Cheers Resi, I’m happy to provide shallowness![biggrin]
what gives me the s..ts is that this country is going back wards. Credit Card debt is now 30 billion dollars – our debt to equity level on the family home is the highest it has been in over 50 years.I agree. That debt to income ratio has roughly doubled in a decade [Link] should worry us all. Much of this has been discretionary spending[blink], but the majority of household debt is secured against residential property, and IMO much of this the result of ill-informed investment decisions. I think ‘following the flock’ has been a primary cause of this problem.
Australians are amonst the worst per head of population in the world for debt, so maybe Foundation I was wrong with 95% are doomed, it could be 98% in reality. we r doing some thing wrong because to me it appears we r going back wards.With saving levels in negative territory, I completely agree. Not only are we failing to save for the tough times, we are borrowing to live in the good times. The period when we switch from being net spenders to net savers is going to be very tough on this country.
If interest rates went to 10% 2morrow this market would crash, but how did we surrive in 1990 – 1994 with 17/19% interest rates, go figure!!At the peak of that interest rate cycle, debt servicing required 7.9% of household income [link]. With current levels of 7.5% income and interest rates at 7ish percent, a hike to 10% interest rates would be drastically more damaging to the household bottom line than the interest rates of the early 90s.
Regards, F.[cowboy2]
<Edit – added for completeness:>
The RBA likes to look at what it calls the debt-servicing ratio – interests rates as a proportion of disposable income.
The debt-servicing ratio hit 9.3% in the September quarter, which the RBA described as a historically high level.Statistics on housing debt show that a decade ago housing debt as a ratio of household disposable income in Australia was low by international levels at 67 per cent, and the increase to 120 per cent in 2002 reflected the ability of households to borrow larger mortgages at a time of low inflation and low interest rates. However by June 2004, the housing debt ratio to disposable household income continued to climb to a more uncomfortable 151 per cent.
Of greater concern to the Reserve Bank, the rise in the housing debt servicing ratio from a level of 4.5 per cent in June 1993 to 5.8 per cent in June 2002 had further escalated to 7.5 per cent by June 2004.
When personal debt servicing is added in, total interest payments as a ratio of household disposable income, the ratio jumps to 9.3 per cent. Once you provide for required principal repayments as an additional demand on the household purse, the debt servicing burden rises to in excess of 11 per cent.
This is not the end of it. If account is also taken to exclude from the equation, households which have paid off their mortgage, the ratio escalates to a more dangerous 20 plus per cent. This is the current position before factoring in the coming interest rate increases.Ok, we’re all doomed~![biggrin] I’d better buy some more gold and get my passport in order so that I can find somewhere sunny to sit out the storm once this s@#t hits the fan![biggrin]
F,
Is that bullion or paper gold? I like Olly Newland’s quote in “The Day The Bubble Burst” about actually possessing the metal…Err… Hrmph.
[[fear] on] Physical. Small internationally recognised pure gold coins (maples and kookaburras). Not normally great for capital gains (and by no means CF+), but nice for peace of mind and a decent hedge against inflation. And they’re pretty, aren’t they my precioussess?![blink]
In turbulent times governments try to control anything that has intrinsic monetary value as opposed to state sponsored fiat notes… Paper gold is traceable, whereas a tin in the backyard is not.[[fear] off]
In reality, a major global meltdown is incredibly ridiculously highly unlikely, but it’s nice to know you’re at least partly insured. And it’s so pretty… shiny… preciousssssss…[biggrin]
But before we get sanctioned for being [offtopic]…
Cheers, F.[cowboy2]Foundation, on a slightly more philosophical level, you have many times highlighted the “speculative” aspect of investors and usually demonise in some more or less subtile way the profit maximising exercises of the said investors, something I boo you for, yet you seem to have overseen the many post, this included where people are figure of speech, waiting on the sideline to see who is down first.
Clapping at interest rate rises, and hoping for some sort of recession and price bust.
Now don’t get me wrong, I am the first that would profit from something like that, but for the “evil speculator” I must be in your books, I would see such scenario with heartache. Doesn’t the hope for someone else’s disgrace qualify for “speculation”? (bad bad man[angry2] moving the index finger side to side)
Just a thought … go get them champ[biggrin]“What you want in your life occasionally shows up…
what you must have… always does.” . . . . . Doug Firebaugh
May God Prosper you.[biggrin]
MarcFoundation,
Great post about debt-servicing ratios, and good to see someone else reading Henry ThorntonDid anyone see Alan Kohler on ABC TV news tonight quoting the Demograpia Housing Affordability Rankings?
http://www.demographia.com/dhi-rank200502.htmI think we talk at cross purposes sometimes 1Winner. Speculating is not evil or wrong. Nor is it strictly investing (by my personal definition). Investing relies on, and aims to achieve historically normal rates of return while speculation chases better returns by trying to predict future trends and scenarios. There is risk of loss involved in either, but moreso in what I call speculation. There can be no moral judgement of either group as their gains and losses are personal…
If someone thinks they are investing, but is clearly holding an expensive asset and hoping for capital gains, I may call him or her an ‘investor’… by which I mean speculator.
