Mortgage Meltdown ABC 4 Corners Monday night

[Sunfish]

Maybe some bears can explain to this noob what joy they will get out of lower house prices.......when the share market has crashed, the economy is in ruins, unemployment is rampant.........etc etc etc.

None. But it is your duty to yourself and family not to be ruined by events which are reasonably predictable. As I've said before "He who loses least wins!"

How do you get your money out of the bank when that happens? And what do you do with your gold? Didn't know you could eat that stuff........

When you can't get money from the bank (happened in Argentina for a few days) or that money is rapidly becoming valueless, precious metals can be traded for food as has been traditional for millenia. No reason to be confused,

 

[yieldmatters]

But there is no doubt that inflation is theft by borrowers from savers. And our governments are the biggest borrowers of all.

This isn't quite correct. UNEXPECTED inflation is theft by borrowers from savers. Expected inflation is built into the interest rate so is not a problem.

So the conclusion that borrowing is good because of inflation is wrong.

If you expect inflation to unexpectedly jump then of course holding some debt (at a fixed rate) is useful because you can rob the savers but if it is expected inflation there is nothing special about it.

 

[WinstonWolfe]

was contemplating that inflation is theft by borrowers.
don't see it that extremely.

there'd be no inflation if supply met demand for goods (consumables and assets) and services. And that's not only local consumption, but for export markets hungry for our resources. consider what the resources boom has done to wages in the mining industry.

there's no doubt borrowed funds increase demand for some things. but can anyone illumine me as to the proportion inflation is sustained by borrowing for assets, non discretionary consumption, and discretionary consumption...

 

[yieldmatters]

was contemplating that inflation is theft by borrowers.
don't see it that extremely.

there'd be no inflation if supply met demand for goods (consumables and assets) and services. And that's not only local consumption, but for export markets hungry for our resources. consider what the resources boom has done to wages in the mining industry.

there's no doubt borrowed funds increase demand for some things. but can anyone illumine me as to the proportion inflation is sustained by borrowing for assets, non discretionary consumption, and discretionary consumption...

I'll have a go at explaining what I know about inflation. Inflation is a PHD topic so you could go crazy on this one!

Inflation is a monetary issue - too much money, too little goods. For example, 3 bananas in an economy and $3 in cash and they will be $1 each. If there was $6 in cash they would be $2 each. But the demand and supply for bananas hasn't changed and our living standards haven't changed (still 3 bananas).

Increasing the monetary base increases funds available for borrowing (they call that the transmission mechanism).

Buying an existing asset is neutral as there is a buyer and a seller and there is nothing new in the real economy (same asset is there). It just passes through and eventually hits consumption somewhere else.

As for discretionary and nondiscretionary - I don't know. Good question.

 

[Sunfish]

This isn't quite correct. UNEXPECTED inflation is theft by borrowers from savers. Expected inflation is built into the interest rate so is not a problem.

Fair enough.

But what is "expected" inflation? eg:

--The more that central banks get involved in providing loans to tottering institutions (Northern Rock) and accepting risky collateral the market will not accept, the worse it’s going to be for the main product of central banks - fiat currency. Banks will print money to bail out the system, and any incremental increase in the money supply will lower the purchasing power of all the money already in circulation.

I lifted that from a newsletter, so, are we now expecting inflation or is this from left field? If we are expecting inflation why is the Fed about to lower rates? Is it my turn to be confused?

Nb: Just friendly banter, I agree with your posts

 

[BoatBoy]

( Oh.....Absolutely loved the bit at the start........."we got five guns hidden in dah house and thirty days of canned food".......how quaintly American)

YEE HAAAAH, I'm gonna open me a can of whoop a$$


Dave

 

[yieldmatters]

Fair enough.

But what is "expected" inflation? eg:

--The more that central banks get involved in providing loans to tottering institutions (Northern Rock) and accepting risky collateral the market will not accept, the worse it’s going to be for the main product of central banks - fiat currency. Banks will print money to bail out the system, and any incremental increase in the money supply will lower the purchasing power of all the money already in circulation.

