All Topics / General Property / int rate 17% in 1990

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  • Profile photo of celesteceleste
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    @celeste
    Join Date: 2005
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    Hi all

    All this worry about the piddly little interest rate of about 7.5%

    In 1990 I fixed my loan on 12% for 5 years and I thought that was good. It did go up to 17%[thumbsdownanim

    this year my loans are fixed for 5 yrs at 6.99% that’s better![biggrin]

    People still brought / built / rented houses etc then.

    So why worry

    Celeste

    Profile photo of JohnSmithJohnSmith
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    @johnsmith
    Join Date: 2006
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    Well there are some relative figures that need to be used here.

    Back in those days average debt was a hell of a lot lower. People had loans of 50K to 150K

    Now – 250k to 500k

    Payments on 300K @ 7.5% are same as payments on 150K @ 15%

    Yes over that time wages have increased, so that has to be taken into account, but so has inflation, therefore the cost of everything has gone up.

    So at 7.5% there are people out there hurting, and we are seeing an increase in foreclosures.

    Regards
    John

    Inspired Finance

    [email protected]
    (02) 9944 7776

    Profile photo of AgaveAgave
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    @agave
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    Thanks John, that has put some interesting perspective on it for me. Like Celeste I thought the same.[hmm]

    I went through the 15% rates back then, and I sure did hurt. Can’t stand boiled rice or 3 minutes noodles today. I remember when I got down to my last two bucks for the month. Always made repayments on the loan, although I got a whole lot skinnier back then. The thing is that I knew what was important to me, and I prioritiesed my goals to keep my unit. Yeah, I didn’t eat fancy meals, or ever buy a coctail, but I knew the cycle would change and rates would eventually come down.

    So for the struggling home owners out there good luck (good prioritising). Back to basic meals, save money where you can, pay the morgage first, and don’t burry your head in the sand. You’ll get there.

    Again, thanks John, I get it now. My 15% back then is the same as thier 7.5% now, only they have more money tied up in the deal.

    Crickey!!

    Profile photo of foundationfoundation
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    @foundation
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    Originally posted by celeste:

    So why worry

    In 1990, the average person earned $24,440 (ABS), the labour force was 7.9 million and the total mortgage debt was $78 billion.

    In 2006, the average person earns $42,500 (ABS), the labour force is 10.1 million and the total mortgage debt is $780 billion.

    At 16.35% in 1990 (and remember very few people actually paid more than 13%), the national Debt Servicing Ratio* (DSR) was 7% of pre-tax income.

    At 7.5% now, the DSR* has jumped to >13% of pre-tax income.

    ï‚· DSR does not include over $150(?) billion of personal debt and >$36 billion of credit-card debt which largely didn’t exist 15 years ago. DSR is calculated from the figures given, and differs from many other estimates.

    And then, to top it all off, it’s only been 2-3 years since prices jumped up so significantly. This means that even if house prices level off, total mortgage debt levels (and therefore DSR) will continue to climb for somewhere between 14-17 years.

    As DSR levels climb, the money used to service the debt is quarantined from it’s potential productive use as savings, investment of consumption, all of which add to our national economic well-being and GDP. Instead it is paid into the deep pockets of bankers, and half of it is sent directly off-shore to repay foreign borrowing by Australian financial institutions…

    Trust me, we are much worse off (individually AND as a country) today than we were in 1990. When the party music stops, we’re going to have a very long time to look back and think about where we went wrong.

    F. [cowboy2]

    Profile photo of celesteceleste
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    @celeste
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    Hi all

    I thought my post might stir things up a bit[biggrin]

    Can you tell I am a bit bored? [blush2]

    Sorry ,I am In between projects and it’s school holidays, all I’m doing is watching Kids shows, going to kid play centres and cleaning. [baaa]

    Tell me what affect do you guys think, things like mobile phones, internet , foxtel etc has done to the average families budget?

    Celeste

    Profile photo of JohnSmithJohnSmith
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    @johnsmith
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    Originally posted by foundation:

    F.

    Thanks that was fantastic information.

    I notice in your figures you did not mention compulsory super, which will in the long run add something back and even now is making a difference in the markets.

    I would also add that it is Australians love of property that is helping to keep its population wealthy.

    I am part of an investment group purchasing USA properties, and if you look at the market over there, the gap between the wealthy and poor is huge, and when you drill down to the reasons, there is a clear relationship based on their thinking in regards to ownership of a property.

    So much so that to see a high flying property guru in the USA costs a few hundred dollars compared to a couple of thousand here. Market Forces at work ….

    Regards
    John

    Inspired Finance
    (02) 9944 7776

    [email protected]
    http://www.inspiredfinance.com.au

    Profile photo of foundationfoundation
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    @foundation
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    Originally posted by JohnSmith:
    I would also add that it is Australians love of property that is helping to keep its population wealthy.

