All is well until tommorows online article

[tom32]

But instead of having it thrust upon them why does one bank of the big 4 at least say OK we are going to offer our loans at a 1% discount to the other banks and only lend to people with an LVR of 0.7 or less.

There would be many here who would jump at it I imagine and surely it would be easier for this bank to raise truckloads of funds and not have to wast money on realisations themselves.

Apart from anything else if you were the director of the first bank to move you immediately start shoring up your loan assets and if there ever was a reversal in housing fortunes (preferably at least a few years after changing criteria) you would be in the best place to weather it and then grow the business afterward.

 

[Aaron Sice]

i guess it just goes to show the nature of the industry.

wasn't 18m ago where all the MB's on here were posting updates about 80% lends - that's it, judges decision is final etc, low docs are 60% - p__s off otherwise.

now, still not out of the woods, we're back to 95% lends, 70% low-doc product (higher serviceability calcs, given...) etc.

bansk aren't a sustainable debt vehicle. they need more more more to feed more more more to lend more more more to feed more more more etcetera.

 

[willair]

Apart from anything else if you were the director of the first bank to move you immediately start shoring up your loan assets and if there ever was a reversal in housing fortunes (preferably at least a few years after changing criteria) you would be in the best place to weather it and then grow the business afterward.

I don't know about that one,but any Director in any of the top 6 high end banks in Australia who tell you that they value process over result are not telling you the whole truth..willair..

 

[Perth Investor]

It is happening a little bit. Until the last few months banks like Bankwest had priced 95's at over 7% and still had loans for 90% and less at 6.7/6.6 or so.

Homeside (Powered by NAB...) has a product at 6.47% for lvr's of 75 or below, which is .1 cheaper for them, and pretty much .2 or .3 cheaper than the other big 3 banks.

I think when the credit reference laws change and they can do a "positive" check, rather than a "negative" check, as we have now, you will find much more pricing for risk, and you might find the banks play around with the lvr's some more at that point with pricing.

Pricing for risk is common overseas, my brother is getting a loan reviewed in London right now, if the val came in short his interest rate was going to be a staggering 5%. Lucky for him the val came in at the right amount, so it is a much more reasonable 2.5%...

 

[tom32]

I just suspect it would be better for everyone perhaps except the salaried top execs if things were done in a controlled manner now, a gradual ratcheting back in LVR's over time let incomes catch up aggregate savings and then we can all move on with a more robust financial system. We might even increase the capitalisation requirement for banks along the way too.

the alternative to this is to let the market rip so to speak and yes I agree banks will chase the most dollars for this financial year because most of the people in control have an interest in short term profits over long term problems. Basically preserving capital is not as important as squeezing teh capital for the biggest return it can be. In essence by just getting rewarded based on their performance in that year it encourages the wrong behavior. Even worse if it goes tits up they walk away with a golden handshake.

I don't know what to say about it other than it seems strange society has not come up with a better way to mitigate risk in an area that is so crucial to society at large not just the banks themselves.

I wonder if Chifley had it right over 50 years ago. Banks are too important to leave in private hands. Personally I don't think this is the answer but surely there is a happy middle ground where they can part way regulate them.

 

[tom32]

It is happening a little bit. Until the last few months banks like Bankwest had priced 95's at over 7% and still had loans for 90% and less at 6.7/6.6 or so.

Homeside (Powered by NAB...) has a product at 6.47% for lvr's of 75 or below, which is .1 cheaper for them, and pretty much .2 or .3 cheaper than the other big 3 banks.

I think when the credit reference laws change and they can do a "positive" check, rather than a "negative" check, as we have now, you will find much more pricing for risk, and you might find the banks play around with the lvr's some more at that point with pricing.

Pricing for risk is common overseas, my brother is getting a loan reviewed in London right now, if the val came in short his interest rate was going to be a staggering 5%. Lucky for him the val came in at the right amount, so it is a much more reasonable 2.5%...

Aussie also had one at lvrs below 60 I noticed. That was actually when I got thinking why don't the big banks do this.

