I am coming around to the thinking that we need a recession. Is anyone doing it tough nowadays with credit so easily available?
Pay TV, plasma TV’s, laptops, digital camera’s, DVD’s etc now seem to be the norm whereas once they were prized as affluent things which we could only dream about.
When we drive along the motorway in our 16yr old Corolla, we seem to be the only ones who don’t have a big new 4WD.
In the newspaper today, someone going to auction with a staggering $800k limit to buy a house in Brisbane, ended up blowing out their budget and payed out $960,000!
Am I missing something here, or has money lost all its value nowadays. Is any one doing it tough?
If you want to get out of a hole, first stop digging.
Couldnt agree more-we have a whole generation or two of people who have only seen the ‘upside’ of things and dont realise that with every up there is a down. The next down is going to pretty exciting if yoyu ask me-people have borrowed to the absolute hilt, as much as the banks would give them in an attempt to keep up with the jones (a very powerful motivator) and because they think property prices will keep going up….interesting times ahead[glum2]
Yes but that big new 4WD is probably on lease or Hp. I’ll stick to my 7 seater 1996 Ford Falcon Station Wagon with 260000 on the clock which we own. Mind you it could do with a clean !!
Amanda
“It is better to be inconspicuously wealthy, than to be ostentatiously poor…”Hi All
interesting topic.
I suppose so many years of growth has given us a feeling of invicibility.
Three years ago i was working in a high school and used to drive a 1983 commodre (till it died). One thing that shocked me was all the students (just turned 18) were driving better cars than me. Many in near new cars. We as adults aren’t much better, we are all being conned into spending up big, there has to be a pay day eventually.
Maybe its time for some good old fashioned if you can’t afford it don’t buy it. Gosh i’m only 41 and starting to sound like my Dad !!!
regards westan
We find deals in the USA with growth potential, with equity and showing at least 14% gross returns. Email at [email protected],
http://www.iproperty.net.auI have a mate who is always saying he doesnt have enough money and was thinking of selling his house and moving to a smaller one. Fair enough I thought consolidate and start fresh.
Instead he went and borrowed more money against his equity bought a caravan and a BMW (second hand)!!!! I just shook my head and thought there is no helping people sometimes.Dave
“Is anyone doing it tough”….you ask…
Too bloody right !!!
I’ve just had to give the chauffeur a right earful. He zoomed around the promenade near the waterfront mansion too bloody quickly, and caused me to spill the caviar and glass of Dom all over my Armani suit.
I’ll be docking the laundry bill from his pension fund. To speak nothing of the tickets to the opening night’s opera getting all wet….
This working class…..I tell you…..they just don’t know when they’ve got it good.
Now – where was I….before the lowly serfs interrupted my train of thought….
P.S. I’ll get my hand off it now…. [biggrin]
The people who I know that are doing it tough are still living in their own place (that thebank owns 95% of), buying new furniture on interest free and considering whether dimmers on their downlights are the right way to go!!!
The interpretation of doing it tough these days has changed.
There are a lot of people living by the pay cheque but there is a big facade that is hiding the truth. When the recession does hit there’s going to be massive problems for a large portion of society.
Agree 100% with nearly all these comments.
I am currently wrestling with 2 of my grown up children who “should ” be much further advanced financially than they are.
Maybe they are happy to let ME do the hard yards and when I die they will get it!!?One of them has just bought a 13k motorbike, supposedly to save money on petrol. Now he has to sell his perfectly good 98 commodore at about 3k less than he paid for it just 12 months ago.
Now me, I may be stupid but I reckon I could buy a LOT of petrol for the money outlaid!
This is a youngster who is a GREAT bloke (being my son) kind, generous , harfworking, etc etc.
He earns good money (more than I do) but saves much less than I do.
It is SO frustrating.I love the comment about the light dimmers!
There are a LOT of ostriches out there who somehow are managing to gloss over or forget just how little they are accummulating!
In a lot of cases going backwards I am sure.
I make a practice of regularly checking my nett worth. In my opinion a much better measure than my annual income![grrr]Giddo
http://www.standrewsplace.com.au“I am not a religious man; but if you are out there somewhere Superman, save me now! -Homer Simpson
Originally posted by NATS12:The people who I know that are doing it tough are still living in their own place (that thebank owns 95% of), buying new furniture on interest free and considering whether dimmers on their downlights are the right way to go!!!
