Wake up Australia, we have a debt problem

I know this isn’t helpful. But had you invested every month after that point you would have made a ********. Big buys in a single go always have more risk. In general statistics show that you are better off investing all in one hit, but that’s like saying I’m going give 49 people a billion dollars and shoot one. Statistically you are going to be happy, but it’s no good for the person with a hole in them. Since we are all experiments of one, next time use dollar cost averaging to limit your risk (also limits your upside)

 

I’m actually in the opposite view to this. The low rates have not helped grow the economy. We have been spending the extra cash on houses. Houses are dead end money in comparison to other options. Buying smashed avocado is better for the economy than house market speculation on a dollar for dollar basis.

Our large debt is actually a drain on consumer spending. If we force people to pay down debt we eventually release funds in the household budget for more wasteful consumer spending which drives business.

Problem is that this is a long term solution. We live in a short term world. So nobody wants to do that.

 

That was always going to happen to house prices when you give them access to really cheap money, interest only deals to anyone with a heartbeat and a really high level of immigration.
Its a bit like letting the kiddies into the candy store on an eat now pay later deal.
You wont know the true extent of the problem until much further down the track, especially if they tighten up on lending policy and rates start to gradually rise .

 

It wouldn't have happened to this extent if they had implemented a 7% assessment rate and a 30% or even a 40% IO quota back in 2012/13 when the big cash rate reductions came along.

The IO and DTI ratios got way off the hook after that....

Allowing "actuals" on servicing calcs while rates were at record lows created the huge surge in borrowing capacity and debt to income ratios... and it was the rapid surge in prices that caused some many young FHB's to take out IO - particularly in SYD and MEL.

So here we are, with this the ticking time bomb in the system. ie re-setting /rollover of this particular sub category of loan ... lets hopethe bomb is a small one and the % who fall over the P&I cliff and default is modest, rather than a large % causing real damage.... otherwise ALL of our property values will suffer - even if we have borrowed within our means and have not contributed to the defaults directly.

Rising tides lift all boats, but it works the other way too....

2019 will tell the tale. I'm still calling a rate cut... or at least calling a 30-40% chance of a rate cut...

 

Quite possibly. And i have no doubt.
Howver. I wasnt nor am i a share expert.
I just wanted to dump some cash into somethinf i perceived as safe .
My relative tripled their money in 2 to 3 years based on the recomendation of their financial.advisor

Ive burnt my self a little dca as well. I kept on buying down on a dud stock. And the company went bust

So yeah im a ptsd with shares.

But ill keep trying

 

Totally agree with you + there is way more inflation "unregistered" than people are seeing in the govt figures so its worse than you think.......this said Australian wages are way way to high compared to the rest of the world and its making us uncompetitive (this is my major concern for Australia moving forward).

I see this in our property charges for repairs etc thinking....that is so out of line its crazy expensive compared to what we pay here in the USA.

 

LICs or ETFs are the go

 

You may not have read my other posts but I have expressed my opinion on this before.

We needed the rates to be at 0% from early on and the reason why inflation is very low and economy isn't going anywhere is the RBA made the wrong call. When US went to 0%, it should have been the hint for Australia.

Secondly in order to ensure a fair share of cheap money flows into the economy as well, we needed to tighten the lending criteria from very early on. That way a more balanced amount of money would have gone into property while still we had a good flow into the general consumer spending.

However because our system is equivalent to dog's breakfast in that we 3 to 4 entities (RBA, APRA, ASIC, Government) and each of them are making their own decisions and more importantly are out of sync with each other, we have the mess right now where the lower interest rates are going to stay while economy tries to recover. No one wants to accept it but the reason why interest rates have not gone up for years is exactly what I have mentioned above.

Dont forget that the money that went into property investment did create jobs so in a way it wasn't all that bad. Its just that it was not done in a feasible and balanced way.

Also houses are not dead money, they are secure assets. Buying shoes and bags on credit card is far worse than buying houses. At least a house is a good debt which is an asset that will appreciate in value.

