House Prices Slump

[WinstonWolfe]

Why save???

bye

it is an interesting question.

Suppose it comes down to risk adjusted rewards.

I agree capital should be kept active. It is better to have it 'working' to improve the supply of goods and services, rather than just sitting horded in the perth mint as gold or under the bed as cash.

The paradox about saving is that savers are subversively considered too ignorant to know how to invest their money towards improving the supply of goods and services. Their savings then are lent to 'smarter' people to this end, and the smarter profit.

What happens when everyone wants to invest directly, and not lend their savings via banks to others? Do we end up with a more efficient market economy?

Hard to know.

What is for sure though, the more Aussies want to invest directly, rather than save, leveraging into assets relies on borrowing foreign funds.

And that exposes us to the risk of foreign funds becoming less available or more costly.

 

[Bill.L]

Hi all,

WW, the example I used does indeed ask many questions.

If the interest on the money saved had been spent on living expenses instead of being allowed to compound, then the "value" of the $40,000 today would be so much less than 30 years ago. However if the money from the rents over that period had been spent on living, then the value of the house would still remain.

Whichever way I look at it, spending the money on an income producing asset, that tends to hold its value relative to inflation, always seems to come up trumps.

In any one year the situation can look different, but over the longer term the relentless march of both taxation and inflation destroy the value of 'savings'.

A large part of our savings are in an offset account, to minimise the effect of taxes on savings while giving the buffer needed, compared to paying off loans.

A house, owned outright in the example I gave earlier, is close to the 'safest' type of investment. You do not have to worry about other people making decisions that can destroy your investment (ie CEO's).
About the only downside risk is anarchy/war, in which case savings in a bank would not be safe either.

Evand,

One point people dont realise is that the interest is compounding, so this generally makes up for the inflationary loss.

Except that you have to pay tax on the interest, which alters the sums.
The example I gave included compounded returns on savings. The inflation effect is such that all those compounded returns still leave you well behind someone who bought a house with the same money 30 years ago.

bye

 

[boz]

it is an interesting question.

Suppose it comes down to risk adjusted rewards.

I agree capital should be kept active. It is better to have it 'working' to improve the supply of goods and services, rather than just sitting horded in the perth mint as gold or under the bed as cash.

The paradox about saving is that savers are subversively considered too ignorant to know how to invest their money towards improving the supply of goods and services. Their savings then are lent to 'smarter' people to this end, and the smarter profit.

What happens when everyone wants to invest directly, and not lend their savings via banks to others? Do we end up with a more efficient market economy?

Hard to know.

What is for sure though, the more Aussies want to invest directly, rather than save, leveraging into assets relies on borrowing foreign funds.

And that exposes us to the risk of foreign funds becoming less available or more costly.

...and of course the risk of seeing these money going back overseas and devaluating the AU$ (like it is happening now).
I don't know exactly how the savings is calculated, but I presume that if money is used for housing the part that will devaluate (dwelling) will be only in part considered savings, while the part (land) that will have always value will be considered investment. For sure saved money will be invested in businesses or spended by the gov like it happened in europe where the household savings was going into gov bond and then spent.
But in Australia we can't complain to see these Chinese and Japanese buying Australian assets and businesses as Australian spend their earnings in consumables
So why bother save? the government should address the matter with an appropriate tax policy.

 

[wally]

What are the chances of the government stopping taxes on interest for direct cash savings?

 

[Sunfish]

What are the chances of the government stopping taxes on interest for direct cash savings?

Right now? Zero. They would consider that a minimal charge for their guarantee.

 

[boz]

What are the chances of the government stopping taxes on interest for direct cash savings?

in the long term chances are very high otherwise we'll very likely bankrupt like Iceland, in the short term are very low because more spending is needed to prevent the crunch. I remind that more money are created with more spending and not with more savings.

 

[plusnq]

it is an interesting question.

Suppose it comes down to risk adjusted rewards.

I agree capital should be kept active. It is better to have it 'working' to improve the supply of goods and services, rather than just sitting horded in the perth mint as gold or under the bed as cash.

The paradox about saving is that savers are subversively considered too ignorant to know how to invest their money towards improving the supply of goods and services. Their savings then are lent to 'smarter' people to this end, and the smarter profit.

What happens when everyone wants to invest directly, and not lend their savings via banks to others? Do we end up with a more efficient market economy?

Hard to know.

What is for sure though, the more Aussies want to invest directly, rather than save, leveraging into assets relies on borrowing foreign funds.

And that exposes us to the risk of foreign funds becoming less available or more costly.

Hi WW

I agree with some of the sentiment you express here but would add a very important caveat. The investment decisoons that you make depends upon your stage of life. A younger person (<50) may be more risk seeking knowing time is on their side and invest accordingly. An older person would usually be more conservative as capital preservation is more important than absolute returns. This conservative basis of investing will by its nature create saving funds through bonds, savings accounts, CMT's etc. Not too mention government policies distorting the playing field, ala superannuation. Demographics combined with govt policies can create distortions. A look at Japan is an interesting example. Older demographics, high savings rates and a declining economy.

Also risk adjusted rewards are a controversial topic as most people use data sets that are too small or use studies that require additional funds such as dividend reinvestment. As an example we often hear of shares showing LT returns of 12-14% pa. But this is mostly based on datasets since 1980 and use DR. Since 1875 the average raw non compounding annual return of the XAO has been 5.77% and median 6.95%.

Cheers

Shane