An “Investment Experience” from Commonwealth Bank

This morning we’ve left Fitzroy Street and have headed into town to catch up with our old pal Chris Mayer, the US based editor of Capital & Crisis.

He’s brought a bunch of American investors over for a tour of Australia and New Zealand so we thought we’d drop in to see what they’re talking about.

I’ll fill you in on any details in the next few days if there’s anything you should know.

Until then…

Last Thursday we wrote: “Short sell CBA – but not just yet!”

At the time Commonwealth Bank shares were trading at $56.75.

Last Friday Commonwealth Bank of Australia wrote: “The Commonwealth Bank (the Group) today announced it expects to report unaudited cash net profit after tax (NPAT) for the half year ended 31 December 2009 of approximately $2.9 billion. This result is significantly above the prior comparative period and well ahead of current analysts’ consensus of approximately $2.7 billion.”

Ten minutes later the share price closed at $58.10.

On Saturday morning we were glad we put the “but not just yet!” rider on our tip. Today we don’t care as the excitement over CBA’s increased profit forecast has disappeared with the price closing yesterday at $56.64.

CBA on ‘Short Sell’ watch

But anyway, regardless of the share price action, the profit guidance from CBA is surely final fact that the banking and financial and economic crisis is over.

I mean, $2.9 billion of profits for half a year can’t be bad can it?

Fortunately, we don’t believe a word of the spin. In fact, it convinces us even more to put Commonwealth Bank shares on ‘short sell’ watch.

I’ll explain what I mean in a moment. And before you think it, don’t. We’re not being contrarian against the banks just for the sake it, to prove a point. We’re contrarian on the banks because their entire structure and business model is weaker than a house of cards with an elephant perched on top.

But one statement from CBAs press release did amuse us. It was the following:

‘Improving equity markets, contributing to a turnaround in “Investment Experience” of approximately $240 million post tax.’

What the blazes does “Investment Experience” mean? The fact that they’ve shoved it inside inverted commas suggests even they realise some definition of “Investment Experience” will be required.

Actually, we’ll make it one of our tasks today to contact Bryan Fitzgerald, CBA’s head of communications, to find out what “Investment Experience” means. Prepare to be either amazed… or bored!

What about the “Investment Experience” at Colonial?

Anyway, it would be delightfully ironic if any of the “Investment Experience” has come from its funds management branch, Colonial First State.

Because on the day that we placed Commonwealth Bank shares on short sell watch, and the day before their profit upgrade, Colonial First State told investors to get stuffed because it was freezing its $850 million mortgage fund.

This is what I’m referring to when I say don’t believe the spin from the banks and the mainstream economists about the worst being over. If the worst was over, the Commonwealth Bank wouldn’t have to freeze redemptions on its mortgage fund.

We’ve written before that these mortgage funds should be called out for what they are – insolvent. And the CBA is aiding and abetting its subsidiary by approving the non-payment of due debt.

You can only imagine how much money investors are trying to draw down. For a $850 million fund to halt redemptions, the withdraw requests must be huge. There’s little doubt that we’re not talking a few million.

For the fund to be frozen again the outstanding redemptions must surely be in the hundreds of millions. In fact, odds are that if the fund was opened up for all withdrawals, the entire balance would probably be drawn down by investors.

Aside from the scandal that a fund is exempt from the insolvency laws that cover every other business, doesn’t it tell you something about the state of Commonwealth Bank’s finances that the bank isn’t prepared to underwrite the withdrawals?

According to the CBA’s last financial report it had more than $11 billion in cash on the books. Plus another $49 billion in investment securities such as bonds.

What’s a tiny $850 million to salvage your business reputation?

Well, it’s obvious isn’t it? The CBA knows it already has a balance sheet full of mortgage crap. The last thing it wants to do is bring another $850 million of mortgage crap onto its books.

Especially seeing as it probably sold the stuff to Colonial’s investors in the first place!

It’s time for Colonial and CBA to pay up

Gee, it would be nice to quarantine debt obligations like the banks can. Imagine if you just stopped paying your gas bill. Or imagine if you went to restaurant, ate the food and then told them you can’t pay the bill.

What do you think would happen? I can tell you what would happen, the gas company would cut you off and then send round the debt collectors, and the restaurant owner would probably take you out the back and give you a swift kicking.

Unfortunately, if you’re an investor in the Colonial mortgage fund you’re screwed. You want your money back? Tough, Colonial will pay you when they’re ready.

And Commonwealth Bank have the cheek to claim “Improving equity markets, contributing to a turnaround in “Investment Experience” of approximately $240 million post tax.”

