This morning we did our usual scan around the interweb looking for things to write about in today’s Money Morning.
We usually look all over the place for inspiration. Local websites, overseas websites, blogs, mainstream stuff, non mainstream stuff – you name it, we’re not fussy where we look.
But today we needn’t have looked any further than the News Ltd website.
It was there that we found the ’smoking gun’ behind the property bubble. It is perhaps the biggest expose of the year from the mainstream press.
It’s a top piece of journalistic investigative reporting. You know, the sort of stuff they used to do in the old days. Reading it brought back memories of Cary Grant and Rosalind Russell in ‘His Girl Friday.’
Mr. Murdoch should be happy to know, this is the kind of news story we’d be happy to pay for.
The only problem is that if we had paid for it, we think we’d want our money back. Or part of it anyway.
Because while this was a news story that could blow the lid off claims that Australian banks are ‘responsible’ lenders, News Ltd’s Sunday Telegraph could only be bothered to take up 261 words of cyberspace (not including the headline).
In fact you can read the full article here.
To be honest, as a reader of Money Morning you won’t be surprised at the content.
It’s exactly what we’ve written about for the last year and a bit. And guess what? We didn’t even need to get off our backside to talk to anyone at one of the banks.
There’s no need to.
Once you know how the banks work and what they’ve got to do to stop themselves from collapsing it all makes sense.
But this article from the Sunday Telegraph confirms that the mainstream press knows the banks and property sector are built on wobbly ground as well. It’s just that they’d rather not make too much fuss about it.
We can surmise that based on the paltry 261 words given to the subject. In fact, we’re surprised they bothered to print the story at all.
And considering it took two journalists – Nick Gardner and Miawling Lam – to write it, this must be the most overstaffed article in the history of journalism.
According to the ’scoop’ from Gardner and Lam:
“Based on an income of $61,000, a deposit of $55,000, and a good savings record, NAB offered a loan of ‘at least $455,000.’”
But here’s the kicker to this concentrated news story:
“A $450,000 loan, equal to 7.5 times stated income, would require repayments of $2496, based on the NAB variable rate of 5.29 per cent — more than half of the buyer’s income. And if rates increase by 2.4 per cent over the next year, as tipped, repayments will rise by $700 a month, leaving less than $1000 a month to live on.”
Got that, a $450,000 loan to someone earning a gross income of $61,000 per year. Giving them monthly repayments that’s half their gross income.
Now, the property bulls will say, “Yeah but, no but, yeah but, most people have their heads screwed on and they wouldn’t do that.”
But why wouldn’t they do that? The property bulls and spruikers tell us that property always goes up. The property buying public has been brainwashed with the idea. And if property really does always go up then there shouldn’t be a problem with borrowers leveraging up as much as possible.
Only the property spruikers really know their claims about rising prices are just lies.
Anyway, the fact is, buyers are borrowing big, and they’re doing so with the full knowledge and support of the banks.
It should be enough to finally expose the lie about Australia’s banks having better standards than overseas banks. And it should also finally expose the lie that Australia doesn’t have a ’subprime’ style problem hiding in the closet.
But this story also fits in quite well with an article that a Money Morning reader sent through today. It was from the Sydney Morning Herald’s – hehem – Lifestyle section.
Even the Lifestyle editor’s can see there’s a problem with the banking system, yet somehow the business editors can’t.
Actually, just as an aside we wrote this in an email to an old pal last week about business journalists:
“They [business journalists] seem in awe of the people they interview and are afraid to call them out as being frauds. Seriously, I reckon football players get a stiffer grilling from sports reporters than the RBA does from business reporters!”
Anyway, the headline from the Sydney Morning Herald Lifestyle section is “Lenders at fault over $18m debt, says Upton Baker.”
Apparently Karin Upton Baker is a “society doyenne.” We’ve got no idea what that means to be honest with you. But looking at the article we think it involves having three names and a fur store.
So clearly your editor doesn’t have the credentials to be a doyenne. Must try harder, as our exasperated teachers used to tell us.
The rather dull tear-jerking story to be brief is that KUB borrowed a lot of money which she now claims the bank shouldn’t have allowed her to borrow.
Of course, your first reaction should be, how about some personal responsibility? KUB made her bed, she should lie in it.
Naturally we agree with that too. But it’s also clearly more evidence that the banks have crappy lending procedures. And I don’t mean ‘crappy’ in that they misplace things or that they make silly little errors.
I mean crappy in that the banks knowingly and willingly lend out as much money as they possibly can in full knowledge that people are borrowing too much.
Look, the banks aren’t the victims of ‘liar’s loans’, the banks are fully complicit in allowing these loans to be approved. They are the ones that approve them.
Simply because they have to.
The banks don’t care. They figure that the property market will always be propped up by them and their pals in government and by the spruikers that even if houses are repossessed they can sell them easily.
And besides, look at all the lovely interest income they’ve earned anyway. So what if the borrower defaults, they’ll get another sucker from somewhere.
As you’ve read in these emails countless times, the banks and the property sector are stuck together. They are inseparable. The banks must continue to lend out money at ever greater leverage in order to prevent the whole system from collapsing.
The problem is that like any pyramid scheme eventually it runs out of victims. And when it does the outcome isn’t pretty.
No amount of nonsense about clearance rates and immigrants and Australian’s ‘love’ of housing will remove the fact that the Australian banking system – like its overseas counterparts – is nothing short of a mass fraud.
The banks fraudulently make you believe that they’re looking after your money, when in fact they are doing nothing more than gambling at the property casino.
And that’s where the fraud really kicks off. A lending criteria that allows someone earning $61,000 to borrow a minimum of $450,000 should really be called usury.
Except that instead of the banks charging an excessively high interest rate, they go about it another way. A way that only the most crooked of crooks would think of – they tell you to borrow more money.
That way they get to increase their interest income without having to increase interest rates.
And thanks to the manipulation of the property market by the government, the citizens of Australia who have been brainwashed to think that property always rises have no other option than to take up the banks’ offer of ‘cheap’ money.
If you think Australia has dodged the recession/depression think again. From what we can see, the banks and property spruikers are intent on building this bubble even further.
Get ready to block your ears for when it finally pops.
Shae’s 60-Second Market Round Up
The S&P/ASX200 closed at 4,859.40 up by 46 points on Friday. However, it opened in the red today as the Dow Jones Industrial Average closed at 9,972.18, a 1.08% drop.
Despite the good earnings report from Amazon [NASDAQ: AMZN] and Microsoft [NASDAQ: MSFT], the DOW still closed lower. But, the drop has been explained as profit taking by investors. You can read more about this here.
In Europe the FTSE finished up 35 points to 5,242.57. Even though UK GDP was lower than expected, the mining companies still pushed the index up for a solid finish. Follow this story here.
The Nikkei was up 15 points to 10,282.99.
The price of gold in Australian dollars is trading at $1,144.60, while in US Dollars it is trading at $1,054.90. And the price of silver in Aussie dollars is $19.20 and in US Dollars it is $17.69.
The Aussie dollar continues to hold against the US dollar, currently trading at USD $0.9251. The Aussie dollar strengthened again overnight against the Japanese Yen, trading at JPY 84.94
Crude oil closed overnight at USD$80.50
For the biggest movers on the market yesterday click here…
Shae.
{ 114 comments… read them below or add one }
The point is you would not get a loan of $455,000 at the NAB on $61,000. Really you guys should know the Press sources are dubious.
Phone the NAB and ask them if that is true.
Agree entirely Peter. It also casts a dark shadow over the press. We can’t really trust anything they investigate or report about the banks’ lending practices and the property market.
If these is not true?!!! then what can you say about me earning around $55,000 – $60,000 and yet the Commonwealth Bank wanted to lend me up to $700,000 for a home loan.
I tried the St George borrowing power calculator using a $61,000 annual income, default expenses, no dependents, 30 year loan, and the default interest rate buffer. My borrowing power was $480,000.
Do you mean that this is just a come on and they won’t really lend me that much? That’s not very nice.
C’mon JC and PF!!!!
If this didnt happen the NAB would sue the pants off the Tele…this makes them look so irresponsible and reckless
It shows that we have been saying, this property bubble has been fuelled by thousands of over-extended borrowers
I bet we will be hearing plenty of examples of borrowers claiming they were loaned too much money – there is already some rich bird claiming the banks lent her too much (for her 5 properties!!)
Oh yeah, but we have a housing shortage so prices cant collapse….hahahahaha!!!