I lifted that from a newsletter, so, are we now expecting inflation or is this from left field? If we are expecting inflation why is the Fed about to lower rates? Is it my turn to be confused?

Nb: Just friendly banter, I agree with your posts

That's a great piece you lifted from the newsletter. If you are on a fixed rate and this happens then you will win - the real value of your debt will drop! If you are on a variable rate, then the interest rate will go up to compensate for the higher inflation - so you stay even. Mostly in Australia we are on variable rates.

Expected inflation is for example 3% a year give or take a little bit. People can deal with that - they know it is coming. They incorporate it to the interest rates they charge, into their business plans, their prices, their contracts. It isn't a problem as it is 'expected'. But if it hits 7% suddenly (i.e. within a year) it causes chaos and impacts the real economy - people find it hard to 'operate' as the value of their medium of exchange (cash) is all over the place. That is why the RBA has a primary responsibility to keep inflation within a target band. If it hits 1000% you have another different but bigger problem - the currency becomes unmanagable - e.g. changing prices every 3 mins, carrying bucketloads of cash around! That certainly slows down the economy as well.

As for the fed (or RBA) target rate - that is complicated. But I will say this. The central bank only sets the cash rate (the least risky rate) in the economy. All other rates above this are set by the market. So if there is inflation coming then the other players will build this into the interest rate they charge regardless of the central bank's activities. They need compensation for inflation before they will lend money.

 

[equitymate]

Interesting doco, them weirdo auctions looked interesting.

 

[MichaelW]

I lifted that from a newsletter, so, are we now expecting inflation or is this from left field? If we are expecting inflation why is the Fed about to lower rates? Is it my turn to be confused?

Good point,

And one not lost on Al Greenspan, who recently warned Ben Bernanke to be careful in cutting rates in response to the liquidity crisis. He cautioned that the big hairy gorrila the Fed needs to be concerned about is inflation, and not some short term bail-out of lending institutions that got on the wrong side of the risk ledger.

Bernanke's got a fine line he needs to walk for now.

Cheers,
Michael.

 

[grossreal]

hi coolie 21
there is alot more to the rock then that link
the goverment has only 100% cover the first 2 k of your deposit and 75% up to 32k after that and anything above 32k is not secure so they will be a bigger run on it soon.
and for those that think the 4 corners was a waste of time for me.
there was alot of very interesting information in it.
the similarities with aust
brokers non regulated in both
the higher the loan the higher the commission same in both
2nd tier lender accountability very low the same in both
hedge funds not regulated in fund finding or getting investors same in both
toothless goverment bodies watching the market same in both.
reverse mortgage and increasing risk same in both.
and as for brokers here not doing the same as brokers there no they are doing the same if you fudge the figures on a no doc and get a higher loan for someone that can't afford it,the commission is higher again same in both.
ease to become a broker there is one group here no money down, 6 months and you can hang up your shingle as a broker again same in both.
business built around debt with out the ability to absorb risk or the ability to pay increases are at risk simple maths
and thats what we are seeing here.
I have not seen it yet but class action may well happen first in the form of litigation against the lenders but also in the form of some sort of fund to buy the properties back before they fall apart and the fund will be a very interesting fund.

 

[Highlygeared]

Question is: what should investors on the forum think we should do right now? Depending on the camp you believe, the options are:

do nothing
buy more
potentially sell if youre overleveraged or at least have a hi lvr

Noone can answer that question but I had lunch with a mate yesterday arvo who works for one of the large investment banks who ironically quoted word for word what I saw on the 4 corners program. Quite incredible. He said at this level and above, there is quite a lot of sharing of info and sentiment amongst the instos - and all are pointing towards a MUCH deeper problem with subprime that is very likely to have a contagion effect worse than we've seen.

I think selling stocks now/soon if/when the market rises post the Fed rate cut. With the property portfolio which is a large chunk of my investment portfolio, its a difficult one. Selling and paying CGT is most certainly taking a real 20-30% hit once you add agents commissions etc.