It’s time Colonial and CBA put their money where their mouth is. If the bank is so sure that the Australian property and mortgage market is healthy why doesn’t it offer to underwrite the mortgage fund?

As I wrote last year, surely these “great” assets would be snapped up by an eager fund manager if they were any good.

CBA could make a killing on this by offering to pay investors 80 cents on the dollar. Retirees who rely on these funds for income would probably be grateful to have the certainty of 80 cents now rather than $1 in whenever.

And if these mortgage assets really are as great as everyone tells us, and the economy really is recovering, then surely a big and secure bank like CBA can afford to carry them.

When the economy returns to normal it could then sell them off to investors at face value.

Why doesn’t CBA do that? It’s only $850 million.

We know exactly why…

The words “funny” and “money” spring to mind. We can’t wait to see what the CBA has to tell investors about its “Investment Experience” when it reports on 10th February.



60-Second Market Round Up
by Shae Smith

The S&P/ASX 200 finished the trading day in the red, down by 1.02% to close at 4,861.20. Today Westpac and the Melbourne Institute release the Survey of Consumer Sentiment for January.

The American market returned from the long weekend with a bang. The Dow Jones Industrial Average was up 115 points, closing at 10,725.78. Certain health care reforms are being debated in Congress and this saw healthcare stocks all finish in the black. Read what else drove the US market here.

In the UK overnight, the FTSE finished at 5,513.14, higher by 18 points.

The Nikkei closed down to 10,764.90, a drop of 90 points. Japan Airlines [T: 9205] filed for bankruptcy yesterday, announcing ¥1.5 trillion (AUD $17.8 billion) of debt. The government is stepping with restructuring plans for the company allowing Japan Airlines (JAL) to continue to trade. The Japanese government has bailed out this airline three times in the past decade. Read more about JAL here.

The price of spot gold in Australian dollars is trading at $1,232.69 while in US Dollars it is trading at $1,138.53. The price of silver in Aussie dollars is $20.32 and in US Dollars it is $18.77.

The Aussie dollar versus the US dollar is trading at USD$0.9229, and against the Japanese Yen JPY84.12

Crude Oil was up overnight, closing at USD$78.91

For the biggest movers on the market yesterday click here…

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

46 responses to “An “Investment Experience” from Commonwealth Bank

  1. and when Asciano broke their lending covenants and margin lent Rowesthorn was underwater like nemo in the capital call, whose supposedly chinese walled managed fund superannuants increased their stake (substantial shareholder notice might clarify that one) to bail out which bank?

  2. oh wow ….now thats one big, lovely, juicy fat article of being scammed

    come to think of it, dont see anymore colonial tv ads nowdays .

    funds have dried up ???????????????

    call the “minimum-wages-indocrinating-police”

    they will refloat the bellied up h.m.a.s. colonial ship

  3. The CBA and WestPac and China concerns have had a very little air play in the mainstream media.

    Maybe they are too dumb to see the importance of WestPac movign back to 85% LVRs, but surely Pascoe and Gittins are questioning their own beliefs in our fantastic and resillient banks.

    Wait for Gittins, Kohler and the other bandwagons bandits to start calling trouble ahead – as if they were never sold on the recover mirage.

    I dont mind people being wrong, but I hate when people pretend they were right

  4. Here is an article on BS about cracks in China. I get the feeling BS is becoming main stream – reporting after events happen instead of looking into the future.

    As for China, if people can understand the magnitude of their stimulus package I think they will then understand why China is in trouble – I doesn’t mean collapse but they are going to have slow growth right down.

    Their stimulus package was roughly 20% of GDP compared to 5% in the US – that is a significant difference. Another way to try an understand the sheer size of it would be to compare it to Australia using cash payments like we did with our $900 stimulus cheques.

    So the average wage in China is about $3000. China’s stimulus was $700 bill or $540 per person. So lets pretend that the government in China then gave each person a stimulus payment of $540. That amount is 18% of their annual income. So now if we compare that to Australia, then Kevin Rudds stimulus payments would have been about $11,000.

    Now, lets add in the $1.4 trillion of bank lending or another $1000 per person and its like giving each Australian about $30,000.

    Now that is going to get you 10% GDP growth and then some… Unfortunately that is also going to give you bubbles, excessive production and severe inflation. Reading DR’s comments on stimulus packages and how they berate the US for spending 5% of GDP on stimulus you would think they would be having a field day on China but everyone seems to believe it will be OK because “its China stupid”

    My figures above are only rough and I realize that the stimulus package doesn’t work this way but I am trying to put into context the plethora of money that is sloshing around the Chinese economy at the moment.

