Banks have treated our housing market like a Ponzi scheme, and it's about to bust

That's smart. If you know your limits then you won't take on ridiculous amounts of debt and won't get in trouble when interest rates go to 8%.

They become too complicated for people to talk about because there are too many variables. You can take the example of one person and apply it to the whole market if everyone had the same income but they don't, if everyone had the same level of debt, but they don't, if everyone had the same level of equity, but they don't.

It depends how much debt they took on relative to their incomes, how fast they can sell if they get in trouble... lots of things. For example, less than 4 years ago I was paying an average of over 9% interest on more debt than I have now. Since then my salary has increased but my debt has decreased. So if interest rates went to 8% tomorrow, it wouldn't worry me. However, someone who it more highly leveraged may be in trouble. If they couldn't sell down fast enough they could go under. But that is not related to property prices. You can leverage to buy cheap properties too. Do we take away people's choices to be highly leveraged?

So basically, you are promoting consumerism. People should just spend, spend, spend because it is good for the economy. Two problems with this: consumerism doesn't make people happy and it is not sustainable.

I think you are way off on this one. People don't have a choice of invest in housing or spend. They have many choices such as invest in housing, invest in shares or managed funds or spend. If housing collapsed and I lost confidence in housing, I would not simply spend more money. In fact, I would not spend a single cent more. I would move my money to the stock market, which is even more unproductive than housing.

If I borrow to buy shares of an existing company, sit back and wait and sell them later for a profit, how does that benefit anyone except me. The company doesn't get any money and the investment doesn't generate any economic activity. It's completely useless.

At least with my rentals I am generating economic activity and providing families with a place to live. I pay property managers, tradespeople, buy materials for repairs and upgrades, pay carpet cleaners and gardeners. Many people benefit from my rental properties. Whereas if the same money was in shares of existing companies, no one would benefit.

 

I get that you too are very angry with me. Clearly I've very much upset you.

I do think in the context you understand what I mean, yes? One person starts talking democracy and freedom and so I talk about laws we have to stop people hurting themselves even though it affects freedom.

I could have said bike helmets, seatbelts, prohibitions against murder, punishments for crime, laws regarding investments or any number of things.

But sadly because you're really angry with me you decide to attack on some pointless thing and for what? So you can express some anger?

This isn't the "property is totes awesome" thread. Talking about the bubble, various economic factors that cause it, recessions, bad banking policies, stupid politicians and so on is precisely what this thread is about.

I get you're angry with me but really, try to stay on the topic.

 

Amazing MGF; I've bought and sold 12 houses, paid lots of taxes, work hard spend money on stuff, save a decent chunk of money when I can, etc...

And you want us all to not do any of that?

What do you want us all to do?

Should I have bought only one house and not ever moved?

 

I actually think yes. Leverage as a financial idea has seeped across to many things where it causes immense harm.

If it were law that people could only borrow 70% of the purchase price then that would hold down house price growth and tie it to wages quite closely.

Those 95% loans were madness and even more so when they were widely used.

The problem with high leverage is that people ignore reality. Out of 100,000 people who take on 95% LVR loans, some portion will become sick. Some will lose their jobs. Some will drop in income. Some will have a child.

People are notoriously bad planning for the future.

The good thing about restricting credit growth in the housing market is that houses would decrease in price.

Someone making $50K a year would be able to borrow $150-200K and there would be a reasonable house available for them.

That's what people forget when you talk about ending NG and so on - house prices must come down and so the ratios of 30% deposit start to work again.

 

You get nothing. I'm not annoyed at you at all. I'm having fun.

I find that comment incredibly ignorant. The WA affordable housing project has been very successful.

Correction. They were falling. Now owner occupier home loans have overtaken investor loans again. Home ownership rates in Australia are increasing again. Australia has one of the highest home ownership rates in the developed world. It really isn't a disaster.

I must be really unlucky because I own in Perth, where rents have decreased in the last year by up to 30% and Melbourne where I am renting out my property now for less than I was getting in 2007 when I bought it.

If there is an oversupply, the market will correct itself like it always has done in the past. Why wouldn't it this time?

 

I don't promote consumerism actually. I simply recognise that is the current model we operate under. Infinite growth on a finite planet is not possible and it's killing us, the planet and all the species we share it with. But that's a different conversation.