Personally, I will hold fire on accumulation unless absolute never seen b4 bargains come up...i dont mind paying market for a quality asset but in uncertain times, waiting for those elusive bargains is insurance against that uncertainty. And fix every loan for at least 3 yrs...most already are but maybe i should rate lock a couple coming off early next yr. we'll see.

What I cant understand is the mini booms talking place right now in Melbourne, Bris and Sydney - how will the fat cats buying $1m plus properties fare if the contagion becomes real.

 

[MichaelW]

Here ya go,

Found a link to the Greenspan / Bernanke stuff I mentioned earlier...

http://www.smh.com.au/news/business...-lending-crisis/2007/09/17/1189881432189.html

Cheers,
Michael.

 

[WinstonWolfe]

Increasing the monetary base increases funds available for borrowing (they call that the transmission mechanism).

I accept the monetary base contribution to inflation, in the sense that lower rates lead to increased borrowing for consumption of assets and all sorts of stuff.

However, I also wonder how this stimulus compares with that of a weaker AUD...Two ways a weak AUD might be inflationary are:

- more AUDs will be required to consume the same amount of imported goods.

- more AUDs will be created if our export income/profits increase due to greater OS demand for our goods....

Further, one could argue that a strong economy, that other countries are prepared to park money in, in the form of loaning money to our banks, is inflationary. i.e. Our housing bubble wouldn't have occurred if foreign banks did not see our home mortgage market as a secure investment.


Buying an existing asset is neutral as there is a buyer and a seller and there is nothing new in the real economy (same asset is there). It just passes through and eventually hits consumption somewhere else.

Agree that nothign new is produced, but the value gets inflated if 6 people are bidding for limited supply of existing assets, due either to increased popn/immigration, or desire to live in smaller households, or just due to PIers wanting to invest in more IPs


As for discretionary and nondiscretionary - I don't know. Good question.


Suppose there is no shortage of discretionary goods (think Chinese imports), and demand for them is the most plastic of all demands. So I hazard a guess "non" discretionary goods and services will contribute more to inflation, as will asset bubbles.

..............

 

[auspony]

US income/mortgage is 3.7, Australia about 7

ARM (variable type loans) account for 20% of US mortgages, Australia I think is way higher (sorry, I can't remember the figure so dont want to mis-quote).

US population demographics suggest population is not ageing as much as Australia, and growth rate is also higher overall than Australia. Even in some of the battered markets like Florida and Cali.

So on some fronts Australia looks safe, on others... ???

P.S note Inflation and thus higher IR hitting the rest of the world including China (6.5%) .. watch for 08

I am new to the forum (introduced by a friend), but I have the advantage of actually currently living and owning property in the US (Los Angeles).

As for the income/mortgagee ratio difference - you forget one key point (if those figures are right - i distinctly recall being told mortgage payments should not be more than 33% of income over here too) - owner occupied mortgage interest is tax deductible here in the US - not in Australia. So as a home owner I am stupid for paying rent if the government is willing to subsdize(sic) my mortgage.

Going OT a little:

I am currently on an 5y ARM (commenced in 2003) interest only. I got a low doc loan - the lender would have lent me more - ie 100% - but I did my sums and wanted to limit my liability and risk. I borrowed 95%. We knew we would only stay in the house for 5 years and move on so an ARM made sense. I also did the calcs for scenarios where the interest adjusted and whether we could afford it - we could. Had we intended to stay in the house for a while, I would have gone for a 0y fixed mortgage - but that meant higher payments up front. I can guarantee you most people did not do the same calcs - they did not even understand the details.

