McKinsey on Deleveraging

There's an interesting, and very long, report on the McKinsey website about deleveraging debt in global markets. It can be downloaded from here:

http://www.mckinsey.com/mgi/publications/debt_and_deleveraging/index.asp

Somethings that caught my eye:
  • Total debt (government, private, corporate) debt in the UK is 450% of GDP - the highest of any mature economy they looked at. :eek:
  • Financial crises tend to run through a six to eight year cycle. A couple of years of recession, followed by five or six years of delveraging of debts.
  • Growth in property prices drove a lot of the credit growth.
The next few years could be interesting. The typical route out of historical financial crises involve above-trend economic growth, but reduction in debt levels through belt tightening. (High inflation is relatively rare.)

The authors also suggest that the preferential treatment of mortgage debt by the tax system is one of the contributory factors, and that this should be reformed. Given the discussions about negative gearing and taxing property that crop up around here, I can't see that going down well.
 
The authors also suggest that the preferential treatment of mortgage debt by the tax system is one of the contributory factors, and that this should be reformed. Given the discussions about negative gearing and taxing property that crop up around here, I can't see that going down well.

This topic comes up often; whereby the possibility of the neg gearing tax benefits may be removed by a future (Aus) gubbmint.

While it is a possibility, the fact that it has already happened back in the '80's and was a total disaster will no doubt dissuade future gubbmints from repeating the mistake - if they have any brains; which is the danger.....

Why should it be reformed?

The system works well, and provides a hell of a lot of rental housing that the gubbmint don't want to provide.

Yes, the tax structure rewards those who get into property investing. But, so it should, otherwise very few people would do it.

I do agree though, that most people should address their debt - not the dollar level of it - the LVR of it.

Millions of people all over the world get "sold up" every day and lose their shirt.

It's not their level of debt that was the problem; it was their LVR being too high when they had to sell, which caused a loss to occur.

My debt level is the highest it's been in my life right now, but the LVR is safely low in the event of a sell-off.
 
There is no preferental treatment.
All expenses incurred in the activity of earning an income are tax deductable.
Depreciation is a real expense.
The preferential treatment is to the buyers with grants, and holders in the way of manipulated low interest rates.
The problem throughout the centuries has always been the same:
Too Much Debt
There is no such thing as good debt. Only controllable debt.
And you can tell that son of many dads that I said so.
 
I think that the point about preferential treatment of property in the tax system is a more general one. Most countries provide significant breaks to owner occupiers, ranging from no capital gains on the PPOR through to interest being deductible against income tax. (The Dutch do this.)

If eliminating negative gearing is politically difficult, then removing more general tax breaks would be far harder. Incidentally, it was the abolition of MIRAS (deducting mortgage interest from income tax) in the UK that led to the late eighties boom, as buyers tried to get into the market before the rules changed.
 
or they can just restrict credit in a growing market, putting upward pressure on prices and create equity (and deleveraging) out of thin air.

not unlike an un-CDO....almost....not.

the reduction or abolotion of neg gearing will either destroy the middle range property market values (as all investors neg gearing de-leverage), put a huge upward pressure swing on rents to cover said shortfall (i aint paying for it) or both....
 
US centric here we come

..................the reduction or abolotion of neg gearing will either destroy the middle range property market values (as all investors neg gearing de-leverage), put a huge upward pressure swing on rents to cover said shortfall (i aint paying for it) or both....

Thence, we may see our system approximate that of the US.

Tax deductible PPOR loans............pushing up trophy home values further as people upgrade for bigger and better at the benefit :p of their taxable position.

Removing IP negative gearing benefits here will have some upward pressure initially on rents and by default enhance yields. The latter may also be achieved by a reduction in cap values (with a propertion of investor sell off to a degreee) further improving the yield figures.

In the US it is far easier to find positive CF properties hence negating (sic) the need for negative gearing anyway ;)

Might we go down that track?
 
  • Total debt (government, private, corporate) debt in the UK is 450% of GDP - the highest of any mature economy they looked at. :eek:
  • Financial crises tend to run through a six to eight year cycle. A couple of years of recession, followed by five or six years of delveraging of debts.
  • Growth in property prices drove a lot of the credit growth.

I think the last point has the relationship backwards. Credit growth drove asset prices in particular property.
 
There are no simple answers.

Firstly, I dont think across Countrys can be compared.

I hear, UK and USA has an oversupply of homes.
Aust has undersupply.

The fact is you will need a massive, and I mean MASSIVE, change in the economy and mindsets for an lowering of house value. And is Aust, (I could argue this and that) but it aint going to happen because:

  • our country is too big
  • our jobs too centralised
  • our people too spoilt

Want to fix house prices and be green. Make 50% only stamp duty on <100m2 small homes. Ditto small blocks. Pay no stamp duty concession for apartments. That is one of the ways to change the mindset of the average Aussie. But which GOV has the guts to do that?