I hope I’ve cleared up our misunderstaning![blush2]
My personal rule is to only ever speculate with what I can afford to lose, and to invest the rest.On the subject of right/wrong (I don’t believe in evil), I abhor misinformation and propaganda circulated and perpetrated by real estate ‘institutes’, lending organisations, ‘wealth creation’ experts and vested interests in the media and entertainment industry. They don’t have the best interests of home buyers or investors at heart, far less that of Australia as a successful and prosperous country.
Regards, F.[cowboy2]dmichie – I did catch Alan Kohler tonight. It’s a shame we don’t see more of him, as he is one of the few straight-talking commentators in the media. Do you have any idea why Demographia does not seem to include the UK / Europe? I’m also a little confused as to how Brisbane can be so far below Melbourne now that its median price is higher. Anyway, it’s all interesting.
This is the story of how the Demographia affordability rankings came to be:
http://www.demographia.com/dhi-pavrls.htmThis is where their source data came from:
http://www.demographia.com/dhi-notes200502.htmI cannot vouch for the accuracy of the survey, or why Brisbane is rated as (relatively) affordable (you can see the figures they used here http://www.demographia.com/dhi-data200502.htm) but it adds to the evidence that something is seriously out of whack in the Australian housing market.
Now I need to pipe in…
Brisbane: 6.0
LA County: 10.1Naive view: Oh Brissy is not that bad, check out LA. Brissy is affordable by international standards; overprice, overshmice.
WRONG! WRONG! WRONG!
The facts: average home loan rate is currently 6% which can be fixed for 30 years! You heard that correctly! Furthermore home interest is deductible against state and federal payroll taxes (but not social security taxes, etc.).
Take median family income and state tax deductions will be in the 4% bracket
http://www.ftb.ca.gov/aboutFTB/press/Archive/2003/03_59.htmlTake median family income and federal tax deductions will be in the 15% bracket
http://www.irs.gov/formspubs/article/0,,id=133517,00.htmlSay on $445,400 loan, at 6% that’s $26,724 interest. (Simplified to ignore slightly higher rates on HELOC to get 0% down).
Subtract standard deduction $5000, (ignore other possible deductions to counteract previous assumption), $21,724 tax deduction, just cuts into lower brackets, but lets take the 19% (15+4) as near enough. So $4127.56 tax savings. Now $26,724 – $4127.56 = $22596.44 which is the real cost of our loan.
Now if I conservatively say 7% for interest rates in Aus that same interest would buy $322,806. (N.B. yes all principal payments ignored). But look how quickly we’ve equalised! Now LA is only $20k more than brissy. At 7.5% interest (possible after next rate rise), cities are equal. But LA doesn’t have the same risk exposure to rising rates! Sure variable loans exist and are becoming more common, but US has historically had slightly lower rates than Aus to boot.
Finally LA is actually cheaper to live in! Yes you hear how much it is, but this is based on rents, you are not renting if you are the above median scenario. Food, gas, cars, entertainment, electronics are incredibly cheap, so there is more disposable income to make payments. Now… at the median point the tax advantages were reasonable… just imagine how big they get if you are in the top brackets! Interest deduction is limited to $1,000,000! What can you buy with $1,000,000 worth of interest payments?
Point to all of this… Brisbane is at least as unaffordable as any US city.
For purposes of disclosure [biggrin] I live in LA with the intention of returning to Brissy.
Resiwealth, you forgot to mention age and children as factors that influence bank accounts. Also, you lucked the best 20 years in both stock and property returns! If you’d underperformed the indexes by even a few %, but started 20 years ago with $100k and say 1k per month, 60% gearing, you would have at least 3 million in assets today, by UNDERPERFORMING! You have done well, congratulations, but don’t get cocky, remember you live in Australia where no one likes a tall poppy. If you want to be a horn tooter, come live here, it seems to be the American way. But at the end of the day who’d you rather have a beer with?
Lunch time, [specool]
superman – so your point is that the affordability situation in Brisbane is actually worse than the Demographia figures suggest?
BTW, I had already made this point in another post:
Sydney is even less affordable when you consider that mortgage interest is tax deductible in the US, US interest rates are considerably lower, and US personal income tax rates are lower (meaning you have more after tax dollars to meet the mortgage repayments)Thanks Foundation, very interesting comments you raise.
yes superman I did leave a few things out, on purpose.
One interesting point I would like to note here is this, people/we/me/others are very good at reading an analysing the past yet we struggle to get the future right, go figure.
Phil[blink]
Originally posted by dmichie:superman – so your point is that the affordability situation in Brisbane is actually worse than the Demographia figures suggest?
