It's the economy, stupid!

 
  MILW Junior Train Controller

Location: Earth
I have friends in Melbourne who treated a (paper) appreciation in the value of their home like it was a lotto win - borrowing money from their mortgage to finance a very expensive holiday and then later on buying a luxury 4WD. They were congratulating themselves on how clever they were at the time because they got these things at a much lower interest rate but the car is now worth a fraction of what they paid for it and the holiday a distant memory - meanwhile they'll be paying off those things for decades to come because it got lumped on their mortgage.
don_dunstan
So, the only way people like that could come out on top would be to treat their house/investment property as a speculative asset and sell it for a massive capital gain that wiped out all their consolidated consumer debt. It seems many people probably did do that, but those days are fading into the past since the short term capital gains are cooling off. If you keep the house, you're paying all of it off, that's for sure, and the real cost of being in debt - the ongoing interest etc. - is almost always ignored.

They would have been better off with a short-term loan at a higher rate, they probably would have actually paid less in interest. I think there's actually a lot of ignorance out there about the real costs of mortgage re-draw; it's actually not a good idea unless you're using the money to improve the value of the property.
don_dunstan
Redraw has now become the go-to method of managing faltering household finances. First they max it out on the credit card(s), then transfer it to the home loan via redraw - until they reach their redraw limit and are forced to make drastic cuts to household spending or liquidate their houses, hopefully getting enough capital gain to clear all the debt. Home loans are now bulging with what is really unsecured consumer debt. These are people whose mortgages were approved based on assumed capital growth in the houses they bought to begin with rather than the strengths of their own incomes. Everyone wants to borrow or cheat his way into wealth, or even just the image of wealth. How cute our flawed nature is.

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  MILW Junior Train Controller

Location: Earth
Talking of mortgages and honesty:
http://www.abc.net.au/news/2017-09-11/500b-dollars-of-liar-loans-in-australia-ubs/8892030

What could possibly go wrong?
Carnot

We were repeatedly told that Australia was not like the US because we didn't have a big subprime mortgage problem.

There are now indications that our subprime mortgage market is much bigger than acknowledged, because it is mostly hidden by falsification of loan applications by applicants, brokers and bankers. The lackadaisical approach of financiers is probably attributable to an expectation of ever-increasing capital growth. They must have assumed that it wouldn't matter if the loans went bad because the houses could simply be sold for a profit. To an extent, they were right, but that approach doesn't work forever, hence the tightening of lending ocnditions (albeit too little, too late).

Anyone whose loan application was falsified by a broker or bank can challenge a future foreclosure in court and may get to keep their house. It's already happening on a small scale in Australia. But that only solves one small problem in the big picture of the mess that is our economy.
  HardWorkingMan Chief Commissioner

Location: Echuca
When in town today I took notice of a couple of things:
1) I drove past about 7 shops in the main shopping centre that were empty or for lease
2) 10 in the port area were for lease and one was having a closing down sale
3) the sewing hobby shop is closing down (backs onto the railway line)
4) about 1/3 of the factories/warehouses are empty.  Businesses are moving to different premises as the savings in rent pays for the move inside 6 months.

If the economy is so strong how come the town has the most empty business premises in over 20 years (in both real and percentage terms).

Also as there is no IT award people are being paid the minimum wage and only given casual work.  There is  a turnover of barista's and other hospitality/retail staff as it's all casual at minimum possible rates.  

housing prices in neighbouring towns are dropping as the factories, tourism and rural suppliers are closing.  As the population dwindles the shop keepers find it harder to make ends meet so put off staff who leave town to find work so there are fewer people to buy things at the shops....

these are not indications of a strong economy
  don_dunstan Dr Beeching

Location: Adelaide proud
Redraw has now become the go-to method of managing faltering household finances. First they max it out on the credit card(s), then transfer it to the home loan via redraw - until they reach their redraw limit and are forced to make drastic cuts to household spending or liquidate their houses, hopefully getting enough capital gain to clear all the debt. Home loans are now bulging with what is really unsecured consumer debt. These are people whose mortgages were approved based on assumed capital growth in the houses they bought to begin with rather than the strengths of their own incomes. Everyone wants to borrow or cheat his way into wealth, or even just the image of wealth. How cute our flawed nature is.
MILW
It's pretty clear-cut that in Melbourne there's been 20 years of very reliable house price growth and that you are probably on a winner if you bet that your property value will go up - particularly inner Melbourne where my friends reside. When they said they were borrowing money from their mortgage to have a big holiday I just smiled and congratulated them... the 'old' me would have probably warned them they were going to be paying it off for decades but I realise now-days that you shouldn't pop someone's bubble just because you don't agree with their choices. Hell, I've made some big mistakes with money myself in the past, who am I to criticise.