  5. Puntpal – i agree that something is wrong with westpac but i dont really understand what… stopping the RAMS line, huge gov gaurantee usage, hinting at no further mortgage growth this year…

    maybe PF could shed some light??

  6. sorry cb, no stories in particular but any glance of the net will find the story on Westpac

    GB – spot on, Business Spectators are truly just spectating in 2010 and calling it after they see it. The only one I listen to is Batholomuesz, he was gloomy on 2010…Kohler and Gotty thought that it was all peaches and cream ahead

    Also great way of looking at China. Here are my two cents on WestPac and China…

    They are pretty much in the same boat as CBA, but have even smaller deposit base to draw from. Accordingly, they are now seeking deposits and deterring new home loans. Some may say this is just a bank managing risk etc…but the consequences of their lack of desire to loan for mortgages is telling.

    Where are people going to find 15% deposits for new houses that are priced at $500K+ in Sydney….they wont, so its affect on house prices is undisputable. Thats why we hear nothing about it, coz whatever way you spin this is BAD news for housing bulls. *dont expect PF on here any time soon, he seems to stay clear when news like this gets out.

    Westpac relied on an implict government guarantee (and the explicit one!) that they will not be allowed to fail, so they recklessly grew mortgage market share in 2009. They have lent too much for houses that could be worth a lot less down the track – now they are trying to get out before its too late, whilst also laying the groundwork to argue that they were the first to tighten their lending (so please dont blame us for the 2010 housing crash!).

    I cant believe the faith people place in China. Its as if they have learnt nothing about the importance of freedom, innovation and transparency.

    We dont know what is really going on within China, yet we accept their figures like they are gospel.

    We know that their people cannot search google and discover the various sources of wisdom and info available in the internet. I ask anyone, how less inteligent and productive would you be with a censored internet? And somehow people dont mention the impact this will have on the productivity of a nation.

    Dont even get me started on the inefficiencies caused by a central, comman-control economy. Roads built with no cars on it and factories being converted overnight, simply so you can answer to the ‘party’ and say you met their goals.

    China’s rise and fall will be the defining aspect of the 21st century. When they start to fall, watch for the powers of the internet to finally break free and a revolution unlike anything we have ever seen before

    For the global economy this will be bad in the short term, but great in the long term – as 1 billion people will be able to to freely contribute to global progress

  7. GB – I don’t have time, but we did discuss this in another forum at
    Note Black Dragon comments at post 40. I won’t out him but he is concerned by Westpacs position, and he is a very very well informed industry professional. The whole thread is worth a read (except for my drivel of course)

    I also had a discussion with a credit manager with one of the big four on another thread who advised that they had called in a loan that they believed to be underwater as a precaution. I’m pretty sure he wasn’t CBA so Westpac or NAB would be my guess.

    Well the economy never fails to entertain does it.

    By guys, work to do…….

  8. Ah, BS – you could almost use them as contrarian indicators. Kohler remained bullish long after the bottom had fallen out of the market, for example, and then became bearish just as the market started to recover. But, to be fair, there is hardly anybody, with the exception perhaps of Marc Faber, who has not been blindsided at one turn or another over the past few years.

  9. cb – another article

    Puntpal, i read a commentator recently that said the biggest bubble in China is expectations, i.e. people simply expect China to boom forever because the communist government wants it to.

    America, Europe, Australia have been slowly building their economies up to where they are today over centuries and have huge amounts of experience with booms, recessions and even depressions. They have learnt from these experiences and grown from it. They have strong laws and protect private property rights etc… The beauty of the western world, that seems to be overlooked, is its flexibility and adaptibility to change. This is the strenghts of the people NOT something a government can command of its people.

    China seems more like a teenager boy – knows everything and wants to be the alpha male, e.g. growth at any cost because they want to catch up with the western world and dont want to take centuries getting there. It has no experience with recessions and unfortunately no law – having weak law is quite serious – why would you ever innovate or invent if the government/people simply took it from you or stole it by hacking into your computer etc… As for flexibility and adaptibility they have none. When changes occurred with the GFC the chinese reverted to communism – everyone has a job. They simply cant seem to adapt.

    And thats what i dont understand – everyone’s, including citizens of the western worlds, blind faith in that…

  10. According to Sunrise this morning house prices will double in 10 years time. I am going to ask Westpac if I they will lend me enough to buy 10 houses today and then I will be rich and retire early. The bank also wins as they double their assets also. It is so easy to make money in this country.

  11. Please help!

    Slight change of topic.

    I’m probably the biggest property bear since Steve Keen. I am 99% sure that house prices are going to crash in Australia. My issue is that my partner has been applying the pressure for us to buy a house to live in – partly for the security of having our own place and partly for fear of missing out because of ever-increasing prices.

