The current sharemarket crisis is all about 'bad debt' and high debt and poor debt to equity ratios. See the hit Allco, Babcock and some of the other finance companies are taking. I was wondering in real terms how much debt does the average somersofter have? Not too concerned about income just the level of debt.
Debt
- Thread starter aussierogue
- Start date
Hi Sue - point taken. Yep by itself it may not seem so relevant. The issue I reckon is that valuations rise and fall, income rise and fall but debt is debt. The only way to clear it is to pay it.
Its just interesting to see the level of debt out there.
Its just interesting to see the level of debt out there.
The other way is to not pay it, and not clear it
When I'm an old man, the debt I have today will be pocket change.We investors are a bit different to companies on the sharemarket, in fact some would argue that the property market has an almost inverse relationship to the sharemarket.
It's times like these that residential property investments will shine, with low rental vacancies our income increases year after year while our debt stays static or declines. As the cycle moves on, property is revalued to reflect the new rents and we all have a laugh
Hi Dantheman
Yes you could not clear it - but you still need to service it and if rates go up and your income is reduced then this could cause strain.
Good debt is good but its not perfect. There is no such thing as perfect debt.
I think it will be an interesting time ahead. Yes I also hope that the property market will take advantage of the sharemarket plunge.
I always get a bit chicken little when i see the sharemarket take a big hit....
Yes you could not clear it - but you still need to service it and if rates go up and your income is reduced then this could cause strain.
Good debt is good but its not perfect. There is no such thing as perfect debt.
I think it will be an interesting time ahead. Yes I also hope that the property market will take advantage of the sharemarket plunge.
I always get a bit chicken little when i see the sharemarket take a big hit....
(Poll-nazi hat on)
And looking at the level of debt without looking at assets and income would achieve what, exactly? Does having $4m in property and $2m in mortgages mean a person is more 'at risk' than someone who owns $200k in property and has no debt?
Allco, MFS, Centro, etc are more about debt MISMATCHES. i.e. short term loans coming due and the inability to refinance them.
Alex
True there is no perfect debt, but there are ways to mitigate the risks. Aconservative LVR along with fixing 1/2 your rates can cushion the impact of any cost increases. If you want further protection there is always landlords insurance to cover your vacancy periods - although I don't think there's much vacancy going on at the moment.
The sharemarket hit might spell doom for the economy, but I think we all hope that it will pave the way to lower inflation and thus lower interest rates. Or at least prevent the RBA raising rates further..
The sharemarket hit might spell doom for the economy, but I think we all hope that it will pave the way to lower inflation and thus lower interest rates. Or at least prevent the RBA raising rates further..
Hi Poll Nazi - you are right it doesnt mean anything conclusive on its lonesome but I think looking at overall debt has some merit purely because it the one element that doesn't vary with changing markets. Income changes and valuations change.
Re debt mismatches - so your talking an inability to service an investment - so income or flow of funds...things might seem different........
Re debt mismatches - so your talking an inability to service an investment - so income or flow of funds...things might seem different........
Not for centro et al. Their problem is the inability to REFINANCE, not service. It's like saying I have a 500k debt, and I have the cashflow to easily service the 80k a year interest. However, if the loan matures, and I can't find anyone to renew the loan, then it doesn't matter how much I can service. that's the problem Centro is having. No one is saying their shopping centres aren't making a profit.
Alex
LVR is important. Cashflow is even more important.
The actual amount of the debt, less so.
Alex
The sharemarket will only be a hit for the share market investors, and the public companies that sell their shares to the investors.
Some will disappear, some will go bad for a time, but there will always be another company to provide the public with the goods they require.
Most of the world is not in the sharemarket.
Rather, they just live from week to week. The average sheep will still pay the rent, pay the mortgage, buy their groceries and go camping in Echuca on their holidays, still pay their cable and Netflix bills.
Totally correct Alex.
I think in order of importance it is:
1. Cashflow.
2. Cashflow.
3. LVR.
4. Cashflow
5. Return On Investment.
No good getting a gazillion % return if you go broke due to a loan default.
If you assume that property goes up over the long term, then all you have to do is survive until the market lifts your net assets.
Cashflow (and open LOCs) allows you to meet interest immediately. LVR theoretically allows you to tap equity, but this is not as good as cashflow or an already-open LOC, because it depends on whether a bank is willing to give you the loan in a tight market.
If you are able to meet your interest payments, and none of your loans are up for renewal soon (since we use 25+ year mortgages that's unlikely, unlike Centro et al who used some short term funding), who really cares what your debt is?
Alex
Cashflow (and open LOCs) allows you to meet interest immediately. LVR theoretically allows you to tap equity, but this is not as good as cashflow or an already-open LOC, because it depends on whether a bank is willing to give you the loan in a tight market.
If you are able to meet your interest payments, and none of your loans are up for renewal soon (since we use 25+ year mortgages that's unlikely, unlike Centro et al who used some short term funding), who really cares what your debt is?
Alex
I don't believe this at all. No debt basically limits profit.
Using funds at hand could have reulted in a before tax profit this year of $125k profit.
By borrowing at what is a conservative level in our opinion, and given that there is enough money in the bank for 5 years of mortgage payments (not taking into account rent) for brand new properties within 15km of Brisbane .
The before tax profit will be closer to $500k.
I think generalising is never good, its weighing up LVR, servicability and the quality of the property.
Nice sound bite, and way too simplistic. Trying to play not to lose, but in reality inflation will run you over in the long run. I don't have such a great soundbite for saying how debt should be used, since it's not that simple and any 'slogan' like statement is going to be misleading.
What level of debt is 'safe' depends on your age, circumstances, income, other assets, job, skills, etc. In the accumulation phase, debt is a great 'kicker' for the portfolio. There are ways of using debt safely.
Alex