This is the pertinent question though. If you were going to lend someone money would you put only a 0.2% premium on the person with a 95% lvr?

If it was me I would lend my money to someone with a house and wanted a 50% loan against it to say buy a second IP if I got the house if they got into trouble at a rate far better than someone who wanted it for say a lvr of 0.8 even. While they play around with the edges the risk for each loan just does not seem to be priced in and I wonder if the system is more fragile because of it.

I reckon the premium of 0.5 over 0.8 for me if I was handing out my hard earned probably happy with my 6.5% for a 0.5 more like 7.5% for the 0.8lvr.

What is interesting above U bank also powered by NAB is offering 6.51% for deposits at call? And what they take that and loan it out through Homeside at 6.47%. Maybe it is tougher being a banker than I thought... Where do they make a quid out of that transaction?

 

[HomeBuyerStrike]

Pricing for risk is common overseas, my brother is getting a loan reviewed in London right now, if the val came in short his interest rate was going to be a staggering 5%. Lucky for him the val came in at the right amount, so it is a much more reasonable 2.5%...

An acquaintence had a review with a UK bank in Ireland about 6 months ago as part of their triage process. Both parties came into the meeting with an axe to grind. The bank wanted their money back and the consortium wanted a rate reduction. The bank relented in the end when they saw the guys loan was performing. The agreement was a rate reduction in return for a small capital reduction. This is a commercial loan.

 

[BayView]

6.25% annualised wouldn't rock my boat personally. Demand deposit wouldn't fare much worse with negligible risk and zero hassle.

Sounds good, but there is a slight difference.

The difference being that with the IP you have the rent, the expense deductions (including the depreciation) to add to your 6.5% appreciation.

Oh; did I mention the tax refund?

And, you can combine all the above (including the tax refund) so that your nett cashflow is positive.

Cash back in your pocket, no tax on it, and the property goes up.

To me; the Bank deposit is little effort, little return.

This is what most people want; the path of least resistance.

A lot to do with why so many people pin their hopes on super, the pokies, the gallopers and Tattslotto I suspect.

 

[Perth Investor]

Sounds good, but there is a slight difference.

The difference being that with the IP you have the rent, the expense deductions (including the depreciation) to add to your 6.5% appreciation.

Oh; did I mention the tax refund?

And, you can combine all the above (including the tax refund) so that your nett cashflow is positive.

Cash back in your pocket, no tax on it, and the property goes up.

To me; the Bank deposit is little effort, little return.

This is what most people want; the path of least resistance.

A lot to do with why so many people pin their hopes on super, the pokies, the gallopers and Tattslotto I suspect.

Put $100,000 in the bank

Make 6% interest, $6,000

Pay 31.5% tax, left with $4,110, so you now have $104,110 in the bank.

Of course with inflation at 3%, you need $103,000 just to buy what you could have 12 months ago.

So you have made $1,110. Well done, very good, very safe investment. If you're in the top tax bracket it's even worse.($6,000 - 46.5% = $3210, inflation at 3%, you made 200 bucks...).

Cash in the bank is a terrible investment, it's ONLY benefit is safety and a guaranteed return, but if the guaranteed return is 1% you can keep it thanks.

A positive inflation rate is government policy (the target isn't "under 3" it is "between 2 and 3", i.e. running inflation ABOVE 2% is government policy). Whilst a positive inflation rate is government policy, and whilst they are successful at implementing that strategy, cash will always be a terrible investment, and use of debt will be a good strategy. What you use the debt for will decide if you are a good investor or a great investor, or really bad at it.

I mean think about it, it's like having to do a test with the answers: "your 18 years old, in 24 years your $100K will be worth $50K, and 24 years after that it will be worth $25K, what do you do?"

Answer: Borrow as much as you can...

 

[HomeBuyerStrike]

I mean think about it, it's like having to do a test with the answers: "your 18 years old, in 24 years your $100K will be worth $50K, and 24 years after that it will be worth $25K, what do you do?"

Answer: Borrow as much as you can...

And if there is serious deflation?

 

[Perth Investor]

And if there is serious deflation?