    I think it could be the worst financial decision of our lives to buy now and that we should delay. But I’ve been saying this for 2 years.

    My question to you guys who also think there will be a crash – what do you think is the worse-case scenario – i.e. what is the absolutely maximum length of time before the crash becomes evident?

    Steve Keen made a drastic error when betting on the timing of the crash – but I feel like I need to do the same thing – i.e. to say: “If house prices haven’t started crashing in xx months/years, I’ll admit I’m wrong and we’ll buy a place”.

    Thanks for your help!

  12. drew – It would be easier to understand if people stopped manipulating the markets, i.e. if the property market started to turn then Kevin would commence operation stabilise which of course simply means pushing more debt down people’s throats

    Although, i think once China steps on the brakes or the western world increases rates then Australia will start seeing trouble.

  13. cb – that was an excellent post!

    Drew – I was in the exact same position with my ex this time last year (note: this was not what caused the break up). My brother is currently experiencing the same thing with his wife.

    Our approach was to sit down and explain it all in simple terms. Then do it again. And again…etc..

    Once they are on your side (i.e. they understand the logic) you have to keep them abreast of developments and always explain the motivations and lies behind the spruiking.

    If they still want to buy houses, then maybe some agreement/deal is the only way.

    But buying at a certain price (i.e if it gets ‘this high’) is flawed because she will actually want the house of prospective prices to go up, just so the threshold is reached and you buy a house.

    I reckon a date would be the best wayt to play it and less prone to manipulation.

    For instance, my mates had a field day in 2009 when the crash I predicited didnt eventuate. Once, during a drunken and heated argument, I declared that by September 2010 we had not seen the begginings of a property crash in Oz then I would say I got it wrong and start applying for loans.

    In truth, it could go on longer and I could be proven wrong (temporarily) but I do believe the wheels are already falling off and eventually people want you to be right or wrong.

    I think (reading your comments) that this housing issue is not just about a financial commitment you have to make personally. It is about right and wrong, rational and irrational…if this is part of who you are, then the bigger issue is not just compromising on when to buy a house, but compromising on your whole belief system.

    Sorry to get so dramatic, however we are talking about love, money and houses!

  14. Ahhh Drew. That is indeed the $64 (or should that be the $64 billion) question. The answer? Well old boy if there were a lot more people like you that would tell the RE agent to politely stick it up their arse, turn around and walk away after they tell you how much the vendor wants for their house (usually a ten times more than they paid for it) then your plans for a realistic home purchase price would become self fulfilling. Unfortunately there are enough panic stricken Sunrise program watchers (possibly your missus?) who have swallowed the bait and hook, line and sinker on the onward and upward story of Australian property prices to neuter your resilience. The power of pricing is with purchasers if they could only get it in their heads. At least wait a few months as the China rescue becomes a mirage, stimulus projects in the education sector wind up and interest rates get another few hikes – regardless of the Reserve does. Wait at least till winter of 2010 mate. Give em a few months to see that a US recovery isn’t even on the agenda, Europe is on the skids and China – well if you’r banking on a totalitarian communist regime to rescue the capitalist imperialist dogs of the western world you deserve what you get and India now has a reason to hate us too. Put poor old Obama on the scales as well with yesterdays loss of a rusted on democratic senate seat and the likelihood that his security services officers will be doing overtime to prevent some fed up redneck from emulating a JFK presidential term ending and 2010 is looking the goods to probably whipper snip those late 2009 green shoots. On a cold, rainy afternoon vendors will be more malleable to the reality that things aren’t gonna get better and in fact may be getting a whole lot worse. Flap, flap, flap. Those are black swans a flying overhead. Of course I maybe wrong and St. Kevin the Stimulator will once again send those cheques out and write another $35billion IOU for future generations of Australians.

  15. Drew – one final thing

    It is not so much a matter of when the crash will bottom, you just need to see some form of price decline and then you will get a lot of breathing space (and a lot of brownie points too!!)

    So like GB said, this could happen a lot sooner now that Westpac reduced LVR to 85% and China is a chance to blow

  16. china announced 10.7% growth in dec quarter!!!

    has anyone noticed that starting in november there has been a massive surge in everything??? CPI in the UK shot through the roof, Iron ore shipped to china accelerated 40 odd percent, CPI in china exploded along with things like westpac……….