Sorry but this article is the clincher. Like Kris said, if Journo’s did this more often (rather than quoting housing forecasts promoted by mortgage lenders insurance companies) then we would be in this pickle
p.s. 50bps rate rise tipped for Cup Day, you wouldnt want to be one of those people that borrowed the maximum amount possible
One work colleague borrowed $220,000 with no savings record and a deposit of $3,000
Another borrowed $200,000 on an income of $35,000 with no deposit.
And the merry-go round continues.
I see now the banks are encouraging gen y to apply for loans before Melbourne cup day….Next rate rise…..
So this is what the banks have left now???? Rape gen y with promises of a great future by applying for loans inside a fortnight……
I’m off to practice my evil laugh for the pop thats due any day week month or year…..Its ironic, the longer away the pop is, the better my evil laugh will be
Great Article!
Here’s my story people…
I am a 28 year old still living at home in a long term relationship. My long term partner and I have saved $150,000 together. Obviously we have been very lucky to be able to live with our parents, allowing us to save such a large amount.
We bought a block of land about 18 months ago which we were sitting on for a while. We were totally ready to build a new house earlier this year 45 kms from the city, but I started to get cold feet. I started to notice that the home buyers boost was increasing the price of everything at a rapid rate. We probably would have spent $450,000 for the house and land by the time the house was complete.
I was worried that if there was a collapse in the property market, the outer suburbs would probably take the biggest hit leaving us with a house worth less than our mortgage.
So we decided it was best that we sell our block and just sit on our savings until we are ready. We even made a decend profit on our land.
We are looking to move out early next year into our own place.
My parents and surrounding family have always suggested buying a house was a great investment, but with prices the way they are going now, I am feeling like we would be better to rent and continue to grow our savings.
I always had thought renting was throwing money down the toilet because that’s what most people around me have said. However I am starting to feel the opposite. If you can continue to save while you rent, then why not rent for a while to build up a decent deposit.
We have no kids yet and could probably live in a low cost one bedroom apartment for a couple of years. I think a 3-5 year plan of growing our savings would probably put us into a better position than purchasing in an inflated market like we have now.
Long term I would like to buy a decent home in a decent area to give our future kids stability in their lives. But I just think now might not be the best time to get involved.
Obviously if there is some kind of crash then we could consider purchasing sooner than later…..
Tony – I say the CBA would NOT lend you $700,000 on an income of only $60,000. Your dreaming.
JC – Thanks for the support. Anyone who actually is involved in lending knows that some of the “bar-b-que stories” are hyper inflated.
Matt – with all respect mate that is just rubbish. None of those scenarios have a ghost of a chance.
PuntPal I understand that you are a sceptic for all of the right reasons. I do agree that banks are at times too willing to lend large amounts, so I’m not altogether going to disagree with the “spirit” of this post, but inaccuracies abound in the press. Those internet calculators are garbage.
Have a nice day.
No problem Peter, but don’t overlook the point I made about the credibility of the press. To be frank, I actually think is likely to be nonsense but Kris Sayce’s views are like fresh air compared to the crap/spin. That’s why I come here: to get a perspective that I can realistically subscribe to.
Hi JC – I usually disagree with Sayce, but as I said earlier I ‘m not completely against this post as at times the banks will lend a bit too much according to their calculators (the real ones that is) but even that has a perspective. If the calculator says that you can afford a loan of $500,000 then they are probably comfortable lending $450,000 but grow less comfortable as you approach the limit of your capacity.
Then you would need to demonstrate good savings, car paid off, well conducted credit cards, no negative aspects such as GE pay nothing for 2 year cards, payday loans etc.
Banks look for mitigating factors, and don’t necessarily lend what their calculators indicate, but they won’t lend more.
JC – Agree absolutely about the press. They have a regular group of stories that they run when nothing is happening. It runs from banks charging too much, bank lending, diets, people getting food poisioning at fast food outlets (must be 70 degrees – I know that off by heart now) lonely hearts clubs ripping off people who should know better, the latest Henry Kaye impersonator, whoever have replaced Storm Financial as the latest investment scandal, a heart tugger case, police corruption, and a pollie sex scandal.
Did I leave any out?
PF – could it be that those figures quoted might involve some sort of hedging or LMI to protect the bank?
In any case, the numbers being thrown about regarding easy credit, do not gel with my experience. I have been hunting for loans for a long time, and I can assure you that banks have not at all been disposed to throw money at me. It has been more like pulling teeth.
So, something does not add up, that’s for sure.
The evidence keeps mounting that this is a giant ponzi fraud. If house prices stop increasing, the Australian economy goes down the gurgler at breakneck speed. When the free government money runs out, who is going to want to pay even more for a house than they are currently paying? There’s not much we can do for now but sit back and wait for the $hit to hit the fan. You can almost hear the silent prayers that K Rudd and the Goose must be saying to themselves – hoping they can hold this off until after the election.
I noted in another thread that the banks are resisting APRA moves to increase the minimum liquidity requirements. APRA wants to increase the minimum requirement from a measly 5 business days’ worth of cash (or equivalent) on hand to a more reasonable 20 business days’ worth of cash. But that’s too much for the banks to bear. They want to keep their cash reserves at the bare minimum so they can loan out the rest. Never mind having some cash on hand to actually meet your obligations as they fall due. Liquidity doesn’t count for much when you know the government will bail you out. Why not splash cheap credit about for people to buy overpriced real estate. They are too big to fail.
As if coming close to a massive recession wasn’t close enough. The banks like us to believe they are so fantastically well capitalised they don’t need this sort of regulatory oversight! Yes, folks, there’s no risk here!
Hi Peter,
Sure, I understand. We all agree to disagree. I don’t necessarily agree with Sayce’s views, but I think his cynical eye and the manner in which he expresses himself (usually free of bullshit) interests me. But I do understand that his is simply a voice among many, even though it makes good sense to me.
Getting back in topic, this “investigation” is still pretty damning, and as you allude to, the banks probably do “lend a little bit too much.” And this is where I’m with Sayce, we get a constant brainwashing about supply side constraints, yet we hear absolutely nothing about the lending of our banks which is easily as profligate as what we’ve seen bury the global financial system. It’s all rather ironic, isn’t it?
cb – journalists live for sensational headlines and controversial stories. There have been times when credit is too easy, but now isn’t one of those times.
Also there are a lot of untruths told after a few drinks. They are just the finance version of a fishing tale.
I am constantly being told by people that they got this loan or these terms from a bank, and I just know it’s a lie, but when your at a social occasion calling the host a liar in front of his friends is not a clever tactic when there is free wine and food being offered.
Yeah PF you rather conveniently left out the really big bullshit stories such as BIS Shrapnel (the average Joe couldn’t question them cause they’re economic experts right?) confidently reporting that on their extensive scientifically backed modelling a 20% increase in cost of residential property over the next three years is a dead set certainty. The FACT remains that the businesses (none more so than than banking and RE sectors) with vested interests have a wholly understandable agenda in keeping the bubble inflating by tickling the purchaser and vendor sentiment strings. That’s okay – it’s only business after all. But it is more often reported as being ‘news’ rather than what it actually is – an advertisement or at best an ‘advertorial’ I think is the term used. The media should make them publish disclaimers.
JC – availability of credit is a factor in all pricing including residential property markets. But it affects electrical goods, cars etc as well. Easy credit does force up prices, basically because people have unrealistic wants and desires that apparently demand instant satisfaction.
Ralph – Sorry mate but the figures on housing will not please you. You should have bought when every bear said don’t buy. But wait, aren’t they still saying that?
bb – the BIS shrapnel forecast of 18% to 20% over the next three years was conservative. Wait for the figures.
Very good! Now that is what I call a ‘bullish’ view which, coincidentally adjusted with a slightly different textual arrangement and the addition of the consonent ‘t’ aligns with my previous views on property reporting.
PF. I am not talking rubbish here. Hop on a plan and come here to Adelaide. I can point you to these people. They will gladly tell you this.
Another example, My offsider (lower income than me) has just been approved for $400,000 to build….Savings history? She has some, he has NONE…In fact he owed $30,000 on a car stolen with no insurance…She may have $50,000 equity. I highly doubt it would be that even.
He has $15 left per week after the mortgage repayment. And they are trying for kids.
The whole system is in a feedback loop that is now completely out of control.
I see you lend money for a living….May I suggest you try new sources of finance if you don’t believe these things are occurring….Just a thought…I mean if RE keeps going up, surely lenders will be out there?
Welcome to South Australia….Formally known as the conservative state! Not these days.
Oh, and PF, the guy with no savings history, was three months off being qualified (yes, he was an apprentice) when he applied for the loan. There was no guarantee he would be employed in three months. But still got the loan, no dramas…None…It wasn’t like this 5 years ago when I borrowed for a car.
I expect to be called a liar, but hey your not the first today.