Right now the mortgages of Australians that are at record highs are sucking up all the money in the country. This kills businesses which increases unemployment which then kills the economy.

Regarding the stock market - it's not unproductive compared to housing. Say housing went back to only returning 4-5% p.a. Okay, so you want to grow your money faster so you head to the stock market. You have a lot of places to buy shares. Many other people do this same thing. Businesses who want to grow know that a good way to do it is to float on the stock market. They grow their business, take the leap and know there will be people there to buy their shares.

Those businesses may be doing productive things. Their improving their processes. Their inventing things.

The stockmarket does have speculative trading but it is not a non-productive use of money. When a company sells a share they get a lump of money that they can use in a hopefully productive way. Perhaps by upgrading machinery or hiring more staff. It is a great way to use money.

Right now in Australia we have massive overbuilding. There is an oversupply of apartments in particular in some of the capital cities. A lot of money, resources and time has been invested in these apartments. It has produced a lot of economic activity.

But underpinning all that is debt. Someone somewhere is holding a mortgage most likely on an apartment. Someone else is holding a mortgage. All these individuals were told their place would rent for $600 a week and now it's $400 a week and still declining. They were told the value of their apartment was $550K but now the bank is saying it's $470K and declining.

That decline in capital is a terrible loss of money and that individual will take the hit from their lifetime savings. They lose $100K before they sell it and that is a serious loss for them.

This is the story for some people now and will be the story for more in the future. Building those homes was not a productive use of money.

When it comes to established properties the story is even worse. Borrowing to buy an established property does not change anything at all! Someone else owned that place before you and they were hiring tradespeople and doing all the things were. There is no NET gain of anything.

When you take all those tens of thousands of decisions to invest in property versus starting a business or doing something productive, it becomes terrible for our economy.

We didn't need to build all those apartments. People could have put their money into the stockmarket and some medical research company could have taken in more money and done something incredible with it. But that didn't happen because all that money went into inflating the price of housing instead.

 

The rate of owner-occupier home loans this month and last month and even the month before has not shifted the home ownership rate as yet.

This is again weather versus climate.

 

Yes, and I'm sure if a Government said they were building one house and they did it they'd say it was very successful too.

Within the terms of what they said they were doing - no argument there. They say they're building X homes and they do it, good on them.

But in a macro sense, no state Government has done anything really meaningful. They're all addicted to stamp duty, in the pockets of property developers and other business interests.

 

It is going to correct itself in an Irish-style burst that takes down our economy in a serious way.

I would have thought being from Perth you'd already have a strong appreciation for how the market can hurt individuals. Vacant rentals were non-existent only a few years ago. Now they are everywhere.

For people who bought years back and have been working reducing debt, they might make it though while still keeping their properties. Those who bought recently and loaded up on I/O loans or are negatively geared - they're going to be in serious trouble. The "correction" will destroy them economically.

There are billions of dollars of SMSFs out playing in the market. I have no doubt many of these people are blithely ignorant of the risks they are taking. When the correction comes many of them are going to lose big and they're too old to recover. They don't have decades to wait it out.

We don't want the boom bust to happen. It's hard to control because people are greedy short-sighted idiots and politicians lack long-term vision but holding down credit expansion would have been a good place to start.

It would be good for investors too - better to invest in a property that is positively geared from day one than take on some ridiculous debt and bet it all on capital gains that will not eventuate.

 

I don't know when it was ever 30% deposits in Aus.

From my memory; it was originally that you required a 20% cash deposit plus purchase costs, and could borrow the rest.

Back then; the Banks only allowed us to have a 25 year P&I loan, and the total repayments for all loans could not exceed 35% of gross income, plus yer 20% deposit...now they allow 50% of gross for repayments or thereabouts I think.

But, then add to this the advent of such things as; LoDoc loan, the IO loan, 10% deposits, 95% loans with LMI - all those things have been introduced as property became less affordable - to allow folks to buy the better house that they couldn't afford.

The Banks obviously see these strategies and loan products as safe enough for them, and no-one is holding a gun to anyone's head saying "Do Not Borrow That Much".

Folks who are worried about a bubble - can simply keep on renting...they are safe from any bubble.