    I absolutely dispute this assertion.

    Let’s see:

    • Our wealth is dependant on our housing market.
    • The housing market is dependent on debt levels rising faster than income.

    Therefor our wealth is dependant on debt rising faster than income…[blink]

    Perhaps you could chang it to “our current perception of wealth is linked closely to our possession of real estate, and expectations for future capital gains from housing. However, this perceived wealth will eventually prove to be an illusion, a mirage that vanishes into the ether. Unfortunately, the debt will remain for generations, acting as a constant grinding drag against our economic performance and real sustained wealth..”[biggrin]

    Then I’d agree with you!

    F. [cowboy2]

    Profile photo of foundationfoundation
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    @foundation
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    Here’s a chart. It shows:

    Annual national GDP growth per year in 1970 dollars
    Annual national M3 growth per year in 1970 dollars
    And for interest sake, Melbourne house prices in 1970 dollars

    http://img213.imageshack.us/img213/4159/gdpdebthpi1970un9.jpg

    Spot the problem?

    (Hint 1 – We’re creating money more than twice as fast as we’re earning it.)
    (Hint 2 – Most of this new money is created as debt, implying lower future earnings.)
    (Hint 3 – The recent rapid growth in money supply over earnings is unprecedented in the last 40 years… actually, in the last 77 years, but I can’t back that up with data.)

    Sure I could have used gross aggregate wages, as in my last example, but the GDP/M3 relation is more widely accepted.

    F. [cowboy2]

    Profile photo of foundationfoundation
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    And here’s another rip-snorter. It shows that in order for house prices to grow 7% pa, housing debt must grow by 15.7% pa. If you look at our current aggregate housing debt which is about to pass $800,000,000,000 then project this to grow by 15.7% per annum for a few years, perhaps a decade…[blink]

    http://img209.imageshack.us/img209/3779/houscreditvshousepricescq8.jpg

    Strangely, I very rarely see any mention of these kinds of analyses in newspaper commentaries, REIx reports, HIA, BIS etc…

    So either I’m looking at the data all wrong, or there is nothing to be concerned about.[blink] Or perhaps they don’t want to upset the bandwagon in case the music stops…

    I’d better point out that half of 2005, all of 2006, and 2007 were based on ‘projections’, the rest is real data (nominal, not CPI adjusted).

    F.[cowboy2]

    Profile photo of sploshsplosh
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    @splosh
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    Originally posted by JohnSmith:
    I would also add that it is Australians love of property that is helping to keep its population wealthy.

    [baaa]
    hahaha that’s Gold! We should extend this love to other asset classes and we could all be even more wealthy!

    How about air? We all need it, they arent making any more of it.. so lets all love it and charge ever increasing prices for it and we’ll all be rich beyond our dreams. And our thinking with reagrd to the price of air will create a more equitable distribuition of wealth! Wonderful! [blink]

    I know, how about Bootstraps! Australians should love their bootstraps. [blink]

    Profile photo of foundationfoundation
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    Originally posted by splosh:

    How about air? We all need it, they arent making any more of it.. so lets all love it and charge ever increasing prices for it and we’ll all be rich beyond our dreams. And our thinking with reagrd to the price of air will create a more equitable distribuition of wealth! Wonderful! [blink]

    I hear you, and I like the way you think. It would be better of course if we could first ensure that most of the air was in the hands of the Baby Boomer generation, because frankly, we can’t afford to pay the pensions and health-care that they feel they are entitled to. So if they hold most of the air before we create an air boom (or air-bubble if you like), they’ll end up exceeding the assets test and lose pension and health-care entitlements…. Of course they won’t be able to sell their air – they need somewhere to breathe after all, so we’ll have them TRAPPED! MuhawhaHAHA!

    I see only one potential flaw in your plan – what if they realise that their air-bubble is over-inflated? What if they fall out of love with air? What if the air-bubble bursts? What if they ran up hundreds of billions of dollars in debt to ‘fund their retirement’ through air-investing? What if they saw their air-wealth going up and p_ssed it against the wall – living large instead of saving dilligently for retirement? They’ll end up worse off than they were before, and will need more pension and health-care funding! What will we do then?

    Ah, I hear your whisper, “We’ll just tax the heck out of Gen’s X and Y!”.

    Oh good, good plan. Let’s proceed then.

    F.[cowboy]

    Profile photo of ogilvyogilvy
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    Ok….now in plain english please !

    Are you saying that eventually there will be a super-super-bust where property will become worthless virtually overnight/there wont be anymore money to borrow/ people are too confident that there will always be money in property…..? Please explain[party]

    Profile photo of JohnSmithJohnSmith
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    @johnsmith
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    Originally posted by foundation:

    I absolutely dispute this assertion.

    Let’s see:

    • Our wealth is dependant on our housing market.
    • The housing market is dependent on debt levels rising faster than income.

