A Funds Industry Built on Turning Debt into an Income Paying Asset

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In today’s financial multiverse we find smart people saying seemingly sensible (but utterly destructive) things about debt. We also find Australian household debt-to-GDP ratios leading the Western world at 112%. And we find heaps of evidence that your best bet for a financial future is to retire now.

More on all that in a moment. First up today is this little pearler from Bloomberg, “Australian banks, including Westpac Banking Corp. and Commonwealth Bank of Australia, risk more loan defaults as the government unwinds economic stimulus and the central bank raises interest rates, according to Fitch Ratings.”

Fitch says it’s the small and medium size businesses that are starting to show “signs of stress.” The $42 billion in stimulus money – to the extent it went to these businesses – is all spent with little multiplying effect. The government (bearing down on an election) can’t give more money away. And with rates rising, businesses are feeling the pinch of higher loan costs.

Fitch reckons all of this will add up to higher bad debt charges for Aussie banks. It says the threat of “large corporate collapses” has receded, though. And the banks themselves don’t seem too terribly fussed. They say even the chance of higher mortgage defaults in Australia is “manageable.”

Frankly, the banks and the media and the financial industry are incredibly blasé about the risks to the economy and the financial system. We’re not two years removed from a major systemic crisis, and most financial professionals are treating it like it was an anomalous “near miss” and not a sign of a more fundamental rot in the very DNA of the financial system.

That rot, we would contend, is the attitude towards debt and leverage. It’s a series of embedded assumptions about how to use borrowed money and what to expect (in terms of risk and performance) from asset markets over time. The financial world is using 20th century assumptions for a 21st century world in which the basic premises (the cost and availability of capital) have radically changed.

Take the Commonwealth Bank and its mortgage fund Colonial First State. It has again halted withdrawals from its $850 million mortgage fund after “being caught out by a spike in lending losses,” according to Eric Johnston in today’s Sydney Morning Herald.

“With rising interest rates likely to spur further mortgage stress, Colonial First State’s move suggests the nation’s troubled mortgage fund market could face a fresh round of problems after the $30 billion sector was hit by the introduction of the bank deposit guarantee about 14 months ago.”

There are three issues here and each gets to the heart of the modern problem with debt, investing, and banks. First is asset quality. The mortgage funds are pools of mortgages or mortgaged backed securities. Colonial First’s has a reputation for being conservative. Right.

But in a note to clients yesterday it reported that, “Since the withdrawal offer opened on November 25th, 2009, we have identified a small number of mortgages in the fund’s portfolio that have the potential to become bad bets…We have commenced a review of the fund’s assets to fully assess these loans and determine the impact on the fund and investors.”

We’ll take the fund at face value on these comments, although that is generous these days. The withdrawal offer, by the way, is the fund allowing withdrawals as of November 25th. They had previously been halted. That limited lifting seemed to be a sign of normal times.

But these are not normal investments. Any time a security is backed by a pool of mortgages – no matter how vigilant the underwriting standards – asset quality is going to be an issue. Asset values are variable, and funds made up of variable assets are generally not as safe and sound and their prospectuses make them out to be. Keep an eye on the default rates in prime U.S. mortages and you’ll see what we mean.

The second issue with the mortgage gunds is that government bank deposit guarantee that came into effect last year. Talk about unintended consequences. When the Rudd government slapped a government guarantee on bank deposits last year, it may have done the Big Four a favour by driving scared depositors into their arms. But it hit the mortgage funds especially hard.

Investors treat those mortgage funds like a high interest bank account that produces a steady, reliable, and secure income. Fixed income with a high yield! But minus a government guarantee, the $30 billion fund industry with over 150,000 investors saw so many redemptions that it had to halt them and freeze investors out from getting their cash.

Reminder: your money isn’t really yours unless it’s in your hot little hand.

The funding model for the funds industry was seriously strained by the outflows. As we understand it, the funds have three sources of funding: deposits, bank credit facilities, and the mortgage payments it receives from mortgagees (commercial and residential). The bank credit facilities are exercised either to make new mortgage loans or pay out withdrawals that exceed what the fund takes in via mortgage payments.

