Economists float radical home plan (long 2c)
Reply: 2.2
From: Tibor Bode
Hi Bob,
No legend (apart from lunchtime), just a simple real story.
Back in in 1988 I used to be at one of our large insurance company as a PM. One day all managers were called in by the MD (swiss guy) and we were told that National Mutual
and AMP going to get married. Everyone (including me) was shit scared that if a behemoth like that will be on the market, whats happening with us. After the announcement the MD asked "Who sees here an opportunity?". Out of 78 or 80 manager maybe 3 raised their hands (I was not among them).
Then he clearly explained why it was not a danger but an opportunity. When two buearocratic giants try to merge their operation it takes at least 2 to 3 years. During that period of time their customer service, pricing, market focus and everything else will fall as people in both organisations will be primarily occupied with their own job, not with the company's
business. It thought me a lesson about seeing opportunity when everyone else is running scared. RK has an excellent tape about the subject "What my Rich dad thought me... about profiting during financial crisis". It is an excellent tape and whenever I feel something is hopelessly out of control, I listen to it. It puts me back to the right frame of mind.
Can you imagine that large financial institutions ever can be so efficient than small players? I don't think so. They might have the might, but thats all.
But before I would get stuck into the details firstly (after reading all 17 pages of this entire garbage) I realised that the issue is;
WE DON'T DIVERSIFY AND BUY SHARES AND MANAGED FUNDS AND ALL OTHER THINGS WHAT MAKES BIG PROFITS FOR THE INSTITUTIONS!
We are (collectively) all stupid as we invest more in real estate than the total value of the entire stock market. Maybe we just should sell up and buy shares and diversify. I think the rich is also stupid (as they have big holdings in real estate ) and the banks are also stupid to lend us much more on this undiversified assets class than on their own shares. According to this report we should have limited partnerships
(owner is the general partner, institution is the limited partner)
After this, I personally think this is rather a stupid idea. As Dan said, people one day want to own 100% their own home. Some of the points they are raising are very questionable, but look at them one by one;
Radically reduce the costs of home ownership;
(I thought this tune was already played not long ago, when subdivisions were coming in. Damn, it did not work, so what about trying this).
Yep, today it also can be reduced you just buy a smaller house, or buy a unit or buy further out, don't keep up with Jones, etc, but you still have 100% ownership. After this you will have only part ownership with all its problems.
Significantly increase the average family’s disposable income and expected wealth at retirement;
Yep, and the average family will go out and invest all their leftover in managed funds and shares and will diversify (and pigs will fly). Sorry folks it means vast majority of people will buy more doodads then invest what is left over (not much) and then they will have a big doodad retirement party. What is then invested will be "well looked after" by the same institutions(in the form of fees), by the government (in the form of taxes), then you may retire (and live happily ever after).
Enhance saving and investment opportunities over the course of the life-cycle;
see as above
Decrease household debt-to-equity ratios;
and also decrease household wealth by having less asset and having less growth of that assets.
I am not sure were some of these people employed by One.tel or HIH or FAI, etc. or even maybe learned financial accounting at one of the big 5s then went and audited and did accountancy at Enron?
What a convoluted logic. I have not reached this height in accountancy as yet, but my simply mind says if you borrow 80K on a 100K property (LVR 80%) is exactly the same as if I borrow 40K on my 50% share of the same property. Or am I missing something here? Yes I should count 100% of the property value as an asset, then its fine. Yep, now it makes sense. Anyone for a creative accountant?
Raise the rate of home ownership;
Its another beauty. So 8 million Australians owing 100% of their home is less good than 16 million Australians owing 50%? Maybe it is good from some sort of political point scoring point of view, not quite sure about
the benefit for Mr and Mrs average. But I guess, it will be just as good as any other statistical "truth". Just think of the headlines "90 percent of Australians are homeowners" (be,bebe,be,be) and also diversified (be, bebe, be,be).
Present a solution of sorts to many of the problems of an ageing population;
Like health care, living standard, lack of sufficient retirement funding, future problems with shriking tax revenue base, aged care, etc, etc. Maybe we just print a bit more money thats solves the problem as well isn't it?
and,
Effectively create a new and highly uncorrelated, one to two trillion dollar asset class.
Yep, for the financial institutions. They also start to realise that the Australian housing market worth more than the entire stock market and would love to put their little pows in the honey pot, especially after how well the diversified other asset classes performing lately. I still just don't get it how Mr and Mrs Average will be better off. Maybe having 50% asset (their biggest asset(apart from the doodads assets), their home value just shrunk by 50%). This can be brilliant, all we need just to increase the house prices by 100% (Mike here comes the boom of the century)
and leave inflation as it is. OH, then we are exactly in the same position as today! Never mind, just buy lots of shares an diversify as we made all big institutions (and their directors and shareholders) very wealthy and problem is solved.
One never knows, it might even solve the GST problems as well.
I hope this 2c is fully satisfying.
Tibor