Peter,
Actually, I’m going to have to call you on your statement that the availability of credit pushes up the price of “all things,” particularly electronics. If that were the case, Blu-ray players would now be over $1000. As for cars, the availability of credit has probably helped the price of collectors’ items and the demand for Porsches, but not Toyota Corollas. You might want to look at the deregulated Kiwi car market for an example of falling car prices amidst a credit bubble. Mind you, the Kiwis were pretty crazy on their properties as well (even without a looming supply “crisis”).
All I can see that has been directly affected by easy credit has been property and equity prices (and commodities to some extent). Oh, debt burdens and irrational exuberance as well.
matt
”"”"”
“”"”I’m off to practice my evil laugh for the pop thats due any day week month or year…..Its ironic, the longer away the pop is, the better my evil laugh will be
how will it sound like VINCENT PRICE mike jacksons thriller ?
http://www.youtube.com/watch?v=Y7q2-4JCcR4&feature=related
I dont know if the article on news.com.au was correct but it does make sense.
A bank makes money from loans. The lend it and make profits on the interest payments. So, a bank must increase loans every year to maintain growth – they CANT stop lending and they wont slow lending
Therefore, if prices rise then loans must increase and banks must loan amounts to customers that are considered reckless and dangerous. For Instance, if the sydney median house price is over 500K and average salary is 60K the bank has got no choice but to lend obscene amounts to that person because they CANT stop lending and a house is so damn expensive
lol, bb, I think PF is pulling your leg, hahahaa
bb – nice play on words, an insult, but a clever one.
Matt – I have just run the numbers and it looks as though you are right. Homeside which is a NAB offshoot might lend up to $200,000 on an income of $35,000 which really surprises me. I would have thought that $120,000 would be the max for someone on that income. Sorry mate I was wrong. Ask me the same question post Melbourne Cup and the answer will probably be much lower.
JC – many factors come into play for mass produced items such as electronic goods. In fact by encouraging mass production many goods may retail lower in shops as production and distribution costs come down with a greater scale of production. I have no intention of analysing everything on sale. What it does do is push people up into luxury goods, and anything scarce rises in price because people have the perception that they can afford it.
GB – a borrower on $60,000 would get a loan of $400,000 from Homeside, with CBA lending a more conservative $313,000. What you are proposing is mathematically impossible. Lenders can’t just lend to keep values rising even if borrowers can’t afford it. That is a strategy that must fail in a very short time. I know that you will all tell me that is what happened in the States, but it is not happening here.
Next you guys will be quoting from Dan Browns latest novel.
cb – No I am aware that Melbourne and Sydney markets have experienced strong growth. I would prefer modest growth, especially as high growth will add fuel to the RBA rate rises.
PF (Spruiker) – “I say the CBA would NOT lend you $700,000 on an income of only $60,000. Your dreaming.”
I say i am not dreaming!! It actually happen to me and i’m just telling you of my experience!!! I was just so surprise of how much i can borrow. Of course i did not tell you how much savings i have, but my point is that the banks just want you to borrow as much as you can.
PF, it sounds to me that your a Spruiker! I guess you should take your own advise and buy, buy,buy!!! Borrow, borrow, borrow!!! Don’t worry right, we live in a fantasy land, where we borrow as much as we can and have a huge amount of debt, but will have no consequences right!!! as what you property bulls and spruikers tell us that property always goes up.
Look, i love this site and i like people’s views and comments. It is very interesting and educating. So keep it coming, i think this house property and economy is just beginning to heat up. But of course it all depends on the government right?! I just wonder what they will do next to change the ball game, specially when the federal election is coming soon.
PF – you have said that sometimes the banks lend a bit too much, but when we sit back and look at the Bank’s situation, why wouldnt they lend as much as is reasonably possible??
The banks that stayed a little conservative (ANZ, NAB…I think it was these two) lost market share to CBA and Westpac…they couldnt sit there while the Government was subsidising the mortgage market. They had to get in on the action and as well as competing on interest rates, they compete on how much they are willing to lend (the more they are willing to lend, the better some customers will perceive them as a bank).
This happens with all Ponzis – fear of misssing out on a bull market. The banks are just milking it for all its worth and when the crash comes, guess who they think (KNOW!!) will come to the rescue….
Chairman Rudd with our money!!! They only have to look overseas and know that big banks arent allowed to go broke by meddling Governments. CBA know they are so big, that their downside has an artificial floor due to the support the Government will given them if they really have made a lot of bad loans.
PF – you are right that BBQ stories will tend to exagerate these things and I would not be surprised if the NAB come out and clear the air on this one (maybe the Tele didnt properly explain what occured in the meeting, but surely it is becoming clear that the banks are doubling down on residential property in Australia and that high prices are not simply the result of supply constraints
Peter, I’m still having trouble seeing the relevance between the credit-property dynamic and prices of daily consumer goods. Is there a point or did it come of the top of your head?
Peter Fraser,
Thanks for the apology. And I have to eat some humble pie for being so aggressive back. Sorry Pete.
To be fair most of these loans are through Homestart, our South Australian government junk loans.
I can not get my head around the RBA lifting rates. I feel that it’s more of a ploy to keep the foreign capital flowing, and to cap inflation…Not to protect homeowners. Its still clear in my mind what it was like mid 2008 with highish interest and high oil…..Since then private debt in Australia has reached skywards again…..
The RBA is probably seeking to protect the Australian economy, that is their job after all, but we have had governments fail to regulate private lending in a sustainable manner…This isn’t a fault that has showed in the last 12 months, or even 10 years. This has been going on far, far too long. Governments should have acted to stop lending above certain multiples of income, unless it can be proven the loan is for productive investment, thus stopping borrowed money for speculation.
It’s almost like we lag the USA by one complete interest rate cycle. As rates rise this time we will see private consumption hit far harder than it was during 2008…..Lets hope we dont go the way of Iceland, and need to have interest rates in the high teens to attract capital.
I guess there is a point because if you leverage yourself to the moon to buy a suburban palace, you won’t think twice about dropping a few thousand dollars on that one-box home theater system at Harvey Norman. I think that it won’t push the prices up for Onkyo and Sony though. At the end of the day, the bank’s happy and you’ve got something to take your mind off the daily grind so I guess it’s all good.
My sister borrowed $372,000 from commonwealth on a 58k salary with no savings and a hecs debt, using 60k of our parents equity (last month). There has not been any tightening of lending standards. Although I don’t necessaryily believe a crash is imminent, property prices cannot grow in Australia until they find a way to further squeeze more money from the average person. Furthermore, these lending practices (that are still continueing today) have indeed set up an easy crash further down the track.
The whole system has landed itself in a bit of a pickle.
PuntPal, in light of the long winded illustration I have given about the way inflation works, I hope that it is clear to you that the proper scope of the quantifier ‘our’ in your phrase: “Chairman Rudd with our money (coming to the rescue of banks in trouble)!!!” mostly ranges over the prudent bears like yourself who keep their savings in cash. The rest of us debtors are already loaded to the teeth with debt, and have little left to offer, except for what they can still grab off us, perhaps, in taxes.
cb – I am aware of it, cheers – p.s. that was a great read!!
That is why I am so angry about how this looks likely to play out. Prudence will be punished and stupidity forgiven….there will be moral hazards everywhere we look and it will be impossible to have faith in market based outcomes for a long time.
I also think that this story shows what a pathetic job the media have done on covering this thing. Surely they know that there is chance we do have a sub prime problem in Australia, but where is the ABC doing their investigative journalism
They had Pilberseck on QnA a few months back and didnt ask her one question on housing affordability – even though it was close to worst ever. SHE IS THE BLOODY HOUSING MINISTER!!!!!! IT IS CORRUPTION!!! PURE AND SIMPLE
I wrote to Media Watch and they didnt want a bar of it…I wrote to QandA and got no response!!!
That is why what Kris and DR crew are doing is so important. We need a critical media in this country and if we get that, a lot of the problems will sort themselves out.
PuntPal – Have you ever considered an equity finance deal? I was initially very sceptical, but on normal rates of housing inflation they work well, and in a reducing market (that seems to be what you anticipate) then the home owner is better off as the equity share owner takes a loss on their portion of the home. They will only expose themselves to 20%, but that means no payments on 20% of the value of the home, so your committment is reduced considerably.
Just a thought.
Ah, PuntPal, the ABC know which side their bread is buttered on, too. They are only human, like everybody else, with clay feet.
I don’t know if you ever watch Question Time in the House. I do, considering its entertainment value to be just about the only thing I will get out of the millions and billions they chew up, them useless drones, or worse. Anyhow, what I want to say is that in question time, regardless of which party is in power, the opposition’s questions are hardly ever answered. Instead, they ramble on and on, promoting themselves, or ridiculing the opposition, and refusing to answer the question, in which there is often a great deal of public interest. With politicians and “leaders” like that, who needs an enemy?