The interpretation of doing it tough these days has changed.
There are a lot of people living by the pay cheque but there is a big facade that is hiding the truth. When the recession does hit there’s going to be massive problems for a large portion of society.
Your last line is what really worries me. Who do you help then? How are you going to know the true battlers from the ones who just wasted it all?
If you want to get out of a hole, first stop digging.
Originally posted by giddo:There are a LOT of ostriches out there who somehow are managing to gloss over or forget just how little they are accummulating!
I agree, but many of them believe their futures will be secure if they can only manage to accumulate enough good debt to sustain a wealthy retirement. Sadly, this economics fallacy is also held in high regard by the majority (?) of PI.com forum members.
[laughing]
Oh darn, I thought I’d left this forum forever.
F.[cowboy2]Good to see you back F.
Can you turn your razor sharp analysis spotlight on your good debt comment a bit more. It has definite merit.
Our group is very much accumulating this type of debt….sometimes I need to stand on tippy toes just to see the ground floor.
If you believe our strategy is no good, I’d like to hear your alternate strategy.
Once again – great to see you back.
1. Love my plasma and austar box especially during football season. Cheaper than eating out and going to the movies can’t do it anyway with 2 little kids.
2. Why pay upfront when you can get 4 yrs interest free, i know you pay more but over 4yrs? Especially when self employed money can be used in other areas.
3. Nothing wrong with a car lease if it is earning you money.
4. Definately get the down lights the dimmers are a bit costly these days, didn’t get them.
5. My cameras are tax deductible, same as fuel.
6. Don’t have any friends named Jones.
Robo
ps get the dvd recorder with the built in hardrive.Won’t all it take is a interest rate rise next week or next month to slow the spending down. Interesting to hear that in the retail secta the first business to slow down are the mens clothing shops, maybe we should be asking them how things are going?
If rates do go up and there is is the big R won’t those with the most debt be hit hardest good or bad?
RoboOriginally posted by Dazzling:[navy]If you believe our strategy is no good, I’d like to hear your alternate strategy.
Of course, debt can be usefully employed to leverage higher returns. It’s just a worry that many people both here and elsewhere classify all tax-deductible debt as ‘good’ regardless of whether it is producing income or not. Often this revelation is followed by the old line about “hopefully it will be worth twice as much in 7 to 10 years”, or the abbreviated version “it’s a growth property”. They encourage others to use interest-only loans and “extract equity” without clarifying the potential pitfalls of such moves. I have been gob-smacked by a few of the newer forum members’ comments lately, but will ignore them and take an example from my circle of friends.
Case Study – Max and Penelope (not their real names)
Age: Mid 50s
Income: 60k + 15kInvestments:
PPOR – valued at 350k in 2003, based on uniqueness. Unfortunately it is so unique (lacking basic services etc), they would be very lucky to now find a buyer at 220-240k.
IPS – 120k (70k 2001), 110k (70k 2002), 100k (98k 2004), 175k (180k 2006)
Super – 120k!!Thanks to the generous valuation of their PPOR mid-boom, they were able to not only borrow 100%, but also capitalised some costs. The IP vals are from mid 2005. Their situation as of today is:
Total realistic value: 680-720k
Total Debt: 445k
Income: 105k
Expenses: 35kTheir portfolio is ‘cashflow neutral’… or so they believe. The interest-only payments are almost covered by rent minus PM costs, but they are paying insurance and rates and property tax out of their income. The country town they have bought in currently has a rental shortage, and all properties have been fully tenanted. Max and Penelope are committed to funding their retirement through these property investments, and adding another 2 or 3 over the next 5 years before leaving full-time work. Their faith in their process is so strong that they are not saving cash (outside of super) despite living quite frugally (except for the drain of their leech-children).
So how are things going to look in 5 years?
Scenario 1) Best case – House prices appreciate 7% pa, steady interest rates, fully tenanted, rents increase 4% pa
Value: 950 – 1000k
Debt: 445k
Income: 37k
Expenses: 35k (plus any increases in rates, insurance, tax etc)Scenario 2) Worst case (?) – House prices appreciate -4% pa, interest rates rise to 7.5%, 20% vacancy, rents steady.