You can see this train wreck coming. If bank credit tightens up, asset quality declines, and withdrawals (for any reason) accelerate, the model gets stretched. Not to the breaking point. But to the point where you look at the model and reach the conclusion that this is not a safe, steady, reliable way of generating income.

But then there is a whole funds industry in Australia (and the world) built on turning debt into an income-paying asset. Often that debt is collateralised by a real asset (like a house, or a toll road). Just to be clear, however, there is no Income Fairy that makes sure you always get paid in these investments. They only work if the funding pipeline is clear and asset quality doesn’t deteriorate.

The trouble in a credit bubble, though, is that plenty of assets get built and valued and prices far above their ability to pay themselves off AND generate returns for investors. What’s more, sometimes the assets fail to generate an income stream capable of sustaining the debt service costs. The inevitable result is falling valuations or insolvency. For investors in these schemes, the result is a loss.

The last point worth making about this story is about the idea of income investing itself. We were yapping with our colleague Kris Sayce about the issue the other day. Kris was looking at high-yield listed investments in Australia and examining how they produced the payouts made to investors. Some of them would make Rube Goldberg, Ken Lay, and Bernie Madoff envious with their ingenuity.

The point?

Not all dividend yields are created equal. There is an assumption among today’s investors, bred by complacency, that higher yield is always available if you’re prepared to take the risk. But the way some of those income streams are manufactured, and the way the funds are structured, is, if not misleading, certainly not safe.

Not that you’re going to retire rich on bank interest. But be wary of funds promising safe yields with no risk. It doesn’t exist. In fact, we’d be wary of nearly the entire universe of financial investments at the moment. We’ll tell you why tomorrow.

You can’t blame investors for chasing yield. With real incomes falling in the Western World – as a result of a corporatist policy to off-shore high-wage jobs – the only way most people can achieve a standard of living that matches cultural expectations is to borrow money from the bank. Debt is just a means to an end. And that end is social respectability.

Perhaps that is why bankers have become so blasé about how they risk shareholder money. We’re referring to the response of former banker Saul Eslake to the news, commented on by Terry Barnes in the Age on the 13th, that Australian households have $1.2 trillion in debt – or 112% of GDP according to the ABS. That’s $56,000 for every man, woman, and little nipper in the country.

In today’s Age, Eslake says debt won’t “roon” us and that the debt-to-GDP numbers don’t convey anything significant. The important numbers, he says, are the debt-to-asset ratio and the debt payment as a percentage of disposable income. By both measures, Eslake says there’s nothing much to worry about.

To prove his point, he uses a hypothetical example where a customer walks into the bank with $100,000 in cash, annual after tax income of $100,000 and a request to the bank manager to borrow $200,000 for the purchase of $300,000 home. Elsake says, “The manager would not reject the customer’s request for a loan on the grounds that he or she would then have a debt-to-income ratio of 200 percent.”

“Rather, the manger would look at the customer’s debt-to-assets ratio, which in this hypothetical example would be 67 percent [a $200k mortgage as % of a $300k house]. Banks will normally lend for owner occupied housing up to 80 per cent of the value of the property (or up to 90 per cent with mortgage insurance. No problem there.”

No problem there?

We can think of at least one. The main one is the point we made before: the value of the property. The assumption embedded in Eslake’s risk assessment is that that the loan-to-value ratio can be that high because house prices generally go up. The borrower is getting an appreciating asset in exchange for his debt. That’s a good trade as long as asset prices rise.

It’s just worth pointing out the nonchalant assumption. Of course if house prices don’t rise, or if they fall, the debt-to-asset ratio would get closer to parity. In practical terms, the mortgagee has a debt that doesn’t change and an asset whose value does. During certain phases of the real estate and credit cycle, that is a formula for indentured servitude to the bank.

But what about the ability to service the debt? Eslake says that, “The manager would also consider the customer’s capacity to service the loan out of his or her income. Assuming a mortgage rate of, say 7 per cent, interest payments would be absorbing 14 per cent of his or her disposable income, plus a little more for principal repayment. Banks will typically lend amounts requiring up to 25 or even 30 per cent of a customer’s disposable income before becoming seriously concerned about his capacity to service the mortgage.”