PuntPal – It’s ‘Pliberseck’ and I think she is actually married to a chap called Michael Coutts-Trotter who just happens to be employed by the NSW government as Director General of Education. He received a bit of media when he was appointed to the role by his sponser – the now disgraced John Della Bosca when he was Education Minister (pre Iganua Joe’s and pre cheating on his politico missus Belinda Neal with the nooky disclosure from his 24 year old bimbo) The reason Coutts-Trotter got publicity was that he is a self confessed convicted heroin trafficker. Yep that’s right. Spent time in stir for dealing dope. Now I’m all for the power of redemption and correcting the mistakes in ones life – who doesn’t admire a real success story? – but when you are appointed (no job applications at this level) to the position of controlling the 25,000 teachers working for you when you have a past conviction that would actually preclude you from ever working with children then I think (regardless of his alleged talents) that you wouldn’t and shouldn’t get this particular job. Despite all that and back to your issue, I think it was Pal McDermot (on his show GNW) that cracked the comment “The federal Minister for housing when asked what she was doing about housing affordability in Australia replied that housing was very affordable indeed when you were employed as a federal minister” One might add “and if your husband also pulls down $350,000 p.a as a senior public servant”. Things are really great when you belong to the Australian Labor Party. They know how to look aftr their mates, particualrly in NSW. How about another picnic party on the Harbour Bridge? Bread and circusess we are fed.
BB – Would you guys in NSW like to borrow Tony Fitzgerald for 6 months or so?
Peter Fraser,
What i meant was the banks cant stop lending no matter what. What choice do they have? Thats how they make money.
As an example, its like a mining company that starts producing but never does any exporation. Once the resource runs out they close down. The same goes for a bank, they can stop lending but eventually the resource runs out because everyone pays pack their loans. Therefore, the bank must keep lending (exploring).
So banks have 3 options,
1. Go into business doing something else and make their revenues from that
2. Stop lending and live of current interest repayments until they close down and lose market share
3. Keep lending to people even though the amount you are lending them is dangerously high – sub prime style
As i said, the banks dont have a choice, if property prices keep going skyward then the banks have to continue making loans and the higher the price the more reckless and dangerous the loans will be
PF – I get where you are coming from, but I don’t like the concept of shared equity finance. Its just another form of ponzi finance and although you are right it could play out well for the borrower if there is a crash, I would rather invest my savings elsewhere and stay a renter for bit longer
cb – I know the ABC know where their bread is buttered, but to not ask a single question of Tanya was just crazy. I mean the least they could do was pretend to be hard hitting and pull no punches. The ABC will have blood on their hands if they dont start putting more pressure on this Government. They are going way too easy on them and their partisan approach will soon be revealed.
You are right but, the main reason we have this housing bubble is the fact that the two major parties are as bad as each other in this issue. They are jointly responsible, so there is no-one able to point the finger….this could provide opportunities for new political movement at next election – watch this space
BB – cheers for the spell check, I do it all the time with her name! I think its because ‘Pilberseck’ sounds more insulting and I was shirty when I posted, as you can tell ; )
I’m so convinced that the housing market will crash that i’m seriously considering some advice from a (financially savvy) friend which goes something like this:
if you’re lucky enough to have some equity in your mortgage, then it would be prudent to NOT leave it sitting in the mortgage account (and thus saving you interest dollars).
Instead, one should draw that credit out of your homeloan (or offset account – it’s immaterial) and deposit it in a “high interest” bearing account at a DIFFERENT BANK!
That way, when the Ponzi scheme folds, and the banks start panicking and freezing withdrawals from the mortgage-linked accounts, your money will be SEPARATE from them and they therefore cannot touch it! Apparently the fine print in the mortgage agreements allow them to do this.
So for example, if you have a 400K mortgage, and say you’ve paid down 100K of that, and you have this 100K lying in the mortgage account itself, or in a linked “offset account”, busy saving you all that interest on the 100K part, then apparently the banks could (if they really wanted to) freeze your access to that 100K worth of funds which you have paid in on your mortgage.
If the sh!t hits the fan, and you lose your job say, i reckon that most people would definately want to retain access and control of that ‘extra’ 100K which they had painstakingly paid into their mortgage!?
So draw it out then and place it in a separate bank…
The disadvantage of this of course is one would get less interest than what you would get/save in the mortgage account plus of course the taxman will steal a good part of that interest earned via our antiquated and unfair tax system!
But this loss is what i would call “insurance” money … because i reckon the banks would murder your innocent lil’ grandma if they thought it would earn them an extra buck!
GB – I understand your reasons, and it is correct to state that banks keep increasing loan sizes and lending against greater equity. But not to the extent that you have stated.
Let me explain -
Probably during the period 2003 to early 2008 I agree that lending became too loose, but it has tightened significantly since then. I also think that we were a year or two behind the very loose targeted niche lending in the UK and the US which probably would have become entrenched here if not for the GFC. That is I am saying that the GFC probably saved Australia from the same fate that other countries suffered, simply because we are a little backward, and our markets not big enough, or close enough to the major finance centres of New York and London. Had that occurred our home prices would have risen even higher, and no stimulus could have saved them from a significant fall.
In a previous thread Mr Clean told us that really Australia is a bit backward and not that great. Unfortunatley he is correct. We lag the rest of the world in EVERYTHING but that is what sometimes helps us choose what is best because we can see what has happened overseas and learn from their errors. Lets face it a low population european style country on the edge of asia is not going to become a world leader. We don’t have the wealth of europe or the US, were out of the way, and we don’t have the population that compares with any asian country to make us a valued consumer. They just want our dirt, and even that can be sourced elsewhere. We are not as attractive as we think.
Back to the original thread – Our whole finance system is built on increasing production which should be passed on as higher wages, which gives the man and woman on the street more to spend, which in turn pushes up costs due to increasing wages for those who produce the goods, and a greater ability to pay and increase profits for manufacturers and producers, and yes that includes the cost of land and construction. It is a cat chasing its tail situation, although in theory with increased efficiencies of production we should all get slowly better off.
Everything works well in times of constant reasonable increases, but in times of rapid gains or losses in markets, then confidence is lost and almost anything can happen. Refer to the GFC circa 2008/2009.
In short we are a long way from being out of the woods yet, but the magnitude of loose lending in Australia has been exaggerated, and I can’t see the return to those days in the forseeable future. It will probably be left to a future generation to repeat the errors and exceed our worst efforts.
GB, your argument also assumes the seemingly all so obvious, that a dollar is a dollar. It is not. When the printing presses are kept running like they have been around the world, it will not be too long before today’s dollar will become 90c, then 80c, then 70c, and so on all the way down to something like 5c, by which time the poorest person will be a millionaire.
It is the fate of all fiat currencies, and the AUD will be no different. Therefore, while no pussy cat, the seemingly horrifying prospect of the average house costing a million dollars or more within 10 – 20 years, not to mention the corresponding explosion in debt levels in nominal terms, may not be the lions they appear to be.
PuntPal, may I chip in:
I recommend the formation of the Punters Party, with you as president. You can count on my vote.
Oh, and even the best of us are prone to the odd Freudian slip, lol.
Puntpal – count on my vote too! (and my partner’s)
We’re both new on the voters role ;p
lol – that’s two less potential votes for the Libs – will make the CP err i mean ALP lick its lips with glee… ;p
as u may have gathered by now, we’d rather die a slow death than vote for the socialist party
Sandra, that advice has a point to it, but if you took the pain of paying that “insurance,” so that you would have spending money on hand in a crisis, then you should seriously consider buying physical gold or silver, or both, with a good part of the spare cash. Gold and silver in your hot little hands are the ultimate form of payment, and nobody else’s liability. They are also highly liquid, and you can change them back into paper money as, and when, needed.
cb – you will like this post by Keen – http://www.businessspectator.com.au/bs.nsf/article/australian-dollar-bubble-should-be-micro-managed-pd20091027-x7ths?opendocument&src=blb&is=financial%20markets&blog=keensian%20economics
CB – point taken. But what are the “catches” (if any) that the government has put in place to cash in on people purchasing gold or silver?
I mean, what effectively will be taking place then is that (if i purchased gold or silver) I would be effectively circumventing the government’s theft of my money by way of their taxation on interest earned.
I mean it really is a joke that they tax interest when it is most certainly NOT an income, but simply a half hearted attempt to try to regain some of the money stolen by the government in the first place through them printing more and more with their printing presses.