You lose, simple.

But (in the Western world) one example in 50 years does not a pattern make. This is the last 60 years, where is the smart money do you think?

Year Mar Jun Sep Dec Annual
2010 2.8881% 3.0539%
2009 2.4661% 1.4581% 1.2613% 2.1084% 1.8201%
2008 4.2416% 4.5079% 4.9811% 3.6852% 4.3526%
2007 2.4358% 2.0739% 1.8626% 2.9582% 2.3324%
2006 2.9831% 3.9757% 3.9386% 3.2537% 3.5385%
2005 2.3595% 2.4862% 3.0261% 2.7986% 2.6687%
2004 1.9816% 2.4770% 2.3223% 2.5910% 2.3436%
2003 3.4407% 2.6890% 2.5993% 2.3656% 2.7707%
2002 2.9390% 2.8401% 3.2042% 3.0281% 3.0032%
2001 5.9904% 6.0222% 2.5210% 3.1226% 4.3808%
2000 2.7915% 3.1889% 6.0778% 5.8018% 4.4752%
1999 1.2469% 1.0744% 1.7312% 1.8048% 1.4654%
1998 -0.1660% 0.6656% 1.3367% 1.5833% 0.8535%
1997 1.2605% 0.3339% -0.3331% -0.2494% 0.2504%
1996 3.7489% 3.0981% 2.1259% 1.5190% 2.6124%
1995 3.8949% 4.4964% 5.0938% 5.0532% 4.6381%
1994 1.3774% 1.7383% 1.9126% 2.5455% 1.8950%
1993 1.2082% 1.8639% 2.2346% 1.9462% 1.8131%
1992 1.7013% 1.2264% 0.7505% 0.2788% 0.9859%
1991 4.8563% 3.4146% 3.1946% 1.5094% 3.2227%
1990 8.6114% 7.6681% 6.0575% 6.8548% 7.2784%
1989 6.7816% 7.5706% 7.9823% 7.8261% 7.5482%
1988 6.8796% 7.1429% 7.3810% 7.6023% 7.2564%
1987 9.4086% 9.2593% 8.2474% 7.1429% 8.4906%
1986 9.2511% 8.4648% 8.8359% 9.7662% 9.0845%
1985 4.4479% 6.5749% 7.7039% 8.1845% 6.7424%
1984 5.8442% 3.9746% 3.4375% 2.5954% 3.9370%
1983 11.3924% 11.1307% 9.2150% 8.6235% 10.0520%
1982 10.6000% 10.7632% 12.4760% 11.0497% 11.2289%
1981 9.4092% 8.7234% 8.9958% 11.2705% 9.6144%
1980 10.6538% 10.8491% 10.1382% 9.1723% 10.1863%
1979 8.1152% 8.7179% 9.3199% 10.0985% 9.0794%
1978 8.2153% 8.0332% 7.8804% 7.6923% 7.9507%
1977 13.8710% 13.5220% 12.8834% 9.2754% 12.3172%
1976 13.1387% 11.9718% 13.9860% 14.2384% 13.3508%
1975 17.5966% 16.8724% 12.1569% 14.3939% 15.1759%
1974 13.6585% 14.6226% 16.4384% 16.2996% 15.2955%
1973 5.6701% 8.1633% 10.0503% 12.9353% 9.2405%
1972 7.1823% 6.5217% 5.8511% 4.6875% 6.0403%
1971 4.6243% 5.1429% 6.8182% 7.2626% 5.9744%
1970 2.9762% 3.5503% 3.5294% 4.6784% 3.6873%
1969 3.0675% 3.0488% 3.0303% 3.0120% 3.0395%
1968 3.1646% 3.1447% 1.8519% 2.4691% 2.6521%
1967 2.5974% 2.5806% 4.5161% 3.1847% 3.2206%
1966 4.0541% 3.3333% 2.6490% 2.6144% 3.1561%
1965 3.4965% 4.1667% 3.4247% 4.0816% 3.7931%
1964 1.4184% 2.1277% 2.8169% 3.5211% 2.4735%
1963 0.0000% 0.0000% 0.7092% 0.7092% 0.3546%
1962 0.0000% -0.7042% 0.0000% 0.0000% -0.1770%
1961 4.4444% 3.6496% 1.4388% 0.7143% 2.5408%
1960 2.2727% 3.7879% 4.5113% 4.4776% 3.7665%
1959 1.5385% 1.5385% 2.3077% 2.2901% 1.9194%
1958 1.5625% 0.7752% 0.7752% 1.5504% 1.1650%
1957 5.7851% 3.2000% 0.7812% 0.7812% 2.5896%
1956 3.4188% 5.9322% 7.5630% 6.6667% 5.9072%
1955 0.8621% 1.7241% 2.5862% 3.4483% 2.1552%
1954 1.7544% 0.8696% 0.0000% 0.8696% 0.8696%
1953 7.5472% 4.5455% 3.5714% 1.7699% 4.3084%
1952 23.2558% 20.8791% 16.6667% 9.7087% 17.2872%
1951 14.6667% 16.6667% 21.5190% 25.6098% 19.7452%
1950 7.1429% 9.8592% 8.2192% 10.8108% 9.0278%
1949 0.0000% 0.0000% 8.9552% 8.8235% 6.6667%