    I am starting to get that sinking feeling in my guts again – the one where i think something bad is about to happen

  17. Cheers PuntPal. I had a three schooner lunch which explains the passion but unfortunately gets delivered with a side order of typos and grammatical error. And by the way I agree entirely with your post(7) re PF not coming out to play with us bears when some fundamental indicators turn in our direction (Although he did steer readers to our newest and most unlikely recruit Chris Joye’s article today predicting our next GFC). I put a lot of effort (without the aid of any beer mind) into a very serious and highly accurate post concerning the OFT and licencing and home owner warranty issues which would indicate that so much housing is now of substandard quality and hence even more overpriced and I got nothin’ back? (shhh. Hoping for a bite now!….)

  18. PF is a stalwart, he doesnt let the following deter him:
    – China’s reality becoming obvious and a direction to not lend anything until the end of January (as if this is somehow the signs of a Government in control!)
    – Joye turning overnight (although he is doing it gradually – fair enough)
    – Westpac changing to 85% LVRs (this got o.02% of the airtime Prince William got yesterday – yet they plaster house boom predictions all over their front pages… I am going to get these cheats in court one day, seriously, it has become one of my goals in life).

    But maybe when we have various soverign debt crisis going on, all the oz Banks share prices have halved in under a month and the biggest class action in the nation’s history has been launched, then we might get PF coming over here and acknowledging that the Oz housing market is in a wee bit of trouble.

    p.s. I would be very interested in reading what you wrote about OFT and building standards (as this is close to my area of the law) – can you point me in right direction

  19. Drew….you have been given some very sound advice from the others. I will add my 5 cents worth. I have been buying real estate since I was 18 years old. The reason then was that inflation was very high. Wages were also rising so to keep cash in the bank did not make economic sense. In the past 20 plus years real estate has done well due to many reasons. What you must ask yourself today is will real estate continue to rise if wages are not? If houses double in the next 10 years will wages follow? If wages don’t follow, how can anyone afford to buy those “doubled in 10 years” house?
    If the house you buy doesn’t increase (or even decrease) just stays put. Will interest rates stay put? What will be the eventual amount you pay for that house be when you finally own it? Are you currently double income? If so will you always be double income? Kids, health etc. I agree with the others that women look at the situation emotionally and that is always a recipe for disaster. As I have said, I have been buying real estate for many years, loved it and have done well. I own it all, no debt, but today I have begun to sell some of it off. Not a chance I will buy at these prices (and/or returns). When I was buying, there was ample employment, manufacturing etc. Do we have the same today?
    Look at the big picture and don’t be blinded by the spin or emotion. If I followed all the experts in my life, I would be in a very poor position today. How often in history have you heard of people standing alone in their predictions/hunches only to be mocked and ridiculed by the “experts” of their time…..Christopher Columbus was one? The hide of him, claiming that the world was round!!!!

  20. Hey Guys,

    Really appreciate all the advice.

    Puntpal – that’s exactly what I’ve done – sat down and explained it in simple terms. She was even starting coming round after I made her sit down and read bubbleapedia! Getting a Notice to Vacate our rental last week (because the owner was selling), didn’t help my cause. So, negations are now getting strained.

    Nick, I have asked myself all those questions and come to the conclusion that we should not buy yet. My partner has come to the opposite conclusion. So what I’m really looking for is a date I can put on my request for her to wait. A date that, in all likelihood, the crash should have at least become apparent. I think that will be much more palatable that saying we should wait forever for the crash.

    BB, you reckon Winter of 2010. Puntpal, you said September 2010 but that was during a ‘drunken and heated argument’. Does that still apply?

    Any other thoughts?

  21. I am pleased that you have an interesting life, Drew. Dealing with the missuz can be tricky. As the notice to vacate demonstrates, home ownership should not be about speculation or even investment. It should be about having a place, a nest of your own. This is where your missus is approaching the question. It is a fundamental position, the bottom line, some might say.

    A good friend of mine has the following, rather interesting decision making formula. She asks three questions whenever faced with a prospect of spending money:
    1. Do I want it?
    2. Do I need it?
    3. Can I afford it?

    If she answers YES to two of the three, then she will buy it, even if she cannot afford it!!! Which, you might say is crazy, but there you have it. She is a lady, and that perhaps explains it.

    But, having said all that, what is the harm in looking around, going to a few auctions, seeing a few houses, etc? It will give you a sense of the mood in the market, and if you have your finger on the pulse, you might even make a better decision and even snap up a bargain if one should come along. You just never know.

  22. BB – I missed your post on Chris Joyes blog as well. I looked but nothing about “a very serious and highly accurate post concerning the OFT and licencing and home owner warranty issues which would indicate that so much housing is now of substandard quality and hence even more overpriced ”

    PuntPal – stalwart eh. Well whatever you prefer, that’s your choice of words. Hmm – barrister or barista. I don’t think you should instigate legal action against Sayce, he is just drumming up traffic and business by writing property posts.

