Hi all
I am the bookkeeper here, so here is the correct math.
purchase 2 x 250k = assets 500 with a debt of 2 x 250 = 500
sell one at 500 k assets now equals 1 x 250 with a debt of 0 purchase 1 at 500 assets now equals 750 with a debt of 500end result 2 houses worth 750k with a debt of 500k better off by 250k
Celeste
Hmmm, the scenario is a bit too hypothetical Foundation, thanks Celeste for the sums, for it to be real.
Are you saying it’s a zero sum game? The losers are paying for the others gain… ASIC would raise its head on RE practice of this kind, won’t it? No one has come out crying foul as far as I know. Banks have their hands in it and would not be seen lending this kind of money for venture capital.
I guess interest rate hike is a common monetary policy to tighten loose spending. Like it or not, in the current climate, the Reserve Bank has had its finger on the pulse and demonstrated good discretion so far on interest rate. Besides, we live in a global economy, there is a constant shift of wealth from one nation to another. No bust is looming from my radar.
CT
I still remembered paying 17% IR back in 1990. It was cheaper to rent and buy a house a few years later.
I quess that’s why I didn’t get into property market this time around (wrong decision) because I worried IR could go up again.
Where do we go from here I wonder? Will the market be flat for a long time? One thing about increase in value on my PPOR is that I can borrow more to invest.
I live in Perth where property prices I feel have gone silly. Very big difference between rental and interest cost. Usually high PE ratio indicate growth potential but more of us agree that’s unlikely in the next few years at least. Having to say that I have given up to put logic into it, been wrong too many years.
Many people in past always told me that mining is cyclical but I don’t know where we are in the cycle.Originally posted by celeste:Hi all
I am the bookkeeper here, so here is the correct math.
end result 2 houses worth 750k with a debt of 500k better off by 250k
…riiight, that may be how it works in the real world, but we’re in property investing land now! You now have 4 identical houses, 2 ‘worth’ $250k and 2 ‘worth’ $500k…
How would the investors (ctaing and myself) look at it? Surely we’d say “if that one’s worth $500k, this one must be worth $500k.”
How would the bank look at it? Now that rental equivalence is ignored, they simply use comparable sales. “Congratulations,†they’d say, “you have $500k in equity! Fancy a LOC against that?â€
How would the REA appraise the properties? The same way – comparisons. “We should be able to get $500k each for them, but buyers always like to negotiate down, to feel that they’re squeezing us for a bargain. We’ll advertise them at $550k each.â€
And the other folk who own houses on the road – they’d be expecting to sell their identical houses for $500k too.
I guess I’m making a couple of points here, neither of which relate directly to the original post topic.
– Investors aren’t simply ‘in the market’, they ‘make the market’. They should keep this in mind.
– The market is very easy to manipulate. I assure you, all kind of monkey business goes on during a boom, from money laundering to houses sold $100k over-value (with $100k of ‘powder’ in the ceiling), to exactly the kind of deliberate resales I’ve described – mostly property in new estates to stir up buyer interest and irrational expectations.
– Bank valuations are worthless. The fact that they’ll lend against a particular value does not guarantee that somebody will be prepared to pay that price next week, let alone next year. Tens, perhaps hundreds of thousands of Victorians and NSW’ers found this out (or are yet to) the hard way.Cheers, F. [cowboy2]
Hi Foundation
I am sure that’s how It would look on paper when I do my Tax and more like yours when I am after more finance.
Bank valuations are worthless. The fact that they’ll lend against a particular value does not guarantee that somebody will be prepared to pay that price next week,As you stated above the value is not set until you have a buyer.
Celeste
Originally posted by foundation:Quote:Originally posted by celeste:
As you stated above the value is not set until you have a buyer.Q: Therefore ‘mortgage equity withdrawal’ is…
- Counting your chickens before they hatch?
- Securing real debt against unknown house values?
- An incredibly simple way to encourage a self-referencing spiral of prices and debt based on speculation yet ultimately unsustainable and therefore doomed?
- Simultaneously borrowing from future earnings while decreasing our future earning capacity?
- All of the above?
F. [cowboy2]
Hi foundation
I say a little of all above.
All of life is speculation!
We are planning our retirement, but will we live that long!
Hubbies long time friend was the fellow that died in Bali 4 weeks ago surfing. He was out surfing, paddlesd into his other mates, walked out of the water and dropped dead – he was 44yrs. The austopsy said secondary drowning – sea water in the lungs – must have been dumped whilst out there.
So we buy property / shares etc but we could get dumped.
Or Jericho!!
Celeste
Celeste, the economy is allowed to grow at a sustainable economic level of 2%- 3% if it gets higher than this the reserve bank withdraws money from the economy by buying bonds. This causes the interest rates to increase. People have borrowed money to buy a new car or a new pool or a new house extenstion by borrowing money from the increased equity of their houses. If interest rates rise people may be forced to sell because they cannot afford the interest payments. If people sell the prices of houses drops in value as supply increases. The banks may ask the home owners to now make up the short fall of the loan compared to the now lower value of their house. The frightening thing is that global growth affects our economy and also as money flows into Australia due to a higher interest rate our AUD /USD value becomes less making imports higher in price.
Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Originally posted by foundation: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]
Interesting numbers. I’ve added ur debt numbers for personal and credit card debt in there at 9% each and it takes the proportion of gross national income to meet interest repayments from your number of 13.6% to 17.5% … and to think, that does not take amortisation into account at all….just the interest owing on the loan… crikey!
Foundation, did u get the figures 78 bill and 780 bill from the ABS as well ….or are those estimates?
Cabo Wabo
Originally posted by celeste: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
I heard that rates today..in comparison with many other factors are comparable to those days of 16-17%?
PS- what rate were 30 day bank Bills when rates were 17% ?
“Money is a currency, like electricity and it requires momentum to make it Effective”
Online Positive Cashflow and Renovating CalculatorsIf rates were at 17%, I’d say the 30 day bank bills would’ve been around then. It would’ve taken the recession we had to have to reduce the rates dramatically. The yield curve would’ve had to be inverted. ie long term rates a lot lower than the short term rates. A couple of years later, cash rate dropped to 12% or so then more normal levels of 8%. So rates doesn’t stay high long. If you have enough buffer/LOC and fix a portion of your loans, you will be fine. Inflation/ higher rates are good for investors anyway. It means house prices are going up but your level of debt ain’t!
One of the guys in “Ordinary Millionaires” had a similar outlook ASDF ;o)
“Money is a currency, like electricity and it requires momentum to make it Effective”
Online Positive Cashflow and Renovating CalculatorsInflation/ higher rates are good for investors anyway. It means house prices are going up but your level of debt ain’t!Another popular PI myth I’m afraid. Yes, there is a connection between higher (general goods) inflation and higher interest rates, but the link between high inflation and rising house prices is dependant on wages rising in line with goods. A couple of very significant dampeners on wages are the globalisation of labour, work-choices… but there are many more. Furthermore, you’ve linked higher interest rates with rising house prices… [blink]
F.[cowboy2]
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