 

A crash predicted is a crash avoided… I love crash predictions for that reason! It worries me that @Redom is only talking about a soft landing.

 

The RBA has already indicated their next move is most likely to be up, though they've said "not for some time". Some time could mean anything, though. It could mean a year, it could been 6 months, it could mean a few years. We don't know. But it'll be hard to fight the Fed forever.

On wage rises and property growth, the two might well offset the other. Almost 10% of the economy is construction, about double its historic rate. As construction winds down, jobs are going to be lost. There's no other outcome. That might well offset wage growth, just as the unwinding of the mining boom did.

 

The ASX seems to have been particularly unloved for a long while. I think it's in for some solid growth in coming years, especially if property does slide.

 

Shoes and bags bad for individual, good for economy(assuming not made overseas).

House prices high good for individual (some of us). Bad for economy.

Yes the housing boom has made some jobs. But it hasn’t created nearly as many jobs if the same $ was spent elsewhere.

I say this because we talk about undersupply being a major factor in price changes so obviously the boom in demand didn’t create as much construction as it could have. Or in simple math. If he house market was ten houses worth 10 dollars before the boom the market would be worth 100 dollars total. During the boom the market doubled, so now we have 200 bucks of houses. But we don’t have 20 houses now, we have like 12. Meaning each house is worth 16.50. That extra 6.50 isn’t efficiently allocated in the economy. If the housing boom increased supply as opposed to current asset prices it would have been much better for the economy. It didn’t and now we have a large drain of people attempting to pay high loans slowing consumer spending.

Basically the same people sold the same houses at higher prices. We didn’t create new physical objects or add new parts to the economy. We created paper wealth which is good for individuals but bad for the economy.

Infrastructure and mining booms much better than property for the nation. They allocate money directly into the economy better than housing booms. Perth house prices went up (and down) due to the mining boom - one industry impacting another significantly. Car sales up, jet ski sales up, flight center trips to Bali up. All spending up.

Inflated property mostly gives bigger loans which give bigger bank profits which give higher share prices and super balances. All good, but people are not spending their super on jet skis.

I actually agree with your idea a fair bit tho - if we cut interest rates early and blocked overspending on housing we would have injected money into the economy quickly and blocked it from being locked in houses. Would have been a much better strategy. We wouldn’t have inflated asset prices and no wage growth if we did that.

Sadly that horse has bolted. Now I think we raise rates, forcibly make people pay down debt and potentially contract or stall the housing market. We then just have to pay our dues and either have a infra boom save us or suffer a small recession. Doing that at least we deflate the ballon rather than letting it pop.

Then we also see how Australia’s children of summer find if when we see the first real lean period in a quarter of a century.

 

And inverse ETF's could be the go soon (so say some of my clients anyway - I have no idea about shares and have never even owned anything in a listed company)

 

Some glimmer of hope?

Housing investor loan cap 'reaching end of useful life': APRA

 

@euro73 I agree that its more likely a rate cut in 2019 and more tightening in finance.

What's the general uplift in interest rate once someone comes off there fixed 3/5 year term? 1% increase?

 

Do you mean the difference in repayments ?



Here's a 300K loan @ 4.5% . The first 5 years are I/O followed by 25 years of P&I

So you'd be going from $1125 per month during the 5 year IO term, to $1667 per month once the loan reverts to P&I with 25 years remaining. Thats an increase of $542 per month, which is 48.17% of $1125.



Here's what a 500K loan @ 4.5% looks like with 5 year IO followed by 25 years P&I




In this 500K example, the IO repayment of $1875 is replaced by a P&I repayment of $2779 after the 5th year. Again, its a 48.17% increase.


For each million dollars of debt @ 4.5% IO for 5 years, you are looking at the monthly repayment increasing from $3750 IO to $5558 P&I. That's @ 1808 per month, or @ $21,696 per annum

 

@euro73 for example if someone is on fixed rate of 3.9% for 3/5 years does there rate then go to 4.9% or the SVR rate at that given time?