I am renting now - not my choice. I am renting because a significant investment I made has gone bad - that's my bad luck and no-one made me do it...I am not a victim of a "Pyramid Building Society" or "Enron" type event.

Same with folks who buy houses - if they want; buy a cheaper house well within their means, or just rent.

We can see you are concerned for the financial well-being of everyone - so am I, but at the end of the day; everyone has the freedom to make an effort and learn about finance, and either take action; take a bit of a risk in the hope of a better life, or not. Most don't do it...hence a large % of low income folks and aged pensioners.

The Banks aren't in the business of stopping folks from borrowing - they are there to make money. They will stop you though only when they perceive it to be less advantageous to their chances of getting repaid.

If you take a risk; there is a chance that it might not work. A risk for the PPoR owner is to continually buy at the top of their serviceability. That is their choice, and they continue to do it by the 100's of thousands every year in Aus - all CHOICE.

I guess by what I have said here that it sorta supports the idea of a Banking Ponzi scheme - but as I said; we can choose....no-one has to pay what the Vendor is asking, or borrow as much of that amount as they can.

 

The problem we have in Australia is that our housing market going down will pretty much destroy our economy.

So even renters will be affected when they lose their jobs. So that's a harsh penalty to pay just so we can support the idea of choice or freedom.

I wouldn't care so much about banks doing stupid things if they were treated precisely as the private businesses they are. Want to give out loans and do the sums on the wrong term and claim future imaginary rental income is income now? Go right ahead! And if you screw it up and collapse know that no one is coming to your rescue. You want the profit, you hold the risk.

But banks got so big and politically powerful that we can't simply let them fail when they do reckless things.

The 30% deposit thing was something Lindsay David talked about - his 30-10-30 plan. Basically it's requiring 30% deposit no exceptions, put 10 months of mortgage payments into an offset untouchable account so give some breathing space in the event of job losses, etc, and require that no borrower can spend more than 30% of post-tax income on their mortgage (restricting the amount the bank lends them).

What I really want is for housing to return 4-6% p.a. and not the crazy levels it does today (in some areas). Someone on $50K a year would buy a $150K house, be able to pay their mortgage just fine.

I really want the financial system to be geared towards rewards coming from doing something useful - like starting a business.

I'm self-employed and my ROI is so much higher than it was back when I worked for someone else. Not only that, I make USD which comes into the country. I'm exporting intellectual property. There needs be more people doing this sort of thing - making stuff, creating thing, building things that are useful.

When I look at I/O loans, low-doc and all that stuff (including ASIC finding serious problems with loan issuing) it makes my heart ache. I know people who squeaked through a broker doing slightly dodgy stuff and they did it to escape the rental market and when it goes kaput (which won't take much), they'll be ruined.

I'm all for choice but we don't allow 200% LVR or 500% and we don't allow plenty of other reckless things. Going to a 70% LVR and making other changes I think in the end would be a net good for Australia.

The people who are fighting any change (because even a 5% drop would put them underwater) don't understand - it's going to happen anyway.

 

Then we will have a recession. Just like we did last time. We had a recession, housing recovered and now we have Sydney. Time for another recession I think.

That is why I specifically said shares in an existing business. If I buy BHP shares, BHP gets nothing. I wait and sell at a profit. My money is tied up in an unproductive asset. My gain is at someone elses expense. It is entirely unproductive.

Yes, a company floating is productive but simply exchanging existing shares is not. It is less productive than housing.

Speculative trading is not when a company sells a share. Speculative trading is when I sell you shares for $5 each that I bought for $2.50 5 years ago. The company gets nothing and you hope you can sell to some sucker at a profit down the track. You can borrow to buy the shares, negatively gear them and get a 50% CGT discount when you sell. It is more of a ponzi scheme than housing but no one gets to live in the shares in the meantime.

Then why did I have to spend near $100,000 to fix up the three rental properties I bought that had been left to rot by the previous owners? Two were owner occupiers who did nothing to maintain or improve their properties, benefiting no one. One was a rental where the house was left in the condition of the previous owner occupier. Buying materials and hiring tradespeople to fix up these places is a productive use of money because the houses are in better condition now than when I bought them.

