On our mind is the flaky and fragile Australian banking system.
Do you remember it was only a few weeks ago that the mainstream press was telling you that the major banks were winding back their reliance on the government wholesale funding guarantee?
Well, maybe they are, but they still can’t help themselves.
According to the Sydney Morning Herald, the Commonwealth Bank has raised USD$1.25 billion last week, every last cent guaranteed by the taxpayer. And the week before Westpac raised $1.1 billion guaranteed by you and other taxpayers.
Even that wasn’t enough to get us riled this morning. It takes more than that these days.
No, there were two other things that came to our attention over the weekend that made us stagger uncontrollably about the house.
But before I get onto that, a quick follow up to last Friday’s Money Morning. Thanks to all the climate change induced rain over the weekend we were stuck inside and so managed to have a glance at the Money Morning message boards.
It seems that some readers believe we misrepresented the “Property Professor” by claiming that he believes property doubles in values every ten years. Apparently what he was really saying is that property provides you with a hedge against inflation compared with renting.
Of course, he didn’t say that at all. It’s typical of the property spruikers trying to cover each other’s tracks when their nonsense and fallacies are exposed.
Naturally, we don’t blame the spruikers for trying. They’ve had it easy for so long, where no-one has ever dared challenge their property investing falsehoods.
Anyway, for fear of being accused of misrepresenting the Property Prof, how about this snippet of financial advice from the emeritus professor of debt:
“If you could, rather than buying one $400,000 property with a principal and interest loan you’d be better getting two $400,000 properties with two interest only loans. When they double in value, sell one and the other one’s freehold. If you keep that principal and interest loan, it’s going to take you 25 years to do that. You hold two and you only need one property cycle, seven to 10 years, and the other one’s freehold.”
That little gem was from an investing round table held by The Advertiser in Adelaide.
But the argument that somehow the Property Prof was misrepresented doesn’t stack up when you read an article he wrote for Realestate.com.au:
“I have calculated capital growth of about 7% per annum, which means it doubles in value every 10 years.”
Click on the link here for the rest of the mind-bogglingly simplistic calculations. Calculations which fall apart if interest rates are higher than 6.5% and collapse completely if property turns out not to double in value every 10 years.
But never mind. As I say, that’s not what got us revved up over the weekend.
Something that did make us sit up to attention was an email from one Money Morning reader who suggested we look at an article on Ratecity.com.au which quoted Westpac CEO, Gail Kelly as saying:
“We are a very highly indebted country – on average we borrow twice what we save… we need to incentivize and drive additional savings as a nation.”
Hmm. What do we make of that? We’re not going to argue against savings. Saving money is a good thing.
The trouble is under the current banking system, saving money in a bank account only makes the problem of excess borrowing worse.
In a perverse way, people who saved money in a bank are partly to blame for the collapse of the banking system and the expansion of borrowing in the Australian market.
And it’s what makes the comments from Kelly all the more troubling. She’s making the right sounds “savings are good”, it’s just that like every other banker, when she’s got her paws on your savings, it’s just used to leverage themselves up to the housing market.
Don’t forget that around 50% of all bank lending goes towards residential real estate. The money that you tuck away in a bank account for a rainy day is used as security so house buyers can get 100 to 1 leverage on a house.
That’s the real reason Kelly and the others want you to save more, so they can lend more.
If Kelly really was concerned about the amount of borrowing then all Westpac would need to do is tighten their lending criteria.
That’s not hard is it?
Only doing so would mean the collapse of the housing market and that wouldn’t do much of the banks’ balance sheets.
And besides, now that the government has given the banks a free kick with wholesale and deposit guarantees there is no need for the banks to tighten their lending. They know they can push things to the extreme.
Which brings us to the other story that made us wince.
We tuned into the Barefoot Investor on CNBC yesterday afternoon. Hosted by Scott Pape, it’s a ‘family friendly’ investing show. He talks about budgeting and paying off debt, and all that sort of thing.