What’s left unsaid here is just as important as what’s assumed. What’s left unsaid because it’s assumed is that the borrower will have an income. That’s a basic assumption, it’s true. But is full time employment over the life of the loan something you can take for granted in an economy like this? Perhaps these kinds of assumptions explain the track record of global bankers in making good loan decisions over the last ten years.

But what’s left unsaid is that the bank is obviously happy for the borrower to maximise the amount of his income that goes to service the loan. After all, the bank is getting paid. What does it care how much stress it puts on the borrower? For the bank, the borrower and his stressed out mortgage payments are just as much an asset as the collateral itself, the house.

For the bank, the borrower is a kind of fixed income investment. Mortgagees are literally a cash crop to be planted, farmed, rotated, and reaped cyclically. The bank only really risks a loss if the cost of servicing the loan breaks the back of the borrower. The banks allow for that in their loan loss and bad debt provisions. But generally, if you break your financial back it’s your problem, not the banks.

We’re not bashing on the banks, mind you. They sell money. It’s a valuable service. But we are showing that if the underlying assumptions behind their lending practices are faulty, or not in your interests, you should be very cautious when they tell you it’s okay to go into debt. They’re in the business of selling you debt. What else would you expect them to say?

Eslake adds, that “Not only would the customer’s request be approved more or less on the spot, but mindful of the ‘cross-selling’ targets, the manger would have had, he or she would have probably also offered a further $100,000 loan for a geared investment in the share market.”

To give him the benefit of the doubt, we detect a note of irony in Eslake’s telling of this anecdote. He’s not endorsing or approving of the scenario. But we think he is saying that under common practices, this is how a bank would behave and that this behaviour is reasonable, prudent, and ultimately, wildly profitable for the bank.

That tells you a lot about the banking sector. It shows you why the financial services industry has every incentive to load you up with debt so you can buy houses and stocks. And in boom times, that strategy appears to make people richer. But when the cost of capital goes up and debt deflation sets in, both banks and their borrowers will regret the debt.

And not just in a financial way, which is bad enough. Debt is not inherently evil. But it is a burden. And a society that loads itself up with obligations it strains to pay the interest on, much less the principal, is a very unhappy, heavily burdened society.

There was a lot more we meant to get today, including cyclical attitudes toward debt. But we’ve gone on too long already. More on why you should retire now and other financial taboos in Friday’s episode. Until then!

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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109 Comments on "A Funds Industry Built on Turning Debt into an Income Paying Asset"

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hoju
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“To prove his point, he uses a hypothetical example where a customer walks into the bank with $100,000 in cash, annual after tax income of $100,000 and a request to the bank manager to borrow $200,000 for the purchase of $300,000 home. ”

$300,000 ?? This was obviously an example from New Zealand then :))

Justin
Guest

Colonial First State’s paper must be trading at a discount. What’s the bet the RBA becomes ‘buyer of last resort’?

Sambo
Guest

“For the bank, the borrower is a kind of fixed income investment. ” is very telling DD, an interesting perspective thanx.

Saul Eslake
Guest
I’m very grateful to Dan for reading and discussing my piece in Thursday’s Age. Dan is right – I was being ironic in suggesting that managers of the bank I work for would have offered my hypothetical customer $100,000 for a geared investment into the sharemarket as well as approving his or her request for a $200,000 housing loan on the spot. It was an allusion to the pressure many of my former colleagues used to be under to ‘cross sell’ various financial products. He’s also right, of course, that the denominator in the debt-asset ratio, ie asset values, can… Read more »
Justin
Guest

Saul, aren’t you just saying asset values are high?

Pete
Guest

Saul, 15/01/’10: “….most of the debt owed by Australian households is owed by high-income, high net worth households; and that Australian low-income or low net worth households seem to be rather less indebted, by any metric, than their American peers. This could be because Australian lenders have been, for the most part, more ‘prudent’ than American ones, or better regulated.”

Completely agree!