In fact, if the thieving government was fair dinkum, one should get a TAX DEDUCTION on interest earned, since one is in effect suffering a net loss when earning interest of: REAL INFLATION RATE – interest rate earned = NET LOSS (rate) due to inflation.
The same goes with capital gains tax. Capital gains tax should only be paid on the percentage ABOVE REAL INFLATION. A stock which grows by 5% per annum over 20 years has most certainly delivered NO real gain in value when inflation is taken into account! Yet one pays capital gains tax on the so-called gain. what a joke!
So my question is really – what has the government done to cash in on me purchasing (and later selling) gold/silver in order to prevent me from preventing them stealing from me via their theft vehicles of inflation and taxation on interest earned?
PF – i believe Keen is spot on!
I wish he was the RBA governor, instead of that simplistic moron Stevens, who seems intent on destroying our economy, not to mention our ability to consume anything but bread and water!
cb – i understand that but your argument is based on wage growth and house prices all rising by the same amount. House prices are growing faster that wages so loans are becoming dangerous.
Wages have a lot of growth to do before it catches up with house prices. So maybe one way out of this mess is to have low price growth and massive inflation in wages until the ratio between prices and wages are back to normal?? That would be stagflation but probably is systemically more stable because people can afford repayments easier if their wages increase – except stagflation leads to higher unemploment
The other solution is a property crash – which is bad
Geez, what a mess…
Sandra, those indeed are the questions to ask, just the way you do it!!!
Alas, the only sure things in life are, as the saying goes: Death and Taxes, but you can also add to that: Bureaucracy.
Talking of taxes, in Australia, there is a capital gains tax, which is, as you rightly point out, nothing but an inflation tax. Fortunately, the inflation tax forgives half of your gains and only taxes the other half. So, if you have 100k capital gains to declare when your asset is sold, be it property or metals, you add half of that, 50k, to your income in the relevant tax year, and you will be paying tax on that.
And that’s basically all there is to it, although you should always check with your accountant. In your case, however, since you are paying interest on that extra money, ie., you are paying extra interest on your home loan, that extra interest becomes tax deductible, while you hold the investment, which also helps. So, in summary:
1. Withdraw equity from your house, or any other asset you might have to make an investment in a real asset, such as property, or metals, or whatever else that qualifies as an investment, as opposed to personal consumption.
2. The extra debt you take on becomes a deductible item in terms of bank fees and charges, storage costs, maintenance, interest payments, etc., on that debt, which are deductible quite generally against other income.
3. When you sell your asset, capital gains tax is payable on half of the total gains realised on capital investment.
All in all, in an inflationary environment this might not be a bad way to go, as inflation will steadily chew up the real value of the extra debt burden you take on over time, and your interest payments on the debt are deductible also, and you only have to pay tax on half of the capital gains realised. Plus, you have the added security that you wanted in terms of having absolute control on a certain amount of cash.
To my mind, it would be a much more sensible option than what you have been advised, given that if you make a simple cash deposit into another bank account, you have to pay tax on the meager interest you receive, which as you rightly point out would be unlikely to keep pace with the real rate of inflation even before that tax, while the extra debt burden you created through the withdrawal would not be a deductible expense, etc., etc., In short, in an inflationary environment that we seem to be headed into, sitting in cash makes your savings/equity a sitting duck for the one way thieving system that has been set up and is being maintained for the benefit of the elite.
I agree with many on here. The whole situation has gotten out of hand because of too much loose credit, encouraging bigger loans and in turn pushing house prices even higher. It’s pretty obvious that growth in house prices is running ahead of wages growth – clearly a situation that is unsustainable for too much longer. But for now, the party appears to be continuing.
But it’s also clear that a property crash would be devastating – for the banks and for nearly everyone. So we can see why the government, along with the banks, are doing everything in their power to keep prices high. It’s not in their interests to see a property price crash.
The ideal outcome, as PF and others have said, would be a steady house prices while wages catch up, possibly over 10 years or more. But how would that be achieved? I assume that the government and RBA are going to try and manage this through cash handouts and interest rates. And if it could be achieved, would property investors be prepared to accept flat capital growth? Somehow, I find it hard to imagine that our policymakers have the skill to keep house prices where they are. THe only outcomes I can see are continuing increases or a significant fall – I don’t know how the ‘holy grail’ could be managed.
As GB said, what a mess…
Spot on, GB. At some point people are going to run out of cash. Simple as that. Increased interest rates, alongside the myriad of taxes we pay, are already sucking the juice out of the market, potentially as fast, if not faster, than what is being poured back in through wages and loans. With a madman at the controls, increasing interest rates will only succeed in accellerating that process, and it will not be long before people and businesses are forced to downsize and tighten even more, and eventually go to the wall. It is a simple cashflow problem, and when cash runs out, then there will start the liquidation of assets. This is why I keep saying that Glenn Stevens is an unknown quantity and potentially public enemy No. 1, because he can single handedly crash the economy if he wants to, and that is precisely what he is doing with the raising of rates when wages and lending both seem to be doomed to stagnate. In the end, something will have to give.
I know that I do not always spell out both sides of the argument in individual posts, and the assumtions I make from time to time might be the wrong ones, because reality might play out quite different, such as in this case, where wages and lending, contrary to assumtion, might in the end not get going again in time to forestall a crash.
wow CB! i’m impressed with your honesty in the last post…
i promise not to tell Kris! ;p
Ralph, yes, just as you say. It could be managed and disaster could be averted, I believe, if, and only if, the RBA and the politicians are all on the same page. I have no confidence in the allegiances and priorities of Glenn Stevens, though. He is a dark horse to me. He is the danger man. What he is doing is killing our manufacturing, or what’s left of it, tourism, and generally our competitiveness on the international market. Just about every other central bank is trying to maintain competitiveness by keeping their currency as low as practicable against the USD, while this idiot is doing the opposite. The renewed job losses now directly attributable to the strength of our currency seems to carry no weight with this man. What is your take on him?
Lol, Sandra, I will take that the right way. I often wish, I must admit, that clarity and consistency were as esily kept up with as honesty.
Well said, CB. The arguments we’re all debating are very complex with many variables that could influence the outcome. On the current topic (i.e. whether there will be a house price crash), it’s a high stakes tug of war. I agree with Sayce that the crash will ultimately come, and short of outright printing of money, I don’t think there’s a great deal that can be done about it. I hope K Rudd isn’t that stupid. But that doesn’t mean we won’t see the bubble blown a bit bigger before it pops.
But I don’t think anyone could genuinely say they have the answers. All of that is part of the reason why it’s fun to come to a forum like this to discuss it all.
On the subject, here is a relevant article by Kohler, with a quote:
“In particular the 50 per cent appreciation in the currency from its long-term trading range could drive a manufacturing catastrophe.”
http://www.businessspectator.com.au/bs.nsf/Article/Australian-dollar-disaster-pd20091027-X7R9U?OpenDocument&src=kgb
CB – not sure what to make of Glenn Stevens. On one hand, I think he needed to raise rates to send a signal to the government that the stimulus had gone far enough and needed to be reigned in. I hate the stimulus, so I applaud that. I also suspect he’s raised rates to put some downward pressure on house prices – the RBA minutes suggest as much. I think he takes the view that if the bubble doesn’t get too much out of control, there is less adjustment to be done later.
But I can also now see that if he keeps raising rates to tighten things up and housing goes off the boil, disaster will ensue and he’ll just need to slash rates again anyway. There’s also the saying that you shouldn’t use a sledgehammer to crack a nut – I also agree with that.
I come back to what I said a few weeks back – I think he has to play the game based on the official figures. If he plays the game with figures that he’s party to but the general public aren’t, then the publicly available figures lose credibility. I mean, why publish a CPI if it isn’t taken seriously? If the RBA knows the real state of the economy but the general public is unaware, then acting based on that knowledge will eventually send the signal to the public that the official figures are dodgy and shouldn’t be respected.
We would greatly welcome Mr. T. Fitzgerald in NSW. We are trapped with a decaying state government – effectively controlled by the likes of Obeid and Tripodi (and their factional mates) with decisions being made for those with enough cash to buy the services of people like Richo. Top it off with appalling public transport, overcrowded high density suburbs, crap hospitals, gridlocked roads, expensive toll roads, a desalination plant that no one wanted, 154 local councils all with different ‘rules’ and wanting their piece of the taxpayer pie and gangsters, public housing ghettos, race riot tensions and well the list just goes on. To top it off a rugby league team from Melbourne won our Premiership. Next year it will probably be the Broncos! It is amazing to have witnessed the decline of what was once supposedly the Premier State and the engine room of the economy to the cesspool it has now become. Still the property prices are sky high so somebody must still want to reside here in twilight town!