Anyway, it was the opening item that disproved all of the pap that we hear about the banks making it harder to borrow. And how the Australian banks have a much healthier balance sheet than overseas banks.
Scott interviewed a young lass from Sydney, the short story is that she had a $200,000 home loan which she took out now to qualify for the first home buyers debt.
But that’s not the half of it. The young lass looked as though she had barely graduated from high school, yet had a $200,000 mortgage which she had secured with a deposit of…
$2,000.
That’s right, two grand. In other words, 100 to 1 leverage.
Oh, and by the way, she didn’t have a full time job at the time she applied for the loan, and still doesn’t!
So how did the bank lend her $200,000? That’s simple, they got her old man to go guarantor for her.
Yep, don’t worry about income or a deposit or job security or the ability to repay a debt, as long as someone else is prepared to hock their home, the banks will give anyone a loan.
It’s a fairly sad state of affairs. And it proves that despite the propaganda from the mainstream press and the mainstream analysts, Australia’s banks are going to extraordinary lengths to make sure the lending and borrowing binge continues.
And it’s all built on the false premise that property values double every 7-10 years. The banks believe it’s true, the property spruikers believe it’s true and the home buyers believe it’s true.
The trouble is, it’s not true. When the mist clears all that will be left is a pile of bricks and mortar that’s worth 40% or 50% less than the loans covering them.
Until then, thousands more suckers will be convinced to buy into property at inflated prices under the false belief of it being an inflation hedge and a guaranteed path to millionaire status.
Cheers.
Kris.
60-Second Market Round Up
by Shae Smith
The S&P/ASX200 finished down on Friday, by 1.33% closing at 4,685.80. An ordinary trading session on Wall Street has seen a pretty flat start to the Australian trading day.
The Dow Jones Industrial Average dropped off 23 points, finishing at 10,318.10. While traders are being told the ‘recession’ is over, they still shied away from speculative stocks. Traders chose to stick with stocks that can withstand economic uncertainty, like Coca-Cola Co [NYSE: KO] and Merck & Co [NYSE: MRK].
In the UK, the FTSE100 saw a sell-off of energy and mining stocks which forced the index to close at 5,251.41, down by 16 points.
The Nikkei had its first four week losing streak since in over a year, finishing at 9,497.68, down by 0.54%. Overall, last week the Nikkei lost 2.8%
The price of gold in Australian dollars is trading at $1,259.07, while in US Dollars it is trading at $1,151.20.
Currently the price of silver in Aussie dollars is $20.23 and in US Dollars it is $18.50.
The Aussie dollar versus the US dollar is trading at USD$0.9142, and against the Japanese Yen JPY81.21
Crude oil closed at USD$77.47
For the biggest movers on the market yesterday click here…
{ 34 comments }
← Previous Comments
Next Comments →
I like your idea PF, of encouraging savings in the manner proposed.
I cant believe thrift is not being promoted by Government – it is common sense when you spend too much to start spending less.
UK tax laws are nice in this respect. I believe all savings are taxed at 20% so long as the individual is a taxpayer.
Other than this one can park GBP7,200 per tax year (cash and/or share combination) in an ISA (http://en.wikipedia.org/wiki/Individual_Savings_Account) and be entirely tax free. I believe this is what Rudd pathetically tries to aim at with the first home saver accounts.
Whilst I think part of the strategy behind ISA’s is to guide savings for retirement, those with needs/wishes to save and access the cash prior to retirement for reasons such as purchasing a house/educating children etc also gain, wheras Super tax advantages are only directly realised upon retirement.
I’d support an ISA-like system here in Aus that would give a tax break for all savers, that could be drawn down on one occassion. This would also go some way to supporting those who argue for greater compulsory super contributions, since it would be taxed concessionally.
PF,
I like your idea, and I think phasing out tax deductability of finance costs would also be sensible – just to balance the books. Might make a few accountants wince though. One issue with both of these may be how they play out in a globalised market where companies can shop for the most generous jurisdiction.
I also like PuntPal’s idea of mandating LVRs.