 

[adso]

Getting Double-Taxed on Savings just seems so broken...

 

[Graemsay]

One of the things that the Henry report was looking into was how different savings vehicles are treated differently by the tax system.

I'm not sure what his recommendations were, but the pre-report discussion implied that tax on savings would be reduced, as would negative gearing.

 

[HomeBuyerStrike]

I'm not sure what his recommendations were, but the pre-report discussion implied that tax on savings would be reduced, as would negative gearing.

The Henry report made a lot of good theoretical suggestions but they were also politically toxic. The time to change negative gearing would have been while it was still a safety net and not yet a structural support. There may come a time when it becomes politically palatable to change this policy but it will have to be when there are bigger problems.

 

[Aaron Sice]

you're right there HBS - it would be suicide for any party to phase out neg gearing.

shame - i think it's taken advantage of on both sides, myself.

i mean, i understand if your shortfall is $50 a week - fine, we should compensate smart but small losses that provide housing.

but i hear - regularly - people being hocked up to the eyeballs in neg gearing debt.

but then, if they scrap neg gearing, there'll be a flood of homes that can't be "afforded" anymore on the market, and reduced private rentals which puts even more pressure on the public housing arm of your state government. so the government have come to rely on it just as much as the investor.

which is why i see it going nowhere.

 

[tom32]

I'm not sure what his recommendations were, but the pre-report discussion implied that tax on savings would be reduced, as would negative gearing.

It was a token effort what the government has put up. I think it is 30k per person you can keep without paying tax on the interest. The only good thing to come out of it is I feel rich now because up until then we kept all our savings in my wifes name due to the lower marginal rate of tax. Now we have put 20k in my account due to the tax free threshold. I am pretty sure though it is 30k you don't pay tax on? I might have to hit the missus up for another 10k...

I completely agree with the above posters around tax on deposits and while I am a little bearish medium term on property I will possibly soon buy a PPOR because of the way savings are taxed. We are getting to the point now where my wife is starting to get hit up on FTB's because she does work part time and the interest is effecting things when combined with her and my pay and our 3 kids. We buy a house and all these problems disappear, we pay less tax and make more FTB.

It is ridiculous as Australians we would be considered poor in an assets sense as we do not own a home so have no "home equity" and yet we pay tax on our measly interest. We cannot get FTB's and yet if we buy a house we both pay less tax and get welfare in the form of FTB's!

In return for paying this extra tax and missing out on stimulous monies and FTB's we get $850.00 a year each in the FHSA's! Australia rather than being geared up for saving for a house knows this is futile and seems to raise and lower the bar as necessary on demand side stimulous to allow people to buy into the market and ensure a stream of funding by buying RMBS for "competition" reasons. The competition of course is with my U bank deposit! I guess this must be how you guys feel when the gov says it is building 20,000 government houses for renters.