Claytonator
Guest
DRA’s notoriety is gaining exponentially. I think some of the property bulls out there are starting to become disenfranchised with their former darling investments. Congrats DD on the commentary storm you have created since discussing and analysing the “OZ property bubble” and its (possible) aftermath. When you throw facts and common sense at people over a period of time it’s possible to make your biggest sceptics feel a bit woozy and disorientated. I do agree with Saul that our situation is different than the USA, however, our interest rates are higher and still rising, so I assume foreclosures will also… Read more »
Justin
Guest

Claytonator, try spectrumsuper.com.au

Pete
Guest
Claytonator, 15/10/’10: “I think some of the property bulls out there are starting to become disenfranchised with their former darling investments.” And elsewhere: “I do not know” … “…am still battling to get ahead…” “…feeling a little duped” “… peasants in a crumbling empire…” “… the peasant’s are nearing revolt…” Sounds like some of the property bears are wholly ‘franchised’ with their lot in life. ;) One thing on which we totally agree. You were duped. You’re not entirely to blame. Father Christmas, the Easter Bunny, and the Tooth Fairy are the myths on which we cut our teeth. When… Read more »
Anonymous
Guest
I like it how Saul calls loans “financial products”. How many of these housing loans were given to FHB’s in the “boom time” using their First Home Buyers Grants as the deposit? People who had no savings history and no idea what they were getting into. Now that interest rates are on the rise, and they are going to go up a lot more yet, anyone want to have a stab at the percentage of these “banking investments” are going to turn into “Bank liabilities”? Flood the market with a product:ie foreclosed houses, and the price of housing in this… Read more »
Saul Eslake
Guest
Justin, Austrlaian asset prices are indeed ‘high’ by historical standards. I wasn’t explicitly saying that in my original article, or in my comment here; but it’s true nonetheless. My point is that asset prices would need to fall by a LOT (more than they did in America, more than Steve Keen said they would) in order to increase the overall debt-asset ratio to a level that would trigger alarm bells in the case of an individual borrower. In response to ‘Anonymous’, the truth as I understand it is that (with one exception) banks and other lenders did not, in the… Read more »
Pete
Guest
PerthNow, 15/01/’10: “The Commonwealth Bank is going from strength to strength in the wake of the global financial crisis and expects a massive 44 per cent rise in first-half cash profit, boosted by fewer bad debts, improved equities markets and volume growth. The country’s largest lender expects cash profit for the six months ending December 31 to be $2.9 billion, compared with the prior year’s cash figure of $2 billion and the consensus analyst forecast of $2.7 billion.” B-b-b-but….I thought that CBA was in dire straits… headed for the rocks…. Must go back and read the above article again. (Interesting… Read more »
Bargeass
Guest

Australia’s whole economic thinking is currently based on the ‘fools paradise’ notion that China will provide never ending growth.
The longer Australia avoids a healthy, necessary correction the worse the experience will be when it actually happens.
Australians are growing fat,lazy and complacent – complacency’s a killer.

Justin
Guest

My point Saul is that you are using debt/asset value, concluding this ratio is only 20% so not a problem.

A smaller [debt/asset value] implies a higher figure for asset value, why are asset values high. I contend they are inflated.

Not only that, you will find the ‘equation’ above describes an exponential function. That is he ratio will increase exponentially as asset values decline.

Justin
Guest

the ratio will increase

John
Guest

Bargearse, 15/01/’10: ” Australians are growing fat,lazy…” Now THAT’S irony… . Delightful… . ;)

Jack
Guest

I was a meeting where Saul Eslake was the speaker.
The man thinks that stimulus & more government programs are the best solution to this problem. My blood was boiling the whole meeting.

The man is the definition of an ‘educated fool’.

Pete
Guest

“My blood was boiling the whole meeting.” Sounds like _more_ of the property bears are wholly ‘franchised’ with their lot in life.

Saul Eslake
Guest
Jack, I don’t know which meeting you’re referring to, but if your “blood was boiling” as you say, I wish you’d said so either during the time allotted for questions or by coming up to me afterwards, as people often do. I do indeed think that fiscal stimulus (principally in the form of ‘timely, temporary and targeted’ government spending) is the most effective response to a situation such as that created by the global financial crisis, where jobs are being lost, businesses are failing and interest rate policy (the usual response in more normal circumstances) won’t work because banks can’t… Read more »
SBD
Guest

Saul, try looking around the rest of this site a little. Perhaps its presumptious of me, but it seems you found your name showing up in google and looked at the comment only.