    Therefor our wealth is dependant on debt rising faster than income…[blink]

    Lol too pessimistic for me, and also too one sided. You discount super, you discount poulation growth, and immigration.

    Yes our trade deficit is not good, yes we have too much debt, but is it all going to fall in a heap – maybe but we are not close yet, and there is still money to be made till then.

    :)

    Regards
    John

    Inspired Finance
    (02) 9944 7776

    [email protected]
    http://www.inspiredfinance.com.au

    Profile photo of foundationfoundation
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    Originally posted by JohnSmith:
    you discount poulation growth, and immigration.

    So… population growth (including net natural growth and net migration) is currently running at 240,000 per year, meanwhile we’re building what, 150,000 new homes per year?

    So back to economics 101, when supply exceeds demand… [ohno2]

    F. [cowboy2]

    Profile photo of foundationfoundation
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    Originally posted by ogilvy:

    Ok….now in plain english please !

    Please explain[party]

    My point was best expressed by Mervyn King, governor of the Bank of England, when he said:

    “House prices are a matter of opinion whereas debt is real.”

    OR, to relate it all back to the original post by Celeste, see this article:

    Sydney Morning Herald

    “See the point? We took the benefit of lower interest rates and used it to achieve little more than a doubling in the price of homes. The recently retired governor of the Reserve Bank, Ian Macfarlane, described this last week as “one of the great disappointments of the long expansion [of the economy] and the low interest rates”.”

    “But whereas the boom redistributed money between individuals, from the viewpoint of the community as a whole the doubling of house prices leaves us no better off. The rise in our wealth is an illusion.”

    *My comment* In fact, we’re worse off, as we now have (including personal and credit card debt) $1,000,000,000,000 to repay*, plus interest. Bummer.

    F.[cowboy2]

    *… and the repayment strategy for the majority? Hold long enough and capital gains will pay for the house. Problem solved. But where do capital gains come from? More debt of course… Oh…

    Profile photo of ctaingctaing
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    @ctaing
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    Foundation, loved your graphic economic analysis, albeit fun and twisted, on ‘consequences’ of leveraging for wealth creation. Leveraging for scarce resources (depending on individual asset selections) is creating good debt.

    Isn’t it the bad debt the culprit? The graphs have not distinguished the two. Readily available credit for instant gratifications to the average persons pull us all into temptation. But I’d like to think not all of us succumb to it.

    It a sustainability issue here; do we do nothing and hope the dire mess of the nation as a whole gets better? No, it’s a pessimist approach. Yes, I hear you loud and clear, you’re a realist.

    I would be interested in your suggestion of any solution that can make a difference to servicing unprecedented debt level we as a nation face.[chill] (Of course besides raising the interest rate).

    CT

    Profile photo of foundationfoundation
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    Originally posted by ctaing:
    Isn’t it the bad debt the culprit? The graphs have not distinguished the two.

    A debt is debt is a debt. What is bad debt? Unsecured? Non-deductible? What is good debt? Tax-deductible? Positively geared? What if the debt is tax-deductible but holding costs (interest costs plus income minus management minus insurance minus rates minus land tax) consistently exceed capital gains? Good debt or bad debt? What if the property is positively-geared but incurs a capital loss? Good or bad?

    In the end, the only certainty with debt is that it must be repaid…. With interest.

    It’s important to note that in times of stable, non-inflationary monetary policy, capital gains are not consistently higher than borrowing costs. To assume that whatever you term ‘good debt’ must over the long-term result in capital gains in excess of costs may be an error of judgement. Otherwise surely there is no incentive for any person to work?

    Regardless, I’ve shown that capital gains are the product of debt, so even ‘good debt’, resulting in net capital gains would require somebody else to take on even more debt. Good for you perhaps, but bad for our collective economy. And ultimately, unsustainable.

    F.[cowboy2]

    Profile photo of foundationfoundation
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    Imagine ctaing, that you and I both go to a particular street in a new development and purchase 4 adjacent, identical houses for $250k each, no money down (ie 2 each). Each of us has $500k in assets, and $500k in (presumably?) ‘good debt’. Now if I buy one of your houses for $500k, and you buy one of mine for $500k, we’ll each have $1,000,000 worth of houses and still only $500k in ‘good debt’ each!

    Isn’t maths fun?

    But hang on, are we really any better off?

    F.[cowboy2]

    Profile photo of Bo_D_Bo_D_
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    dont u mean 750k in debt each?

    Profile photo of foundationfoundation
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    Originally posted by Bo_D_:

    dont u mean 750k in debt each?

    Ah, not at all.

    My Debt = 500k + 500k to buy ctaing’s house. Her debt then = $0. She buys one of my houses for $500k, so we’re both back in hock to the tune of $500k!

    Magic!

    F.[cowboy2]

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