In fact I reckon the Reserve Bank’s lever for the economy should be the Deposit Percentage Required, and they should leave interest rates to market forces.
Increasing interest rates doesn’t effectively reduce demand – especially when you can borrow 100%! People just stretch themselves further. Huge increases are needed to actually put people off buying (as happened in the early 90’s).
Increasing the LRV on the other hand does reduce demand because it makes it impossible to borrow until you’ve saved more. And it would also automatically reduce the riskiness of loans at the time when it’s needed most.
Well said, Rod Schiller. Argument is closed, and the brave are walking. As the saying goes, even though the dogs are still barking, the caravan is moving on.
Darren, thanks for those comments. Your message must have been held up for a while. I agree, govt statistics are cooked. And when you consider that the markets are also manipulated and rigged by criminal sydicates (oh, sorry, we call them brokers, market makers, hedge funds and investment bankers), then it is not that farfetched to conjure up the image of being stranded on a life raft in shark infested waters and heavy seas, without even having a compass.
Darren, I was referring to your first post.
PF, that is an eminently sensible suggestion. I would go even further and mandate a minimum % interest to be payable on all CDs, so that savings would be encouraged regardless of the machinations and manipulations of the banksters. What effect would, say, 10% minimum mandatory interest have on all savings held in special savings accounts? What would you see to be the pros and cons of it, and who would be the winners and the losers out of such a system?
PuntPal, I agree that the perversion of traditional financial values is deplorable. At the same time, it is not surprising, after decades of the system making losers out of savers, and instead making winners out of debtors. These days, if you do not partner the banksters and do your asset purchases through them, and thus giving them business and a big chunk of your income, then you are simply barred from having access to those assets. That’s what it has come down to, and even though we may whinge about it, less and less people want to keep pissing into the wind, and just go along with the rules of the game.
cb, Rod Schiller
what about the negatives against property
1. Government stimulus being wound down
2. Interest rates going up
3. Foreign banks are turning away from Australia – cba and westpac using gov guarantees
4. Westpac admitting we are too indebted – basically there is not much more room for more debt
5. China is slowing down – our resource exports are weakening as can be seen by the LME stockpiles rising (except iron ore and coal and that wont keep the boom going)
6. Mathematics learnt in primary school is advanced enough to prove that people cant afford the loans to buy a house
there are more negatives than positive factors….
However, i understand that this is the last stand of the spruiker… which is evident in the posting on this website – how? because the spruikers are running out of logical/factual arguments and are now resorting to using meaningless hogwash such as celebrity sponsoring to spruik property – ‘If Kylie Minogue is doing it – shouldn’t you??’
GB, I would venture as far as to say that borrowing to buy has never been free of risks, even though the difficulties of getting into the market have varied from time to time. If the prospect of a housing price correction would keep someone awake at night, or would end up wiping their savings out, etc., then it would be more sensible for such a person to keep renting, instead of buying. To my mind, these arguments hold true independently of which part of the cycle we happen to be in.
But, on the other hand, if one opts to rent because they are speculating in the expectation that prices will drop, this is quite a different matter, and I wish them good luck with their market timing. There is much ado being made by the editor of this forum about speculative buyer while nothing is being said about the speculative renter. At a time when the best experts disagree about the direction and future of the economy, I find that rather lopsided, and the shill against buying nothing short of incredible.
What we know is this: if you buy, prices will fluctuate, but at the end of the road, in return for paying a little more to service your mortgage in comparison to simply paying rent, you will end up with a valuable asset, a debt free home, by the time you retire. Whereas if you do not buy and simply keep paying the rent, you might have a little more money to spend elsewhere now, but by the time you retire you will be still paying rent at the then market rate.
When you look at the question of home ownership this way, there should be no contest as to which is the more sensible option, but you would get no hint of such a thing from the editor, would you? Instead, what you are being encouraged to do is to be a speculative renter, and make your quick fortune on his speculative small caps. Well, all I can say to that, is good luck to the followers, because the leader will probably be doing all right out of this doctrine.
← Previous Comments
Next Comments →
Comments on this entry are closed.