    Drew – you made your beloved read “bubblepedia” Why on earth would you do that to any woman. What did she do wrong. Don’t you ever want to have sex again.

    Mate you will be discussing granite kitchens before the end of 2010, just you wait.

    Love to all.

  23. Oh, and if you are quite sure that you just want to play for more time, the following should be feasible.
    1. Give it one year, and ask for one year. To be sure, sign a minimum one year lease on your next rental, so that you cannot be harrassed out of the agreement.
    2. In the meantime, make a commitment to start looking. It might be enough to reassure her that you are serious and that there is a plan.
    3. Do not expect to have a much clearer picture one year down the track. A correction may, and may not begin by then, and you will still not know where the bottom is going to be. It is like that most of the time. Anyhow, good luck, and keep us posted.

  24. hi cb – mate, according to Drew both PuntPal and BB have promised a correction by winter or September 2010, so we won’t have long to wait.

    I can’t wait..

  25. PF – … ?? ……. Can’t wait to vote? Ah, the elections, those darn elections that always get in the way of a decent correction!!!

    But seriously, we might indeed see another lull in the market by then. But a wholesale crash? That is somewhat less likely. All the same, those with their finger on the pulse could have the opportunity of picking up some deals – provided that the bank are still lending at that time, that is. For, if a decent correction gets underway, mate, a willing buyer better be cashed up to the eyeballs, for loans will probably be as rare as hen’s teeth. This is one thing that the bears often lose sight of. Anyhow, we will have an interesting year, that’s for sure. Out with the vino. Long live Bacchus on this long weekend.

  26. Drew… cb has a valid point in that if you are seeking security in a home for the long term then price is really a secondary consideration as long as you can “afford” it. By that I mean if you can make the payments and “live” a little along the way then I am all for it. I have never looked at my home as an “investment”. Whatever its price is today I will never sell it. Even though it’s worth a hell of a lot more than when I first bought it. Investment real estate is just that, “investment” and you “play” according to what gives you the most benefit/value for money. From what you say this is not your case. My advice is what I give to my kids. Don’t set your sites too high on your first home. You can make it your “palace” as time goes by. You improve it, add rooms as kids come along, sell it and up size after you’ve paid most of it off… etc. But most of all go with what you can afford with some to spare along the way and allow for “hick-ups”. As for the “crash” no one can predict that accurately as there are many factors that can extend the inevitable. Politicians are good at that. People can only give you an indication of a “trend”. Keens is a learned man. His mistake was to put a time to it. It does not mean he is wrong in his “theory”. I was told by some very wise and successful men 20 years ago that “the next depression will make the last one look like a Sunday school picnic”. Back then I could not see how it could happen. I was “full of beans”. However, today I can see exactly how it can happen. If fact it should have happened some time ago but the more the situation is manipulated, the more “dangerous” it will become. Now that was 20 years ago! Will it take another 20 years to come to fruition? No one can really tell. My gut instinct though, tells me it will be sooner.
    Buy something that you feel suites your immediate needs with potential to improve as time goes by and your resources allow.
    I agree that you should give it 12 months though. In that time save as much as you can and be ready to commit at the end of that period. By then you will have a better idea of which way things are headed, both for the economy and your situation. Don’t think you or your partner are Robinson Cruso. I started my married life in a very modest 3 bedroom house with fair size land for future expansion. Our dreams were for all the nice inclusions others our age went straight into, but we kept within our means. However, today my wife and I are living our dream while those who jumped straight into brand new homes from the start, look at us in envy.

  27. Good advice, Nick.
    You know, as a variation on that theme, if I were looking for a place, and if I were younger and just starting out, I would seriously consider purchasing a well-situated block of land, either with no house on it, or a really run down house begging to be pulled down. Then, I would look around for a decent and affordable house to be built, fresh off the plan. For example, you see these adverts on TV from time to time from “Stone Homes,” or something like that, which look pretty decent and affordable.

    I have not investigated this idea in any detail, but it is an idea I would check out before buying an already built and overpriced house, especially if it is older than 15 – 20 years.

    I am thinking that buying a block of land to start with may not be such a bad idea, as it would allow me to take things in stages and when I am ready to build something that is to my taste, and even with that I could do it in stages, adding rooms and extensions as I need them and could safely afford them. In the meantime, I could potter around and do the landscaping, put on it a cheapy demountable or mobile home, or even make do with a couple of old caravans to tide me over and save on rent until I was ready to build something more permanent. I think that it would be fun, and it would be a journey, and an adventure.

    It certainly would be safer than coughing up the whole lot upfront in the current market.