Take away NG and rents will rise. With rates low at the moment, rents and depreciation almost cover it anyhow. If rents rise and they cover cost, then Investors get back in and prices rise. Interest rates rise, rents woud rise? Where is the lower price? Most 80% of public housing for the mentally ill, aged, and very low single mum with kids. A normal family gets no chance.

FACT: We are a wealthy country who lives beyond our means.

The average House and Land package price has got almost nothing to do with investor demand and NG. It is all about people expectations, aspirations, cost of land and gov charges, prices of trades and materials. If rates and costs drop, guess what, people will build bigger McMansions. Do you see chippes taking home 30% less when Bank employees, public servants get another 5% rise in wages. Why would they work for less and especially when they are in demand, no bank tellers.

Get serious about affordable housing? Put a ring around Sydney, Melb, Brisbane, etc and say outside this is forever green. Go up, not out. We all live in apartments, then Councils can afford the parks, trainlines, bikepaths, etc.

But they tried that in Sydney in the 1950's green belt and it was abandoned.

My rant off, Peter
 
Want to fix house prices and be green. Make 50% only stamp duty on <100m2 small homes. Ditto small blocks. Pay no stamp duty concession for apartments. That is one of the ways to change the mindset of the average Aussie. But which GOV has the guts to do that?

Get serious about affordable housing? Put a ring around Sydney, Melb, Brisbane, etc and say outside this is forever green. Go up, not out. We all live in apartments, then Councils can afford the parks, trainlines, bikepaths, etc.

But they tried that in Sydney in the 1950's green belt and it was abandoned.

vote for me. i'll do it. i'll even cut STD rates for calls outside this belt.

come on - BC for mayor!
 
Get serious about affordable housing? Put a ring around Sydney, Melb, Brisbane, etc and say outside this is forever green. Go up, not out. We all live in apartments, then Councils can afford the parks, trainlines, bikepaths, etc.

But they tried that in Sydney in the 1950's green belt and it was abandoned.

My rant off, Peter

They tried to do this in Melbourne recently. Many people or is it a vocal minority(?) in the established suburbs didin't want high density living and protested successfully against some of the new development sites in their areas, so the government is looking to re-draw the Melbourne boundaries outwards.

Culturally, most families still want homes with a bit of land. We are not ready for high density living. Yet....
 
culturally, we should be able to provide small lot living with a yard space.

whole ground floors could be open style carports, an outdoor kitchen, living/laundry/wc/stairs and courtyard.

so only maybe 100sqm of footprint, then go up.

you could then have 100sqm of yard on a 200sqm block.

i can fit a BUCKETLOAD in a 100sqm of yard.
 
They tried to do this in Melbourne recently. Many people or is it a vocal minority(?) in the established suburbs didin't want high density living and protested successfully against some of the new development sites in their areas, so the government is looking to re-draw the Melbourne boundaries outwards.

Culturally, most families still want homes with a bit of land. We are not ready for high density living. Yet....

Exactly, but if you said, ok have your land cheap but you have gravel road, no main rads, no water, no sewer than all hell would break loose.

When people compare Aus to Europe like say Netherlands with beautiful squares, trams, cafes, et al they fail to point out 85% of housing is gov owned. No arguements of development. They simply do it. No I want a yard, Tough. Housing is afforable because it is small on a small footprint.

Aussies will never change. NIMBY is our motto. No one want high density it is thier house being sold for the block then bring it on.

Smart Housing goes some way. Peter
 
culturally, we should be able to provide small lot living with a yard space.

whole ground floors could be open style carports, an outdoor kitchen, living/laundry/wc/stairs and courtyard.

so only maybe 100sqm of footprint, then go up.

you could then have 100sqm of yard on a 200sqm block.

i can fit a BUCKETLOAD in a 100sqm of yard.

We did, they were called Terrace Housing. I had one. 52m2 - 2 bed (originally serving 3 kids and 2 parents) covering 95% of the block (Originally, covering 85%. Outside toilet. No parking.

Close to city read jobs. Parks nearby. Pubs and Shop on every corner.

Peter
 
no mate - i mean vitrually nothing on the ground floor - just open space and a small access room to the upper levels.

3 stories of 7x7 modules - ground being living, stairs, kitchenette, laundry, middle being living, meals, balcony, kitchen, wc, stairs, upper being bedrooms and 1 bathroom.
 
no mate - i mean vitrually nothing on the ground floor - just open space and a small access room to the upper levels.

3 stories of 7x7 modules - ground being living, stairs, kitchenette, laundry, middle being living, meals, balcony, kitchen, wc, stairs, upper being bedrooms and 1 bathroom.

If only possible:)

Peter
 
entirely - modular housing would be very easy with a setup like this.

minimal steel - just for the corner columns and perimter floor beams, the rest could be hypspan/timber truss fro renewability.

if the stairs were in one place you could even swap the upper and middle floors depending on views, noise etc....
 
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