Value: 555 – 587k
Debt: 445k
Income: 24k
Expenses: 45k (plus any increases in rates, insurance, tax etc)Scenario 3) Half Way – House prices appreciate 1.5% pa, interest rates rise to 6.5%, 2% vacancy, rents increase 2% pa
Value: 732 – 775k
Debt: 445k
Income: 32k
Expenses: 41k (plus any increases in rates, insurance, tax etc)Entirely simplistic, I know. I did not even bother to mention a recession, or a credit tightening.
Ok, so here’s where I’ll put my credibility on the line and I know and accept that many of you will laugh out loud. I think that in 5 years time Max and Penelope will realise that they would have been better off selling their first 2 IPs in 2004, paying CGT, and investing the 55k odd they had left in a 6% no-frills saving account. It will by 2011 be reaping a massive $4400 per year in interest. Sure, in the ‘Best case’ scenario they have half a million dollars of equity to draw from, but more than half of this is their PPOR, and another large chunk will be untouchable without a huge mortgage insurance bill. Oh, and of course this is a PIE IN THE SKY scenario. The likelihood of this occurring as opposed to not occurring is minute, and certainly not worth the risk premium. In fact, if you go through the figures, they would only be marginally better off!
Obviously, Scenario 2 sees this couple in financial ruin. ‘Nuff said…
Scenario 3 (which I see as quite plausible) doesn’t look like a rosy retirement to me. There’s a bit of equity there, but what bank will let them ‘withdraw it’… as in TAKE ON ADDITIONAL DEBT when they’re retiring? Perhaps, but they’re also now CF-. They could sell their portfolio, but of course that would trigger CGT, and sales costs and… oh dear, they’d come out with around about… zip, zilch, nada, nothing. A bit of creative accounting may net them a positive return, but it will not be anywhere near what that cash in the bank has compounded to! Not to mention all the money they will have wasted on rates, insurance and property taxes over those 7 years…
Sure, there are plenty of other ways to invest in property, just as there are other ways to make, store, invest and compound money, but the above scenario is real and it has and is being replicated around the country.
Rant over.
F.[cowboy2]
* I reserve the right to amend any dodgy numbers from this post[mellow]So true.. What if there is a recession, will investers be able to still invest? And hold their portfolio…
Brenda would you mind emailing me privately -Thanks.[blush2]G’day all,
What you said Foundation, is spot on.
I have always believed that there is no such thing as GOOD DEBT.
All debt is bad. Yes you can work a rort on your tax return.But over all, you would be better off collecting full rent from your rentals,paying no bank interest (Oh GOD! how wonderful). Then paying some taxation.
At least with our taxes they might do some one some good. Or build new infrastuctures for the good of our country.
As for being over-stretched financially, that is ALL those investors who stupidly ?? use their home as equity to fund more property
purchases.
These investors don’t (or do) realise that they’ve just given their homes to the banks.
They now own absolutely nothing !!!!!!!!bruham.
Money without financial intelligence is soon gone.
Cheers Foundation,
I understood what you wrote and I agree with almost everything you have put forward.
I too share your concerns re: your Max & Pen scenario. I suppose my only point of difference, as we have discussed on several occassions, is the actual vehicle of wealth. Poor ol’ Max & Pen are flogging a dead horse – no doubt about it.
I don’t agree with the “cash in the bank” scenario. The ravages of taxation and inflation I see first hand with what my parents are experiencing right now with that tactic….it ain’t pretty – but they are absolutely scared witless to join forces with our group.
With me working overseas….but not for too much longer, the wife and I have discussed all sorts of difficult scenarios….the worst being me popping my clogs off. In that case, we have decided to wind back our entire portfolio, to be left with only 2 properties, the PPoR and one IP, both would be fully paid off.
That gives the wife and kids a really decent house to live in, in a good area and one IP on a great big chunk of land close to the CBD, producing a decent enough rent that will keep them happy forever…..that’s worst case.
Of course, this scenario is available to us right now, but we choose not to take it, as we see a much brighter future for what we hold now and are intending to buy up soon….it’s not all glum and downhearted.