  28. Oh dear! Apparently I bravely made predictions about the housing crash whilst under the influence? Okay. I’ll stand by it. And to demonstrate my commitment in winter of 2010 if house prices haven’t dropped, like Steve Keene I too will be travelling to the Australian Alps – only I’ll be driving there with skis on the roof. PuntPal & PF – my post concerning OFT and Home Owner Warranty is on the previous MM article referring to the Saul Eslake issue.

  29. Nick, you mentioned that you are going to sell some of your houses now. The question is – what are you going to do with the cash?
    I have a deposit for a house, but if I don’t buy a house now and wait for the better moment what can I do with the cash in the meantime?

  30. BB – I didn’t see your prediction so you can deny it, or as you suggest drive your Volvo to the summit.

    PS PuntPal – you can opt out as well if you choose. No walking required.

    Have a great day.

  31. “”Vlad 01.22.10 at 9:25 am
    Nick, you mentioned that you are going to sell some of your houses now. The question is – what are you going to do with the cash?
    I have a deposit for a house, but if I don’t buy a house now and wait for the better moment what can I do with the cash in the meantime? “”””

    excellent question vlad ,,maybe some of the old school will know fer sure ,bit of a dilemna tho, not even banks look safe ,
    (and therefore almost nothings safe)
    going by very recent artitcles here,aussie banks are highly toasting

    external media tell they are safe,,but are they REALLY ??????

    my opinion defintely dont buy shares ,into the scham market.
    props are over-priced .
    stuff some cash in matteress?? or under dog-kennel

    cb,.pf ,,nick etc ??? take the baton please ……………………………..

  32. Drew – I think cb’s suggestion of at least looking is a good one. That way when she hears some slimy real estate agent say this three beddie unit is going for $600K, she can consider the consequences of accepting that deal.

    On that note, it is also worth considering the consquences for you of each course of action (broadly there are 4 outcomes worth considering – I have ignored the possibility of houses stagnating in price because that would be boring, although still highly likely and would be a vindication of your position anyway):
    1) you win the argument and are proven right, prices drop 20% over the next 12 months and you snap up a bargain this time next year – so you are feeling great, have more spare money and are in the good books with your lady for the next decade
    2) you win the argument and are proven wrong, price continue to climb and because wages cant keep pace (never mind that this is the irrational part about it all – something PF or any other bull can ever explain) you are stuck paying tons for a place to live. The missus could leave you (at worst!) or she could expect you to do the house cleaning until 2015
    3) you lose the argument and are proven right, well you have paid more than you had to and taken out a loan will take a few more years to pay back…never mind. By the time you are 50 your love will be so great that you just smile and say ‘never mind dear, I dont mind that your irrational decision to push me into buying a house during the biggest housing bubble the nation has ever seen will add 5 more years before I can retire).
    4) you lose the argument and proven wrong, well you bought a house and you still cop grief for delaying it so long…but at least your not like that PuntPal guy from MM, who kept renting until 2012 and eventually apologised to PF and decided to move to California and live in a country where house prices eventually reflect wages

    PF – in light of recent developments, my housing crash alert has actually beem brought forward. I think by April we will see serious signs of a housing price crash

    Anyone see the news about vacancy rates going up over the past few months…wow, I thought we had a chronic housing shortage???

  33. all the local rags here in melbs west burbs are full of vacant props about 7 pages
    so debate seems back in the bears corner……………

    yeah wages suck big time unless u work 7 days a week & then she will say “oh ..his in love with his job ..never home ..or having an affair ”
    then shes gives ya the big “d”
    if ur rent payments will be almost the same as a mortgage …buy .

    if the payments are really going to stretch /blow the budget forget it

    the problem is they want all the latest new things/gadgets ON TOP of that
    sit down & work a thourough monthly budget & try stick to it

    wats the price of a “green-card ” these days ?????????

  34. Vlad…good question. I tormented myself for some time before I made the decision to sell. My case may be a little different to yours as I have no debt. I am buying gold.
    In your situation, my opinion is that banks are not going to close in 12 months. However, I do feel that you will be in a better bargaining position in 12 months time real estate wise. So don’t think that you’ll “miss out”.
    You can earn pretty good interest in “on call” accounts. Just as a hint NAB has a 5.15% interest on an internet saving account. Just a suggestion. Others have similar. Interest will rise over this period so you will earn more while you wait. I sold some property because I have a very strong feeling that if I waited, I will not get the prices I got if I waited any longer, and as I followed up later, indication are that I made a very wise move.