The gist of the crisis is - unregulated mortgage lenders, brokers, etc... and desperate people wanting to own who cannot afford to own - people got sick of hearing rising prices and feeling they were missing out - why rent when you can buy into a rising market. Not dissimilar from a sharemarket bubble. The other part of the problem is the incentives in the mortgage system here (I don't know how similar they are in Australia) - those selling mortgages are incented by selling more and not by the continuing integrity of the mortgage - ie servicing. Once sold the mortgage is securitized and sold on to a third party who bears the risk of mortgage default. So if the incentive is to sell max that's what happens irrespective of the risks. Those third parties buying the securities were a little swindled by the rating agencies assigning a lower than real risk to these securities.

So I don't think the experience is directly transferrable to Australia, but there are some similarities.

 

[auspony]

It was interesting to see those new surburbs in LA and the inner surburbs of Cleveland, where all the For Sale signs were.

It sounds like the lack of regulation of the mortgage brokers selling higher interest rate loans to people who could have got lower rates is now starting to bite them. But at the same time, these people should not have trusted their mortgage brokers.

A someone who lives in LA, I would caution that the slump is hugely variable by region, city and suburb. Here in LA yes there are definitely some areas which are being devastated. But other areas are still rising. IN our area, prices are fairly stable. Sure houses are not valued at the ridiculous prices of 18 months ago, but then again those were unrealistic. Having bought in Oct 2003, I can tell you that at current market value we are still up 45%. But I think that is largely driven by the area we are in, the demographics of the residents, and the fact that there is a finite supply of housing here - no more is being built so inventory is never going to increase.

 

[auspony]

As for the Australian market, IMO it is going to keep rising but I see a lot of LA 3 years ago in the Melbourne market for instance - unaffordably ridiculous prices which cannot be sustained. It won't be the credit crunch which will break the back of the market but the downturn of the economy. And here is where the tie in from US will occur. If the US and Europe go into recession, the Australian economy (which is dependent on world economic growth) will suffer and that is when the property market will be broken by a slide in demand as jobs are lost and spending decreases.

 

[WinstonWolfe]

So I don't think the experience is directly transferrable to Australia, but there are some similarities.

That may be so, but where the risk lies for Australia is in the tightening of credit worldwide, due to a reticence of one bank to lend to another based often on a distrust of the credit rating agencies.

This article is well worth a comprehensive read.
"Here Comes the Whale" at
http://www.investorsinsight.com/otb.aspx

 

[auspony]

Thirdly,
In the USA the way they tax property ownership is completely different to here. This makes a huge difference in how it affects property prices.
I was speaking to a couple of people who owned their own properties (Houses) a couple of months ago. The equivalent of our yearly rates for these people were around 1.5% of property value.
Picture your rate notice showing a $15,000 bill per annum in New Jersey (house value just under $1m) or another person who thought she was lucky because of a 'grandfathered' lower rate of only $24,000 on her property of $2.4m value (Pasadena). The rates without the 'grandfathering were over $35,000!!!! . These types of 'rates' add a different dimension to property ownership.

bye

yes property taxes here are a killer - in CA we're sort of "lucky" as it is capped at 1% of property value per year

 

[yieldmatters]

Thanks for the reply WinstonWolfe. I agree asset prices can rise if there is demand / low supply etc but in terms of inflation asset prices aren't actually in the measure for inflation (CPI) so it doesn't have a direct effect. There is an argument for central banks to watch asset prices as well but central banks disagree.

 

[newoz]

As for the Australian market, IMO it is going to keep rising but I see a lot of LA 3 years ago in the Melbourne market for instance - unaffordably ridiculous prices which cannot be sustained. It won't be the credit crunch which will break the back of the market but the downturn of the economy. And here is where the tie in from US will occur. If the US and Europe go into recession, the Australian economy (which is dependent on world economic growth) will suffer and that is when the property market will be broken by a slide in demand as jobs are lost and spending decreases.

Im a newbie in this. But I thot the current Australian boom is riding to some large extent the Asia Pacific boom, mainly China's need for resources which Australia is supplying. So as long as the resources industry is going fine, the property market is going fine? However, looking at the heat still going on, esp now in Melbourne and Brisbane, it looks scary. Can normal wage earners really afford such debts? Wonder when the bough will break...... or am I missing something?