Everything else is easy peasy from there, including recessions / interest spikes / disablement / market corrections. Small potatoes.
These are all quite minor for our thinking and frame of reference. I suppose the trick is to get out of the mire so you aren’t having to invest in 150K IP’s and end up like “Max and Pen”.
But then, if you aren’t prepared to do the hard yards early on in life…..you ain’t got no choice.
P.S. How are all your oil stocks going ?? [eh]
Hi Bruham,
Could you go into a bit more detail about your thoughts on using equity in PPOR to buy more IP’S.
What should you do if you have equity but no deposit?
Doesn’t the bank own your PPOR if you have a mortgage anyway?
thanks
RoboOriginally posted by robo:What should you do if you have equity but no deposit?
Perhaps I’m a bit old-fashioned for a young(ish) person, but I’d say “Save! Save! Save!” and I don’t mean it in the way Harvey Norman would.
Originally posted by bruham:As for being over-stretched financially, that is ALL those investors who stupidly ?? use their home as equity to fund more property purchases. These investors don’t (or do) realise that they’ve just given their homes to the banks.
Bruham, I somewhat agree, which is why I have a beef with people who refer to “using the equity” or “withdrawing equity” rather than “securing additional debt”, why I don’t like chatter about how debt-financed asset purchases amplifies capital gains without the flipside – that it also amplifies capital losses.
Originally posted by Dazzling:P.S. How are all your oil stocks going ??
I sold off the 3 I was holding late last year when crude fell below US67, then bought just the one, ROC on 13/12 (crude @ US59). Currently up 25%, which is nice but relative to the rest of my modest, little, savings-funded portfolio is below par. LHG is up 41%, GDR up 140% and DEG (the rumour buy) down 12%, for an average of +49%, all within 6 months… but I try to be cautious when talking about such things, as I believe a decent correction is well overdue. I’d hate to see good people securing additional debt against their PPOR or IPs in the final moments before a 10%+ fall.
I agree with your comments regarding “the ravages of taxation and inflation”, and the inflation story is worrying. A recent IMF report has our money supply expanding at 8%, well down from the 14% peak a couple of years ago, but still I fail to see how over the long-term consumer price inflation can be expected to remain at <3% while this continues (here and abroad). Sure, a growing productivity helps, but I think big price rises and a coresponding drop in the standard of living are coming. It’s not just metal prices that are skyrocketing, basics like sugar have doubled (at the farm) recently, vegetables are up 7.9% for the quarter. Add fuel prices to the mix, and it would be tough to live from savings alone.
But I think the big stories of the year will be the interplay between US interest rates, the value of the USD, Aussie interest rates and the AU/US exchange rate.
Cheers, F.[cowboy2]
I have always believed that there is no such thing as GOOD DEBT.
All debt is bad. Yes you can work a rort on your tax return.But over all, you would be better off collecting full rent from your rentals,paying no bank interest (Oh GOD! how wonderful). Then paying some taxation.
At least with our taxes they might do some one some good. Or build new infrastuctures for the good of our country.
As for being over-stretched financially, that is ALL those investors who stupidly ?? use their home as equity to fund more property
purchases.
These investors don’t (or do) realise that they’ve just given their homes to the banks.
They now own absolutely nothing !!!!!!!!bruham.
I’m gobsmacked. Are you for real or is this a trolling attempt? It’s as if a right to lifer is posting on a pro choice forum.
All debt is bad? People that borrow against their homes are stupid? It’s better to pay more tax? When a bank has a mortgage over your property you don’t own it?
I considered arguing against some of these proposterous statements and you know what, there’s no point because I don’t think you would be convinced.
But I will say, in my humble opinion sir, you are wrong. And I challenge you to find a single (self made) wealthy person to agree with you.
And to comment on the general feeling of this thread – I’m amazed to see posts that read as if the author is hoping for a recession, to teach all the bad investors a lesson. I am in my 20’s but that is old enough to have been through a recession and in case I have got it wrong, everybody, not just investors suffer. Jobs are lost, lives are ruined and it is hard for anyone to make an honest buck. I sincerely hope we never have another recession.
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