However I wouldn't do a re-draw for the simple reason that I'd be worried that you're increasing the time that the mortgage has to continue to be paid and in that time interest rates are almost certain to go up; better if you can outright pay off the mortgage or get it down to a negligible level so that you aren't still dealing with it when you are approaching retirement.
  MILW Junior Train Controller

Location: Earth
It's pretty clear-cut that in Melbourne there's been 20 years of very reliable house price growth and that you are probably on a winner if you bet that your property value will go up - particularly inner Melbourne where my friends reside. When they said they were borrowing money from their mortgage to have a big holiday I just smiled and congratulated them... the 'old' me would have probably warned them they were going to be paying it off for decades but I realise now-days that you shouldn't pop someone's bubble just because you don't agree with their choices. Hell, I've made some big mistakes with money myself in the past, who am I to criticise.

However I wouldn't do a re-draw for the simple reason that I'd be worried that you're increasing the time that the mortgage has to continue to be paid and in that time interest rates are almost certain to go up; better if you can outright pay off the mortgage or get it down to a negligible level so that you aren't still dealing with it when you are approaching retirement.
don_dunstan
The sensible thing to do would have been to wait a bit longer and save the few grand required for the holiday. Of course, you can't tell people that, and so they have to be allowed to pay the extra money. It is unfortunate that the truth, or an honest opinion, can totally ruin relationships. I've almost given up advising people against their own stupidity. You don't get any brownie points for saying, 'I told you so, either, only more resentment. Often, the only thing to do is let them crash and burn.

Alas, the situation is far worse than that, because redraw is being used not only for cars and holidays but essential day-to-day expenses. But even for families who have reached that point, all is not lost just yet. They still have time to sell, perhaps take a big fat capital gain (depending how long ago they bought) to wipe out all debt and still have a deposit for a future home purchase, and if they are living in the house they can start renting while they regroup and completely restructure their family finances. Surely that would be better than desperately clinging onto the house as its value starts to fall.
  don_dunstan Dr Beeching

Location: Adelaide proud
The sensible thing to do would have been to wait a bit longer and save the few grand required for the holiday. Of course, you can't tell people that, and so they have to be allowed to pay the extra money. It is unfortunate that the truth, or an honest opinion, can totally ruin relationships. I've almost given up advising people against their own stupidity. You don't get any brownie points for saying, 'I told you so, either, only more resentment. Often, the only thing to do is let them crash and burn.
MILW
I think there's too much of a cultural 'instant gratification' thing in our culture that says you shouldn't have to wait - it's how people like Gerry Harvey have built their fortunes. It's so much better to wait till you can afford it and then drive a hard bargain with your cash. The last time I bought a major appliance (my desktop computer) I took $800 cash with me to go shopping... it's amazing how much better the deals get when you wave that cash in the shop assistant's face. Even in 2017 most big retailers will knock a good amount off for cash - I ended up getting nearly $100 off the ticket price.
Alas, the situation is far worse than that, because redraw is being used not only for cars and holidays but essential day-to-day expenses. But even for families who have reached that point, all is not lost just yet. They still have time to sell, perhaps take a big fat capital gain (depending how long ago they bought) to wipe out all debt and still have a deposit for a future home purchase, and if they are living in the house they can start renting while they regroup and completely restructure their family finances. Surely that would be better than desperately clinging onto the house as its value starts to fall.
MILW
At this point it appears that most small-time landlords etc. are still okay unless they went deep in WA or the NT. As Carnot said (above) it's hard to know what the quality of many owner-occupier or investor mortgages are actually like until things get sticky... maybe we're about to find out.
these are not indications of a strong economy
HardWorkingMan
Having been to Regional VIC recently I'd say that there's a lot of prosperity as you get closer to Melbourne but as soon as you move beyond the commuter belt things start to look parlous.
  MILW Junior Train Controller

Location: Earth
At this point it appears that most small-time landlords etc. are still okay unless they went deep in WA or the NT. As Carnot said (above) it's hard to know what the quality of many owner-occupier or investor mortgages are actually like until things get sticky... maybe we're about to find out.
don_dunstan
They have all been OK simply because they had the option of selling to take capital gains if things got too tight. A sole breadwinner colleague of mine recently went to refinance because things were getting a little tight, and was told by the bank that under the new lending restrictions he never would have been given his current mortgage because his assessed capacity to repay is now lower, so he walked away unsuccessful. Luckily he had the option of reducing spending (or so he thinks for the time being), or his house would now be on the market. I'm going to assume this is happening to quite a number of people. In the cheap debt and high capital growth environment of the last 15 odd years it has been so easy to set oneself on an unsustainable financial trajectory.

According to Digital Finance Analytics, household finance confidence fell in the last month, with most of those of the 52,000 surveyed who said their wealth had increased in the last year attributing the lion's share of that rise to unrealized capital growth in their properties rather than real gains in income from employment or rental receipts. It seems assumptions of capital growth in residential property are underpinning everything.


The amount of home loans that have been extended based on “factually inaccurate” information is estimated to have reached $500 billion, according to an updated stu