There seems to be no other sign of your posting here.
If you’d been reading the site (albeit without commenting) for the past 6mths like I have, you would not be so mystified as to why he took offence to your defense of stimulus, and most posting here would feel the same.

Eg. Read this new article, fairly typical of the site.
http://www.dailyreckoning.com.au/mr-market-never-gets-a-say-on-government-jobs/2010/01/15/

Ross
Guest
So Saul, when in the early noughties you were asked in “question time” about the yuan and trade/deficit imbalances with the US and you guffawed it off (just as you have done here with “not being Robinson Crusoe”) and so we get to the lack of substance in all your positions. Bad jobs need too be lost, under productive assets need to be written down, no asset market should henceforth primarily serve the interests of banksters, the taxman, and the bloated nanny state government ahead of those of the consumer and investor. Bubble inflated assets will be marked to market;… Read more »
Bargeass
Guest
Saul fiscal stimulus, government bailouts etc do to economic growth and productivity what welfare payments do to the work ethic. All produce the opposite of what is touted by the lazy, unworthy, greedy, gamble went bad, recipients who beg to get their hands on the money and wealth generated by their hardworking, intelligent,opposites. Why don’t you just jump to the next step and advocate Communism or Socialism as both share the same economic, philosophical, traits and consequences that any other form of government handout does regardless of the euphamistic name given to it in order to fool those whose money… Read more »
BB
Guest
Ross makes an excellent point concerning Rudd and the nanny state mentality enabled by the incorrect assumptions of the impact the GFC would have. Australia’s bloated public sector is a prime example of what Ross refers to as ‘unproductive jobs’. Despite most other private sector businesses needing to respond to market forces the GFC excuse enabled public sector employment to grow as it did under the latter years of Howard. Lindsay Tanner never got the opportunity to wield the razor and states like NSW are in a morbid torpor – they can’t even privatise the ferries because of the unions… Read more »
Pete
Guest
Saul, I’m sure you’re aware that gold can only rise if the economy collapses… as in the US. What these respondents are kindly trying to point out to you, is that their objective is frustrated by governments of any persuasion a.) keeping employment high; b.) keeping banks solvent; c.) supporting the country’s third largest industry, construction. Their ‘solution’ …. do nothing, let it all collapse… is borne of the highest moral and ethical altruism. They want to become extremely wealthy, perched atop stacks of the shiny yeller stuff. For anyone to argue that jobs, stability of the country’s financial institutions… Read more »
Ned S
Guest

“They want to become extremely wealthy, perched atop stacks of the shiny yeller stuff.”

Beg to differ there Biker – They are narked because Oz hasn’t crashed in a deflationary depression; With them being amongst the 75% who remain employed and pick up a cheap house … From what I’ve been able to make of it anyway?

Sure, there are Golden Calf worshippers amongst them – But only as a means to their ultimate cheapy accommodation inspired end. IMO?

Ned S
Guest

Gotta admit I’ve seen about one property advertised each week since that before Chrissy out of the hundreds I’ve trawled thru on the net that would be worth considering if I knew what was on Ken Henry’s mind. Which is about one more per week than over the last year! Ah, the joys of being an investor in “interesting times”! :)

Pete
Guest
Ah, Ned, Ned… thou art misled. More religiosity for ya: As his namesake, Saul, was told word-for-word (Acts 9:5-6): “… it is hard for thee to kick against the pricks…” Check it out! : http://av1611.com/kjbp/faq/holland_ac9_5-6.html Yes, that’s exactly what is says…! :) And, with just a little poetic licence (only the name has been changed to protect the Aaroncent): Exodus 32:2 And yea, after his blindness was lifted, Paul went fifth and said unto them, Break off the golden earrings, which are in the ears of your wives, of your sons, and of your daughters, and bring them unto me.… Read more »
Ned S
Guest

Then they’re even bloody stupider than I thought Biker … Surely NOT???
Jeez, at least a house really IS worth something?

Ned S
Guest

The thought comes to mind of an albeit fictional bloke from a while back who reckoned “true wealth” could be measured in four commodities – Land, gold, ivory and slaves!
Some of those have become less fashionable over the years – But the first still seems like a reasonable bet to me?

