and / or mortgage companies in your market. You might consider short-selling that - again, if you have the risk tolerance. This will require some insight, but it should be easier to execute and generally safer than something more exotic like a swap. (I don't know exactly what sort of options you will have along these lines in Norway.)

Of course, any advice along these lines can only really make sense in full context of your situation, your risk tolerance, and the market conditions, so don't trust anyone on here (including me) too much. Get professional help as needed.

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