Wow BB – I think that you’ve just lost the tourist marketing campaign for NSW account. I’m from Qld as you probably know so I’ve learned to keep my nose out of interstate affairs, but it is clear that some work needs to be done. Assuming that there will be a political shift at the next election, does the opposition have the required testicles to do the job?
Thanks PF. I have just read Keen’s and will read the others later. It is more or less what I have been whingeing about when we got that latest rate rise. What I find interesting is that everybody in the public sphere who is picking up on the dangers, and is warning about them, does so with a very generous assumption that the RBA is at worst being hamfisted with the setting of the rates.
I do not believe it. These are smart people, and certainly smart enough to see the implications of their decisions for the economy and the people of this country. Hence, my argument is a reductio to a different conclusion.
They are killing the Australian economy, and they know it.
Ergo: They are the enemy, and only question that still remains: whose interests are they exactly serving.
QED
cb – The RBA have few tools other than interest rates. What we need is control over credit and where it is directed, but we are not a communist state. In a democracy the government should be setting tax and other benefits to either encourage or discourage lending into different areas. Perhaps that is a complex solution, but the tax act is a mess anyway.
Really I don’t have the answers, but if we all keep asking the right questions someone will come up with an acceptable formulae.
Appreciate your thoughts, Ralph. If you are right about why Glenn Stevens raised rates, then he is at best duplicitous. I say this because he insisted in senate committe hearings that the debt binge stimulus should not be stopped. But I suppose worse about the man, that he indeed wants the debt binge to continue, and that the more the govt will stimulate like this, the higher he will be able to raise rates, with net effect being that Australia takes on more and more debt, and pays more and more interest just so that it can avoid a crash.
Until I see decisive evidence to the contrary, I can only assume that something like this is part of Glenn Stevens agenda, and that at an opportune moment, he will in fact want to prick the bubble with his rate rises, after which he will be cutting like crazy to feed cheap sh!t money by the bucketload to the banks. After all, this is exactly what the criminals have been doing in the US and Britain. The pattern looks definitely familiar. Insiders, of course, will also know how and when to position themselves and front run the volatility in all the relevant markets at our expense.
Think of it this way: all those savings we have in superannuation must have the mf criminals salivating all over their keyboards, and it would not surprise me in the least if Glenn Stevens was not in fact their man.
No doubt Simpleton Stevens will be pumping up the rates again on tuesday. Then we can all divert an even larger proportion of our net pay packets on interest to the already bloated profit coffers of our consciousless banks.
So less money to spend on food, motoring, entertainment, retail, and the like.
Way to go Waldo!!
but i guess that’s how things are supposed to work Downunda – spend 90% of your dispensable income on a mediocre roof over your head, and let the rest of the economy shrivel up and die!
WOOHOO CB!! way to go!!!
At last somebody (besides myself) willing to call Stevens for what he is …
Is there a dumber reserve bank governor anywhere in the G20?
i doubt it
PF, well, that is a refreshing dose of optimism. I have a tendency to overreact at times, conjuring up the worst in my darker moments, as well as susceptible to conspiracy theories – none of them strengths when it comes to investments. Probably part of what explains why I suck at market timing so bad – running with the herd and invariably selling when I should be buying. Whoever came up with that phrase ….
“Just because I am paranoid, it does not mean that they are not after me!”
I’m not certain that Fatty O’Barrel (as he was once known prior to his impressive weight loss) has the gonads or not BUT if there was ever a better odds on certainty bet (can you bet on an election outcome?) that NSW will definitely have Premier Barry O’Farrel come 2011 then I haven’t heard of it. Quite possibly even a better investment bet than (dare I mention it?) RESIDENTIAL PROPERTY. Whether or not he makes any difference is anyones guess but if he happens to read MM please, please Barry can we grow up like Victoria and Queensland and forcibly amalgamate the ridiculously stupid number of eighteenth century local council fiefdoms into a reasonably coherent and cost effective local government system?
lol, Sandra, if we could get an audience with his mf worship to give him a piece of our mind!!!!!!!!!!!!!!!!!!
I agree with that, BB. Labour in NSW is as good as toast, the whole lot of corrupted, criminal cesspool of them.
cb – I don’t think that you are over-reacting. Rate rises cost borrowers thousands, so I would rather they didn’t occur. I’m just saying that there may be a better way so that the RBA need not need to raise rates. Just asking questions at this point. We also need to reward savers, because we need them as well.
I’m sure after a few vinos I will come up with something. Anyone want to share a nice red with me?
BB – We could send you Peter Beattie, but I think he is glad to be out of the political limelight. He would sort those councils out.
yeh – Peter Beattie is a good example of Labor democracy – bugger what the people think – just do whatever you want!
Surely it’s up to the people in a local area to decide whether or not they want to amalgamate or not. Apparently that’s not how democracy works with the socialist party. same thing now with the lying through her teeth Anna Bligh – she supposedly “didnt know” about her plans to sell off state assets during the election (was it April 2009). What a crock!
She was elected on DECEIT! typical of the LNP though, so shouldnt be surprised
Peter Fraser – I agree and i did actually come up with a way the government can use taxes to control credit. I think its much better to try and control credit at the consumer end rather than the banks. i.e. make the consumer control their own debts. I called it controlling the demand for debt – instead of controlling the supply
How it works – everyone must pay taxes on any income they receive so my formula adds a portion of a persons debt onto their taxable income
Taxable Income = Gross Income (Salary, dividends…) + Proportion of Debt
Proportion of Debt = (Total Debt / Gross Income)Interest Rate
The interest rate is ‘to the power of’ so divide debt by income and raise to the power of the interest rate – the interest rate is a whole number, i.e. if its 6% then use 6
This makes it exponential so that the further you go into debt the more tax you pay exponentially. It actually creates a safe point based on your gross income and after that you very quickly loose your income to taxes BUT it forces you to stop taking on more debt because you physically cant do it.
this would cap house price growth because prices could only rise along with wages because of the taxes, and it has the potential to stable currencies and the business cycle
Run it in excel and graph with and without the formula and you will see how it works
lol – not so sure now Stevens is the worst possible man for the job!!
Given the alternative suggested
whether your money is stolen in from you in the form of interest to the banks or in the form of new taxes – it’s still stolen.
here’s a novel idea: how about we remove the governments on all levels and replace them with people who actually will fix the problem by encouraging NEW DEVELOPMENT of land and housing…
i.e. reduce the redtape and the ridiculous taxes and get on with the job of increasing supply, so that it can bring prices down, so that people can actually spend their hard earned cash on something other than just interest and taxes!
Now how’s that for a novel idea? too easy for ya right?
Thanks, PF. Long live the gods, headed up by Bacchus, no less.
I agree that different parts of the economy should be targetted with different tools. Lending against speculative, (non-owner occupied), property, for example, could be gradually targeted with an additional 2 – 3% interest rate premium, which would be likely to motivate more and more investment property owners to move out of the residential segment of the market, potentially capping further price rises and allowing more owner occupiers to come into that segment of the market.
Similarly, CD rates should be similarly raised by 2 – 3% above the CPI, to encourage people into savings, so that we develop a more robust domestic savings pool for capital formation. The banks would probably be all against it, but that should be neither here, nor there. After all, at 10/1 leverage, they are able to collect interest on ten times more money lent than they have to pay interest on deposit. So, if my simple understanding of how they are permitted to collect interest on the 90% of their lending, which they are permitted to create ex-nihilo, they are collecting interest on 100% of the money they lend, and pay interest on a mere 10% of it to depositors and their lenders.
Few businesses can hope to come as good as that, so I would think that they would be protesting too much if they they complained about having to pay more to savers.
GB – I’m not enthusiastic about another negative tax on borrowers who in other countries get tax relief on their borrowings, and not additional taxes. Still put the idea to Keen, RBA or Dr Henry, or someone.
Sandra your very quick to criticise, so you must have some great ideas ready to just pop out.
cb – thanks for that. All food for thought. Note that Lehmanns was leveraged around 70 to 1.
Peter Fraser – you actually dont pay any tax until you breach your safe point. For example – at your safe point you may an extra $700 a year in tax so the government could rule that the first $6000 of the extra tax related to the portion is tax free.
However, if you start going beyond the safe point into dangerous levels of debts your taxable income starts increasing exponentially
e.g. for every extra $10,000
Safe Point $700 increase in taxable income
Safe point + $10,000 is an extra $1000
then $1500 then $3000….
So you only pay tax IF you take on high debt levels so therefore people cant not get into situations where they are today
lol, GB, that looks more and more like a real scheme pitted against the current scam. Do you want me to elaborate?
yep, would like some thoughts on it
GB, for what it’s worth, these are my thoughts:
`The question is,’ said Humpty Dumpty, `which is to be master — that’s all.’