Pete
Guest
Well, it WAS worth something, mate. Then those 40% discounts rolled in and wiped me out…. !! ;) Shouldn’t laugh. We did pick up a couple of nice blocks with water views, very reasonably, during the plateau. No-one except the state’s largest developer lost out… and we’d be foolish to think he lost much…! On property investment. It really is hard to know what to do. We commenced the journey buying (many) beach blocks, one-at-a-time; then started buying special rural blocks (3-10 acres); then started buying rentals; then started building rentals. I’m now _inclined_ to think the latter is the… Read more »
Ned S
Guest
I felt the same years ago about a property I’d built with the then lady Biker – And her thoughts went along the lines of your missus. No point moaning – Us blokes usually do as we’re told! :) The 40% discounts that prove you are a midget amongst all the mental giants on this site – Yes … You have my sincere and unending condolances – I can only hope you struggle by in your ongoing penury regardless. ;) Gotta admit mate, there is no way I’m EVER going to let ANY Oz property that comes within my grasping… Read more »
Biker Pete
Guest
Ned: “”…true wealth” could be measured in four commodities – Land, gold, ivory and slaves… the first still seems like a reasonable bet….” True enough. Most of the better-off Mexicans we met in Puerto Vallarta and Sayulita (and a few little towns further south) had achieved that happy state through the sale of part of their property. Did I relate our experience swimming in the crystal-clear rivers and streams of the Sierra Madres? Many of the sandbanks below the waterfalls glittered with gold dust. My mate back in Oz, emailed: “Take a GPS reading!!!!!” It wasn’t necessary. We found it… Read more »
Ned S
Guest

VISIBLE GOLD – I like property a real, real lot Biker, but when the bullion shines at you out of the backs of the trucks that are carrying it away it’s definitely become tempting? I’m with your mate from Oz … Hey, some really strange things HAVE happened in this world?

Biker Pete
Guest

Ned: “I can only hope you struggle by in your ongoing penury regardless. ;) ”

Must admit we get a few disbelieving stares when we rock up on the bike at the tiling and carpet warehouses, Ned. “You lot… again?!!” We live very simply, Ned… he said, scoffing (homegrown) last season’s olives, washed down with a chilled Preston Vale Chardonnay, courtesy graysonline. Drowning in wine purchased every Melbourne Cup Day, when no-one else is bidding. Chardonnay? Yes, I’m a dag. Kath ‘n’ Kym are me heroes…!! :) :) :) :)

Ned S
Guest

Simple is good Biker – Although it’s very easy to fall into the trap of thinking one can’t live on bread and cheese – With some olives and anchovies for flavour. PLUS A GLASS OF PLONK! :) :) :)

Biker Pete
Guest
Ned: “…a property I’d built with the then lady Biker…” Well, my Lady Biker is a real find. Granddad helped found the VSE… had an entire drilling rig stolen in Alberta… held the patent for traffic lights. Her dad recently gave me a lump of amber as big as a fist, which came up while granddad was drilling. Scratch it and you can smell a pine forest 12,000 years old for the first time since… . My Lady Biker has never dropped a motorcycle. My right leg has sixteen stainless components… precious metal which I’ll wear to the grave. You… Read more »
Ned S
Guest

“Sixteen stainless components” – Yep, you love a bit of risk and have been rewarded! (Although I’ve known others who loved risk and whose rewards were less tolerable … :) )
Been a pleasure mate – Gotta run and make an OS phone call. Looking forward to seeing you and the lady in July! (And chatting between times.)

Biker Pete
Guest

DD said: “And we find heaps of evidence that your best bet for a financial future is to retire now. ”

Was there a follow-up to this, Ned? I’m only 63… too damned young to retire! Will our booming state continue to _function_ if I pull the pin, now?!

Biker Pete
Guest

Tamara, then.

Ned S
Guest

Phone call made – Yes, the consoling thought is that the world will get by quite happily without any of us. I realised that when I saw Bob Hawke’s cheeks awash with water on being dumped! :)
To continue the OT theme – A pearl beyond price.
Snooze time – Cheers … Ned!