  35. Thank you for the answer, Nick.
    I do keep deposit at 5.62% NAB’s UBank at the moment. But I also have the same pressure from my wife as Drew has. She is chatting at work with peers and they don’t bother with all this analysis and world-wide trends. There are dozens of peers saying one thing that she wants to hear and me alone telling her what she doesn’t want to hear. Alas!

  36. Vlad…one thing you nad your wife MUST realise is that most of the population is oblivious to the current world economic situation. They have no clue as to why we are in this mess and they will go on with their debt ridden life as if it will continue forever. It is tough “living outside the fire” but take it from someone who has done so and secured a comfortable life as a result. Not only that but whatever lies ahead with the economy I, and others like me who look at the big picture and not the immediate gratifications, will cruise comfortably through the storm. One thing I guarantee you is not one of those “peers” who “don’t bother with all this analysis and world-wide trends” will be there to help you when you are drowning as they will have already gone under.

  37. PuntPal, GB, BB, CB, PF and Nick, thanks for the advice – you guys are legends.
    PF, yep, not only did I make my beloved read ‘bubblepedia”, I got her to read these comments too.
    Her verdict – maybe we should buy an investment property as well as a house to live in. 🙁

  38. Drew, my commisserations = she is raving mad. At the very least, she will ruin you. It just depends on how agressively pushes for these things. If she sulks and gives you the cold shoulder for saying No to her, then she is trouble. Only you know.

    Advising couples is a dangerous thing, but this is what I would do: I would insist on diversification of investments and finances. For added protection, separate your finances. She can go ahead and buy as soon as she is ready, but only on her own account. Make sure that you do not sign, and in fact make sure that you provide a legally prepared disclaimer, and advice to her lender, that they cannot come after you, your income or your assets if and when she defaults and the house is sold out from under her. Protect yourself, and safeguard half of your finaces so that if disaster strikes the two of you will still have you free and unencumbered.

    If she threatens divorce on such a stance, this would be a good time to let her go. You give in now, and in the fullness of time, she will take you for everything, and you can start afresh, with nothing. I hope it does not happen to you, but you would be unwise to ignore the fact that such is a common experience.

  39. drew…who’s money is being risked here. Is it yours or hers? Have you guys commited to marrage of just “partners”? Do you have kids? if not will she still be working when you do? generally when someone makes a claim like “maybe we should buy an investment property as well as a house to live in” sounds to me like she is using your money and not hers!! As someone who has earned and saved would be far more cautious with how they spend their own cash. It’s always easier spending someone elses!!!. If you can afford to do what she says then you must have a fair bit of cash putr aside. In which case why not put it all into your home as the interst on that is not tax deductable so there is no benefit to keepin a loan open on your home. It’s your life. you have had some genuine advice on this site…..but something tells me something is not right with your picture.

  40. Whoa, talk of divorce or separation of money won’t be necessary –we’re just about to get married!

    OK, I think she’s raving mad on this issue but so is most of Australia and, to defend her, she just taking the advice of her parents who came to Australia with nothing and now own their own home and an investment property.

    By the way, the savings are from both of us.

  41. drew – i have always used the maths. i.e. use excel and put into your disposable incomes so take out taxes, bills and especially ask her how much she wants to spend on shopping and going out etc….

    then work out the mortgage repayments and see how much is left, use a higher interest rate though because if you can afford it at higher rates you can afford it at lower rates – i have always believed that to be important – and also check at what interest rate your cash is gone

    then if there isn’t anything left over start trimming her shopping and going out budget

  42. drew so did my parents…they lived through WWII, Nazi occupation of their country with the associated horrors. They endured the depression in their youth. That’s why they left for a new life. Could not speak english, just a suit case in hand, to a land on th opposite side of the earth. they ended up owning severl properties and educating 3 kids to University level. But even after all that, they have always preached to me that the way things are going they have all the similarities of what they witnessed prior to the depression. What I am saying is that you cannot look at the past 10 or 20 years and assume that the next 10 years will be just the same. Think of it like a Credit Card that someone has given to you as a gift with $100,000 credit limit. For quite some time you can look really good buying up what you want and party, i.e. follow the crowd. Then one day that credit you have spent needs to be paid back and you havn’t prepared yourself for that day. Well, that day has come for the world and all the governments are doing is extending your credit limit so you can “spend” your way out of your debt???
    This is where we are now in history. My suggestion to you is read as much as you can on what is going on world wide and visit sites like these, and apply your own logic to all the info. Especially, take notice of those few who do not follow the popular trend and have a contrarian view point. Are you aware that out of all the economists & “experts” in the world only 12 predicted the recent crash? Steve Keens was one of them. Now why should I listed to all those who couldn’t see this coming and rely on them to be able to tell me how to get out of this mess.

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