 

Yup - your tax policy would do that. Banks would fail; a lot of our super is in the banks - anyone with super ain't gunna be happy.

Yup, your policy would mean FHB would need ~40% deposit - gunna be hard to do that when rents skyrocket due to a reduced supply of properties for them to rent. I can see homelessness increasing too.

You are of course aware that everyone but the poor FHB has a deposit of 50% or more when they upgrade their house ?

So a few of the segments of the community that would not benefit from your policy......

• Bank shareholders
• IP investors,
• Anyone with a PPOR,
• Nearly everyone with Super
• All future FHBs (who don't yet have a deposit saved up)
• the homeless
• anyone running a business (in a failing economy)
• all renters (after a couple of years of lack of supply & consequent skyrocketing rents)

...and a shorter list of those that would benefit from your ideas.....

• First Home Buyers who already have a deposit saved up

 

This isn't what "productive" means.

By that measure we should smash all the windows of a house you just bought so we can generate some economic activity repairing them.

 

If you are going to be ridiculous, why not just burn them down. We would generate a lot more economic activity.

But really, you are being obstinate. Buying a run down house and renovating it is productive whether you like it or not.

 

You've repeated a few times now that rents will skyrocket if any changes are made to NG, etc.

Yet rents are purely based on supply and demand. Right now supply of properties exceeds demand and is still growing. NG and CGT could be changed right now and investors don't simply get to hike their rents to cover the difference - they can't.

Supply and demand is a wonderful thing - lets say changes happen in the market, prices drop and the median house drops to 3-4 x the median wage. Okay, so now people can buy without going into stupid debt.

The ROI from building new homes is back to what it used to be before all the tax distortions. If people can make 5% from housing, they'll try to make it!

And guess what? If demand rises then prices will rise and that rise will produce a supply response!

It's not like demand jumps massively in a month and supply lags years behind. Its a slow rise and fall.

Currently the Australian market is massively inflated. The bubble is crazy. When it bursts (and I say when not if) then anyone with money in the housing market will see it decline. Some people own outright and they don't care (except for the job losses). Others will lose a serious amount of money.

It's going to happen anyway - if no changes are made from now, if APRA doesn't do anything else, it will still happen. We have had too many investors in the market for too long. We have too many loans existing (in the order of billions) that are being paid by people who exist in a market with falling employment.

The other direction, forever inflating, is simply not possible. House prices cannot increase by 10% per year while wages remain flat. Not mathematically possible.

It's kind of a weird thing where people look at the current system and say "this is the way it must be forever". Despite it being different in the past (somehow we had 70% home ownership without all this stupid debt - how did we manage that? How did we manage to get by borrowing only 3-4 times our wage rather than 9-10?) it cannot be changed now. The only changes can be in the direction of more debt, higher prices, more more more.

People who are bubble deniers have no good answer as to why we had high home ownership rates without massive personal debt under a system that was much stricter. Any attempt to return to a stricter system is a calamity! Debt, disaster, homelessness!

Despite there being countries all around the world making such moves to rein in the worst excesses.

 

I'm saying in terms of what productivity means economically.

I can pay someone to dig a hole in the yard. They get money. They spend it. The money circulates through the economy.

I could borrow $300K and hire a thousand people to dig holes in my yard. They get money, the money circulates.

This is a non-productive use of money.

Buying an established house and repairing it isn't productive.

Starting a business and creating something new is. Inventing something. Improving a process.

The people who worked out how to make thinner food tins did something productive. The people who worked out how to shrink a computer.

 

To be fair I don’t think it’s because they necessarily want to plunge themselves into as much debt as possible- it’s just that’s the reality of the only way you’re going to get into the market. It wasn’t that long ago that the average mortgage size in Australia was often flung around as being $300,000. Now it’s gone up to $471,000. People are definitely getting themselves into more debt and increasingly it is becoming owner occupiers that are doing so.

http://petewargent.blogspot.com.au/

“Unsurprisingly the main driver of the gains has been the average size of mortgages sold in New South Wales which has jumped by more than $60,000 over the past year, and has soared from $454,000 to $584,000 over the past three years. Over the past year the average mortgage size also increased significantly in Victoria (+$34,000), Queensland (+$24,000), South Australia (+$30,000)”.

 

/Thread.