The way I figure it, any slack cut by the tax man, including stimulus money provided, to the the borrower, tends to be taken up very quickly by the bankster man (wit the increased loan sizes as a direct consequence of the FHB scheme). So, your proposal being that the tax man hit the borrower for giving business to the bankster man, would mean an ipso facto declaration of war by the tax man against the bankster man. Effectively, it would mean a turf war between those two, which I would guess will never happen.
It will never happen because that proposal would pitch again each other two parasites that have long reached a truce with each other in their conspiracy to live off the productive section of the enonomy. In any case, it is unlikely that we would see much benefit from their clash, even if it were to happen, though it might still make for a more stable system overall.
That works for me!!!
The consumer is protected because legislation will automatically remove their ability to take on too much debt
The government gets extra revenue off those who live beyond their means
And the bankers will finally earn their massive bonuses trying to work out how to force feed more debt into consumers, that by law, cant take on anymore
lol, GB. There is a wicked streak in you, I can tell. I suspect you won’t be an invitee to the next bankers’ ball, lol.
Well, Well, Well. Isn’t this an interesting little gem?!!!
Over at Chris Joye’s blog, I have just come across a brief exchange in the comments, which I am going to paste in here. It relates to a claim made in discussions, several times, that average household income has not been keeping pace with the average rise in house prices. Well, guess what officialdom’s view on this is, and especially the RBA’s:
——————————————————————————–
chris joye
Posted 24 Oct 2009 10:56 AM
But for the record, after tax household incomes have grown at nearly twice the rate of house prices over the period December 2003 to December 2008.
——————————————————————————-
-John Mazzarollo
Posted 25 Oct 2009 12:56 PM
“But for the record, after tax household incomes have grown at nearly twice the rate of house prices over the period December 2003 to December 2008. ”
Chris, Do you have a graph that shows this trend? I’d like to see it if you have one.
——————————————————————————-
chris joye
Posted 25 Oct 2009 4:52 PM
Glenn Stevens provided one in a recent speech (ie, comparing house prices and incomes). Top RBA execs like Stevens, Richards and Edey have all made the same point recently.
——————————————————————————-
cb, again: Well, isn’t that interesting? Such a view, right or wrong, would go a long way to explain why the RBA might not consider loan servicing capacity of households to be a problem.
Any comments?
cb – I am a very big fan of Chris Joye, but I will add something to that exchange. The state of an individuals finance is not just the after tax increase that they may have been lucky enough to achieve, it is really the after tax, after child care costs, after child support payments, after petrol, after ancillory debt obligations, after cigarettes, after alcohol, and after lifestyle expenses that is the issue.
Life is more complex than the pretty graphs we use. Anyone who has a complex life arrangement with multiple ex-spouses and children in different families has enormous financial difficulties in life.
I do a lot of work with ex-bankrupts etc and you would be surprised at how often difficult scenarios exist. That did not occur as often 40 years ago. Social changes must have some effect on our economy.
cant see how, link below show median house prices in 2003
Sydney 454K now 600K which is 32%
Melbourne 276K now 480K (from the recent article on the age)which is 76%
So sydney income must have risen 64% in 5 years
Melbourne has risen 152%
Doesn’t make sense but probably missing something.
http://www.econ.mq.edu.au/research/2004/Abelson_9_04.pdf
http://www.myrp.com.au/sydney_house_prices.do
http://www.dollardaze.org/blog/?post_id=00255
lol, PF. Yes, for sure. On our economy AND on our stress levels.
PF,
I’m interested in your admiration for Chris Joyce and its relationship with personal income. Could you explain?
If the RBA and Chris Joyce say that after tax household incomes have grown at nearly twice the rate of house prices from 03-08, then it’s probably true (but a deceptive and deceitful fact in reality). I don’t have any graphs handy but I bet my left hand that we can see a closer correlation between the availability or credit and house prices (even though it would be prudent to look at the trend over at least 15 years).
Thanks cb and Sandra, I might ask for your votes one day as I honestly do want to get into politics one day and it wont be as part of a major political party
This is a property newsletter sent out by Domain…look at how pathetic their propaganda has become (my response is indicated with ‘ME’)
Property Newsletter – Domain.com.au
Subject: Why we shouldn’t freak about rising rates, altered states, property market hits full stride
There is no reason to reach for Nutella everytime you hear about rising rates
NUTELLA BANISHING REASON #1: A MORTGAGE IS GOOD DEBT
Most of us know about good debt versus bad debt. Bad debt buys goods or services that have little or no value after purchase, such as a car or clothes or a holiday. Good debt will buy an asset that improves in value over time, such as property or shares. Since mortgages are inextricably linked to buying property – a long term investment which provides shelter – then they are a GOOD thing.
ME – Mortgage debt is not good debt if the asset you have purchased with that debt is grossly overvalued and when the massive size of the debt means the cost of servicing it will crush you if you lose your job
NUTELLA BANISHING REASON #2: RISING INTEREST RATES MEAN ECONOMIC RECOVERY
All the economists keep telling us that the threat of rapidly rising rates – which could go up another three-quarters of a per cent by Christmas according to some – is because Australia is leading the world in recovering from that pesky Global Financial Crisis. We need to look at how this will benefit each and every one of us, because economic recovery should potentially offer things like pay increases, more business opportunities and greater prosperity.
ME – Or rising rates could simply be in response to misguided and inflationary fiscal stimulus, with no real lasting recovery
NUTELLA BANISHING REASON #3: DEBT MIGHT BE DAUNTING BUT ASSETS ARE ACE
We all know that the interest we pay on our mortgage is a waste of our money, but if it forces us to save money we would otherwise spend on fun stuff like going out, buying cars or having new clothes then a mortgage is a useful forced-saving tool. And that means we end up with an asset at the end. An asset that will give us a roof over our head and means we don’t have to pay rent.
ME – This is just bizarre – mortgages are good “because otherwise we spend money on fun stuff like going out”
NUTELLA BANISHING REASON #4: WE’RE ALL IN THIS TOGETHER
With around one-third of Australians holding a mortgage (and larger mortgages than ever before), you are not alone in worrying about increased mortgage payments due to higher rates. The 2009 Mortgage Choice First Homebuyer Survey found the top five fears of first-time buyers was the length it takes to pay off a home loan, the fear of not being able to afford repayments, the concern of being committed to such a large financial obligation for such a long time, the amount of money repaid by the end of the loan term and buying the wrong home. Surely we can’t have one-third of this country being forced to pay more than they can afford just to keep a roof over their heads? Would the goverment let that happen … hmmm, don’t answer that one or I’ll need another spoon of Nutella.
ME – THIS IS DISGUSTING!!!!!!!!!!!!!! Translation – even if you are screwed, so many others are screwed too and the Government won’t let house prices crash!!!
NUTELLA BANISHING REASON #5: PROPERTY DOESN’T HAVE TO RISE IN PRICE TO BE VALUABLE
While economists and experts are divided over just how much further property prices can rise, the real opportunity for those paying a mortgage is trying not to bank on capital-value increases but counting on either rental yield increases (for investors) or the mortgage payments you make being cheaper than market rents (for owner occupiers). The only losers are those who have mortgages that are worth more than the capital value of their property – the rest are taking advantage of housing as either shelter or passive income.
ME – Rental yields are rubbish and when you take in the upkeep costs and taxes, property investment makes a lot more sense in a rising market.
NUTELLA BANISHING REASON #6: VEGEMITE AND MELTED BUTTER IS JUST AS GOOD
ME – This is the only part I agree with ; )
Yes, the myths out there, …. honestly ………
Alas, you are right. Renters, although paying already too much for accommodation, in fact are getting subsidised housing through the willingness of their landlords to take on debt. Chances are that you will not be able to buy a house and let it out profitably, even at these relatively low interest rates, and you will in fact end up being negatively geared with the property. Everybody else, of course, makes their cut from the exercise: the bank, the tax man, the lawyer, the broker, ther real estate agent, the pest inspector and the building inspector, and goodness knows who else. But you, as the “investor landlord,” will have paid out a lot of dough upfront, plus taken on a debt for the long term, the payments on which you will have to subsidise from your other current income in order to provide subsidised shelter to your tenant who may, and may not, look after the property. When you think about it, it is quite a bizzare setup.
PuntPal – I agree with you, that has to be the biggest load of …. i have ever read
I liked the part about going into debt is good if you buy shares – did they not learn that mistake last year!! and point 3 – they assume house prices always go up… and go up so that after 30 years its worth more than what they paid plus the interest. Point 4 is plain scary
It seems the spruikers are geting desperate – maybe they are running out of ways to convince people
JC – I have high regard for Chris Joye’s intellectual ability and his knowledge of the property market, but I thought that my post at 84 made it clear that I was not quite at one with him on that issue.