I am no where near this position below while I wish I was... but here is an example of how even with our current seemingly ridiculously low capital city yields a PPOR still come out even on income / income saved V a U-bank high yield deposit:

Say you have 500k saved

Option one stick it all in U bank a 6.51% (you would need to put this across 2 accounts:

Interest Income: $32,550

Marginal tax rate, lets assume 40c: $13,020

Nett: $19,530.00

Isn't it a coincidence that as far as family homes in capital cities go 20k is about what you would save in rent by buying, in fact probably more, certainly if you take council rates out and repairs you would be around that money I would say. I suspect there are quite a lot of people who say stuff buying a house they are too dear (as I did when I was 25) get into there mid 30s and find that the entire Australian tax system is geared to buying a house. Add to this howards Family Tax Benefits and you are nearly forced into a PPOR just to put your savings somewhere to stop them earning income.

All this said while this is a compelling argument for buying when you have a bit saved I think the maths is different on buying IP's with money at a cost of 6.5% p.a.

 

[tubs]

6.25% annualised wouldn't rock my boat personally. Demand deposit wouldn't fare much worse with negligible risk and zero hassle.

Mr Troll,

That's 6.25% annualised return on somebody else's money. The amount the investor puts in is significantly smaller, increasing the returns astronomically. I'm sure you know it. It's called leverage and it's the thing you're hoping nobody pointed out in your opening statement.

Anyway, I've called you out on your lack of economic credibility in another post before, so I suppose that's 2 points to the good guys now.

 

[HomeBuyerStrike]

Mr Troll,
...
Anyway, I've called you out on your lack of economic credibility in another post before, so I suppose that's 2 points to the good guys now.

Normally I'd use my inbuilt ignore function for posts like this but you've illustrated perfectly an attitude problem shared with some others. If you'd read the thread, you'd find the issue of leverage and impact on magnitude of positive and negative risk has been dealt with. Thanks for your invaluable contribution. Trolling indeed.

 

[HomeBuyerStrike]

Isn't it a coincidence that as far as family homes in capital cities go 20k is about what you would save in rent by buying, in fact probably more, certainly if you take council rates out and repairs you would be around that money I would say.

Is this ignoring the 'rent' on the mortgage capital though? i.e. mortgage interest. I agree that most people don't think of mortgage interest as rent but I'm curious as to which figure you're comparing to.

 

[HiEquity]

Rent cover mortgage? Where? I'll invest myself.

I dunno - maybe here?

Some on here would be happy to take on board all the positive risks highlighted and block out any notion of negative risk, such is the nature of cognitive dissonance.

Cognitive dissonance cuts both ways.

People who decided to buy property that may not have performed very well can use it to defend the perceived wisdom of their decision.

Likewise, people who decided not to use high leverage and not buy property that since performed very well indeed, can use it to defend the perceived wisdom of their decision.

Which one are you? Whether you are in or out of the market, you can still suffer from it...

In negotiating terms this would be referred to as Best Alternative To Negotiating Agreement, or BATNA for short.

Someone remembers the negotiating lectures from their MBA. I have found the concepts useful when negotiating with vendors when purchasing property, particularly in trying to discover their resistance point. Apart from that, they haven't been much use in adding to my wealth...

Property investment is a lot harder than the main stream media imply or how popular opinion would suggest.

Totally agreed. There is an absolute heap of dross for sale out there. There are also some properties for sale right now which will make their new owners an absolute motza. This forum is meant to assist investors identify the latter. Do you have any contributions on that subject?

It is for most a means to an end. I do not put money in a deposit thinking that is where it is going to stay forever and start mapping my retirement out using a bank deposit as the way to get there. However it is a sure way of saving for the house you want with no risk.

No it's not. Apart from questions about ongoing govt guarantees, going by history by far the greatest risk with this strategy is that house prices and deposit requirements will appreciate much faster than the vast majority of people can save. I know an awful lot of people who are feeling pretty stupid right now for pursuing this "no risk" strategy that has been very detrimental to their wealth.