BTW, I had already made this point in another post:
Sydney is even less affordable when you consider that mortgage interest is tax deductible in the US, US interest rates are considerably lower, and US personal income tax rates are lower (meaning you have more after tax dollars to meet the mortgage repayments)Yes, I do actually recall you (or someone) mentioning the US tax deductibility before. But the loan rates and terms are equally pertinent to affordability. Sydney costing more than LA isn’t that astonishing. I was interested in pointing out that even the 10.1 to 6.0 gap can be withered away to favour US (LA specifically).
As for predicting the future, yes I’ve always struggled with my prescience [blush2]. I too have always found the past easier to see than the future [exhappy].
Originally posted by dmichie:Did anyone see Alan Kohler on ABC TV news tonight quoting the Demograpia Housing Affordability Rankings?
http://www.demographia.com/dhi-rank200502.htmI would be cautious about the independence of the Demographia site.
Its sponsors are Wendell Cox. Wendell Cox is not an independent research organisation.
Rather they exist to push a particular political agenda and their articles are biased to highlight information favourable to this.
For instance Wendell Cox oppose any form of urban planning or public transport. Instead they want uncontrolled sprawl where people commute 100km+ to work each day and settlement patterns preclude any form of non-car transport.
And to push this agenda they complain about home affordability in an effort to make their policies appeal more broadly.
Rgds, Peter
Yes, the whole point of the Demographia website is to push their anti urban consolidation agenda (aka “Smart Growth”) but I don’t think that completely discredits their observations about Australian housing market. Their most unaffordable city (Los Angeles) is hardly a prime example of urban consolidation!
BTW, Today’s SMH draws comparisons with the US tech bubble and the Australian property market.
A chief investment strategist for HFA Asset Management, Jonathan Pain, says the tech bubble “illuminated the saying that clever people do stupid things”. He believes Australia is moving toward another dangerous bubble in the shape of an overheated property market.“Bubble history” demonstrates that people who are making money aren’t easily persuaded that they might shortly start to lose money on the same venture. “As Mark Twain said: ‘Denial ain’t just a river in Egypt,”‘ he says.
http://smh.com.au/articles/2005/04/12/1113251627650.html
Remember the “New Economy”? Remember “Irrational Exuberance”? Now the author of that book (Robert Schiller) is warning of a US real estate bubble. If the US has a bubble I hate to think what we have!
I thought prices were declining in NSW though, or is that not correct? IF there is a bubble I understand it is deflating anyway.
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
foundation asked:
Do you have any idea why Demographia does not seem to include the UK / Europe?I found some UK figures here:
http://news.bbc.co.uk/1/hi/programmes/inside_money/3132575.stmAdmittedly its a bit out of date (August 2003) but it shows that UK house-price-to-income ratios range from 2.3 (North East) to 4.8 (London). Certainly nothing like the 6-9 ratios seen in most Australian cities.
Can anyone find a country where housing affordability is worse than Australia?
I thought prices were declining in NSW though, or is that not correct? IF there is a bubble I understand it is deflating anyway.Growth in house prices have outstripped growth in incomes for 6-7 years now. House prices have to come back to the long-term trend line either by falling quickly or remaining flat for many years. I suspect a gradual, grinding decline is the most likely scenario.
Chart showing house prices vs incomes:
http://www.cis.org.au/policy/autumn05/autumn05-1_clip_image002.gifOriginally posted by dmichie:foundation asked:
Do you have any idea why Demographia does not seem to include the UK / Europe?I found some UK figures here:
http://news.bbc.co.uk/1/hi/programmes/inside_money/3132575.stmAdmittedly its a bit out of date (August 2003) but it shows that UK house-price-to-income ratios range from 2.3 (North East) to 4.8 (London). Certainly nothing like the 6-9 ratios seen in most Australian cities.
Can anyone find a country where housing affordability is worse than Australia?
I find the London one amusing – average wages of 47,000 GBP (must have included the Queens salary in that calculation) and a house for 220,000 GBP…. is that a house or the on street parking space at the front? At least the BMW that goes with it is cheap.
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
“Can anyone find a country where housing affordability is worse than Australia?”
a brief search reveals Finland… where the index for Helsinki is 51.3. Various parts of the US as shown in previous posts. I would expect the UK in reality, tho the statistics above left me scratching my head. Must be a nicely presented table of all these countries somewhere.
Of course we also need to consider rents when we consider housign affordability. With rents at such low levels it could be said that renters are getting a free ride on the coat tails of homeowners. One easy way to boost housing affordability would be to drop negative gearing, thereby decreasing demand for property, boosting the rent levels and removing a whole heap of government distortion from the market.
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
Originally posted by AUSPROP:Of course we also need to consider rents when we consider housign affordability. With rents at such low levels it could be said that renters are getting a free ride on the coat tails of homeowners. One easy way to boost housing affordability would be to drop negative gearing, thereby decreasing demand for property, boosting the rent levels and removing a whole heap of government distortion from the market.
That’d get my vote
With rents at such low levels it could be said that renters are getting a free ride on the coat tails of homeowners.Do you think its possible the rents are reasonable and its the house prices that are high?!
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