I’m sure that he is right for many people and I don’t doubt the graphs, but it is probably due to the drop in mortgage interest rates and those resultant savings, and some of that will be lost over the next 12 months as rates rise again.
Borrowers should be saving as much as possible or making extra repayments while they can.
PF,
I also have high regard for Chris Joye’s intellectual ability and his knowledge of the property market. I also admire his patriotism and faith that micro-managing the economy and providing exotic financial instruments can only benefit our great and prosperous nation. And I think you would have to agree that his work ethic and business ambitions set a good example for any Australian.
JC – absolutely agree with that. Chris has also been very generous with advice and information over the past year and I thank him for that.
And he has just posted a fantastic piece on Super. Well worth a read.
I just wanted to be the 100th poster! Back to the earlier posts on this forum and the question of easy loans inflating the housing bubble. I just received my local rag with the ‘Domain’ RE supplement – that is actually larger than the newspaper itself. On page 7 is a full colour advert by IMB which touts itself as the winner of the 2009 Money Magazine award for building society of the year. Wow! There in bold type is the advice that you, I or any other Joe with 5% deposit can get finance for my dream home (subject to approval by lenders mortgage insurer). I’m no mathematician but that appears to be a 95% LVR when supposedly high risk forms of lending (post GFC) have been declared dead and buried? Granted they aren’t a top tier bank but they are significant second string players in the mortgage market. The highly amusing thing is that the loans are advertised as only being available from 3 suburban Sydney branches plus their city office. The suburban branches are in Cronulla, Sylvania and Miranda where the average house price is frequently over a million bucks and up to several million at the top end. Let’s see then, with a humble $50,000 I can get IMB to stump up the $950K to get into this excellent value market. Must rush. Off to see my local IMB manager and forget about next Tuesday’s Reserve Bank meeting. Bye.
Oh and one more thing. I have to tell the experts like Chris Joye and his mates at the Reserve Bank that maybe THEIR wages have increased twice as much as the cost of houses has over the past three years but I can absolutely verify that having checked my income tax statements from FY 2005/06 through to end FY 09 mine (and I suspect the vast majority of Australia’s ordinary wage and salary slaves) mine certainly didn’t. It’s an easy thing to verify. Check your own income records but I’m pretty sure you would have noticed if your annual salary went up by around 78%.
And he (Chris Joyce) is also Kris Sayce’s “biggest” adversary when it comes to the “residential property in Australia” debate?
And i dont mean to minimise the valuable contribution of PF and CB here when it comes to attacking Kris’ views on this (and other) topics ;p
I and a few other ‘regular’ doubting Thomases here still find it hard to understand some of Chris Joyces views on property – especially its continuing superiority as an investment vehicle, given the umm let’s call it “strangely unique” situation in Australia where the ratio of ‘avg property price : avg income’ is two to three times higher than in other English speaking first world countries…
In plain English this means that Australians have the highest debt levels in the (English) world (and possibly the enire world as well) and are truly in debt up to (past) their eyeballs, simply because property here is grossly overpriced.
The reasons for this sad set of circumstances is a subject on its own, and has been debated here at length. There have also been many suggestions here on this forum of how best to “cleanse” this unfortunate situation of Australians being the most heavily indebted nation on earth, including suggestions of making people pay more tax in order to punish them and dissuade them from being so ‘naughty’ to take on such ridiculously high levels of debt. I found that particular suggestion a trifle amusing…
My two cents worth was to instead punish those most responsible for this dire situation namely GOVERNMENT (not reward them with more taxes) – who have inflated this property bubble to ridiculous levels by their incessant meddling in the property market! however, not surprisingly, this kind of logic falls mainly on deaf ears. let’s rather use a band aid to cover the mess than actually fix the underlying problem – government meddling!
So yeh, sorry, but i can’t share in the admiration of Chris Joyce. At least not when it comes to his views on the future direction of residential property prices in Australia.
roger that BB! ;p
my salary didnt even go up a fifth as much as that… so Stevens must be alluding to his own bloated salary increases.
Sandra – I think we all have to accept that even well intentioned commentators and posters have their own favourite investment vehicles, and their views are bent slightly to support their view of the world. My own included, although I like both property and equities.
BB – Please send us a photo of your new $1M house. I’m sure that IMB will lend to you. You look just like the people in their brochures don’t you. That should be enough.
Sandra, what you say about you lack of admiration for CJ’s support of govt meddling may have merit, but you should also remember that his business model is not based on the wholesale breakdown of the system; conversely, it’s about maintaining the status quo and engineering it for better performance. His views and perspectives are fully consistent with he is trying to achieve. Furthermore, rubbing the RBA, govt. and finanical sector up the wrong way is hardly the way to further his position in the establishment. Just like all of us, including Kris Sayce, he’s taking care of his own self interest (and doing it rather well I should add).
JC – i couldnt agree with you more!
Which is why I’m amazed at how many people here hang onto his every word, when his viewpoints are so obviously self serving.
Well folks, the news is in: Utilities have gone up some 20 – 30%, pushing up inflation. Now, get ready for the RBA’s rate rise, as it takes this to be the green light for charging the monster head on.
The way mass media is selling the message already, seeing absolutely no wrong in the reasoning, these mf morons and their minions obviously think that the prople are stupid. We are helpless all right, and that is probably good enough for them.
CB – i expect the imbecile to raise rates by 0.5% – just as his following of journalists and other ‘experts’ are predicting…
That’s my entire increase for this year gone in one foul swoop!
Aren’t we lucky to have such a moron heading our central bank?
Well, what can I say. Believe me I am trying hard to see it all from a different perspective, something more benign like PF and N suggest, but I just cannot. I simply do not find it credible that what he is doing can be made good sense of, let alone be justified, in light of the fact that the domestic economy is still on lifesupport from borrowed money, and instead of allowing it to get up on its own feet through the income we could still be earning through our exports, he guts the value of exports and sends our jobs overseas. That is not a case of being hamfisted or moronic, but out and out criminality. In my books, anyhow, but then again, I am not immune to exaggeration.
And, since I am openly indulging my susceptability to paranoia, I might as well add for good measure, that I am becoming rather suspicious of Rudd Co as well. If he is so concerned about the economy and considers debt binge stimulus to be still necessary, then how come he is taking these rate rises lying down? These things simply don’t add up. What is going on???
CB – umm i’d have to say the answer is incompetence. Labor aint exactly famous for their brilliance wrt the economy, but they seem to be quite adept at ruining it and leaving it for the Libs to cleanup when they’re next in office…
Peter,
I have come in to this one a long way down the line but as an FYI we have been offered well over half a million dollars on just the wife’s salary $85k
PA without even adding on the 70k I average a year. I am the self employed one. It’s true madness what is being splashed around at the moment. Fortunately we have bought ourselves a place with 60% down so the mortgauge in real terms or rather in relation to what most people borrow is small in comparison oh and that is after we took 50k off the amount the loan shark (mortgauge adviser) from a well known home loan company wanted us to take out. I suspect it was his kick back. The ongoing payment from the bank not the initial couple of bucks he has to legally tell us about.
When the poo hits it really will be ugly.
CB havent I told you a hundred million times not to exaggerate.
Mick – sorry I took my eye of this thread. I wasn’t ignoring you.
Only half a million. Your getting ripped off – I could have got you more.
The point is what can be lent and what you should borrow are sometime two different things. You obviously did the smart thing and just took what you needed, but you see, that is your choice, no one forces people to take extra, in the same way that no-one forces someone on a diet to eat that chocolate. It is the individuals choice.
I should confess here that I often advise clients to keep a bit extra out as emergency funds (you never know when some one may need expensive medical treatment, car repairs etc) and just pay the extra off the loan so that it doesn’t cost them anything, but it is there in an emergency. Whether the clients utilise those funds responsibly is beyond my control, but I do like to see them with some ability to cover unforseen expenses.
We do get a commission but the usual for $50,000 is about $200 so I hardly think it is entirely about the money. As for the kickback – there is NO trail paid for 12 months and then it will be between $4 and $8 per month for that $50,000. If you repay or refinance the loan within 12 months the broker will have to refund the whole commission to the bank and will have worked for Zip.
Actually if everyone worked on those conditions all useless non-contributors would starve and only the best would survive. Look around your workplace and ask yourself how many of those you work with would survive. No results – no income. I like it, it has a beauty all of its own. It is the ultimate way of sorting out the wheat from the chaff.
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