Pete
Guest
Ned, seeing as we both face a similar issue delaying construction of our next projects, I’ve been looking at retrospectivity and the rule of law. In past decades the government/taxation department has accepted that our property acquisitions were undertaken with the understanding that the rules were X, Y and Z… and that our liability should be according to those ‘old’ rules. I’d expect all our _current_ property to fall within the ‘old’ rules, even if the KRH implemented ‘new’ rules. It therefore seems to me that it may be quite foolish to delay our new construction projects, particularly since there… Read more »
Ned S
Guest
It’s certainly my understanding that Australia doesn’t often/ever(?) tweak tax laws retrospectively. Considering that and the potential negative effects generally, I find it almost impossible to imagine that for example, a property that had been purchased/built on the presumption of negative gearing applying, would have that negative gearing facility removed in the future. But my main issue is a bit different to your’s perhaps, in that I’m waiting to try and get a bit of an indication of what entity types assets might be best held in – With Super and a Discretionary Trust being pretty obvious options. As I… Read more »
Pete
Guest

Think I’ll go ahead, Ned. Super is beginning to look iffy… . Notice our little friend is still hitting us both with Minus Ones, mate. We must getting to him… ! :)

Ned S
Guest
I can’t see any reason why you wouldn’t go for it Biker. The land tax question is another potential one for me though – I’d like to keep anything I develop – So getting things in the names of different entities could be useful there too. Yes, if I start getting anything other than minus one, I might have to have a big rethink about everything I’m considering. I see Doc Cowie has gotten all concerned about banks giving loans of 30% of people’s disposable income – Seems strange – I thought that was regarded as quite acceptable? DRA really… Read more »
Ned S
Guest

errata – “loans of 30% …” => “loans based on 30% …”

Pete
Guest

Ned: “DRA really is getting pretty uptight about debt!” Well, it’s actually getting harder to find anything to panic about, in Oz. Always amusing to see these little insertions from the tin tanks, bewailing the(ir) situation. One thing DD is right about, Ned. Americans really are still asleep at the wheel… .

Ned S
Guest

There would seem to be some logical inconsistencies coming through – On one hand we’ve got talk of be careful because it’s “a time of rising interest rates” (which implies growth and inflation.) And on the other we’re still hearing the woe unto Oz property prices storey. Guess we’ve just got to make our own minds up.

“Americans really are still asleep at the wheel” – Wouldn’t have credited it! I’d assumed they’d figured out they are looking at a few lean decades? With the only real question being just how that impacts the rest of us.

Pete
Guest
Ned: “….we’re still hearing the woe unto Oz property prices story…” All the repetition doesn’t make it so. It’s not hard to create a culture of dissatisfaction with the promise of half-price houses. What’s harder is to maintain that culture when the promise isn’t fulfilled. What we saw in two of America’s largest cities leads us to believe that a fuel crisis would cause sheer panic and dismay. Take Bill’s latest vehicle purchase, for example… an F350. His apologetic rationale “Fuel’s cheap here” (compared to Europe) means he’s really learned little there. One of the reasons outer-suburbia, with its huge… Read more »
Tim
Guest
Surely ’tis a slight mark of approval to have someone so, and you can’t deny this, well regarded as Saul Eslake comment on DR. I also think his responses have been measured, polite, to the point, and I might say, logical. Be good if others could observe the same civil manner. Thanks for your thoughts, Saul, it’s a pleasure to be able to hear first hand the thoughts of someone so well regarded. Disclosure: I’m not a property bull. My dear old grandfather (W Sage of Sage Bros Real Estate in the Bayside Mel area – many years as an… Read more »
flawse
Guest
Two SMALL items that seem to be missed here. Where would property prices be if we had not stabilised our economy temporarily by selling off another $100BILLION worth of equity in our own nation in one year????? The amount of the govt stimulus including First Home Vendors Grant, and the Gerry Harvey thank you package, is one thing. This is easily dwarfed by the amount of equity in our resources and companies sold off last year. Australia absorbed 15% of the world’s savings last year. This money is not sent here because they LIKE us or we deserve it!!!! It… Read more »
wpDiscuz
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