Thread: Every country is borrowing money....who from???

With respect to China, I read a fascinating book over January called "The future is Asian : global order in the twenty-first century". It's a looong dry read, but well researched and presented.

It changed a lot of my perceptions of not only Asian (of which China is obviously a major part), but global economics and emerging structures too.

The single most profound change it offered me was a chapter or two that took the reader (presumed to be western) through understanding the world through an asian lens. It shows how when we try and interpret the actions of Asian leaders and countries with our western understanding of culture, relationships and history, we are as equally unsuccessful as expecting an Afgan villager to comprehend the machinations or our democratic system of government.

As an example, it painted a picture of why to many Asians the USA's system of democracy would be seen as morally bankrupt, with little social cohesion, care for your fellow man or a shared common goal etc. etc, and why the thought that they would want to emulate "democracy" would be laughable. To be clear, it wasn't bashing the USA, but rather trying to show how a different lens produces vastly different interpretations of the same facts.



I only raise this to point out that our "analysis" of China is based on an Australian view with little understanding of a broader Asian picture. And I'm the first to point out that I'm not an Asian expert at all, just that any countries foreign affair platform is far more complex than a simple good or bad.

The global balance is certainly shifting. It is worth noting that the transition of one global dominating power to another has always been a tumultuous affair, with the exception of the last one of Great Brittian to the USA. We can but only hope that as we move away from a single dominant power, cooler heads prevail and realise that like the last change, cooperation is a far better outcome than conflict.

I've just re-read this post and it diverged quite far from the thread topic, so sorry. It was was not my intention when i hit the reply button.

Growing up in Brooklyn, post war, there was a guy down the street that had a printing press. He seemed to use a lot of green ink.

Just sayin.

Originally Posted by Beardy

Housing prices are dictated by demand largely by the owner occupiers who are the majority of buyers. Investors just fit into that pricing structure looking at price they need to pay V rent dollars the market will tolerate and will purchase only if it is deemed a good investment. Demand is largely controlled by the banks willingness to lend money.

Think about who actually benefits from housing prices being over-inflated.

Not the owner-occupiers. When they buy a house they do so at market rate. When they sell a house they do so at market rate again, regardless of how much the perceived value has risen. But then they buy another house in the same market conditions, so in effect the appreciation in price on buying and selling really makes little difference to them. Th eprice may have risen at 1% per annum or 30% per annum and the difference is minimal to them because they are buying again in the same market they sold in.

State Government make money when someone buys and sells a house through stamp duties, and the higher the price the more stamp duty is paid. Local governments charge rates based on the land price, which is in reality the total cost less the price of building the house on it. As prices go up the price of land goes up so councils benefit by charging higher rates to everyone - not just thee ones who bought at an overinflated price. Every time someone buys a house at a higher price in an area local government benefit.

Investors benefit because they move their money in and out of different types of investments depending on where the greatest gains are perceived to be made, so they will ride a housing boom, capitalize their investment and then move on to shares or whatever next. Owner occupiers do not do that.

When the prices are going up it is investors that are driving them up and owner occupiers coming for the ride.

Federal government wants the states and councils to benefit from high property values so that they have a sustainable revenue base and require less federal support. Banks benefit from higher prices because people take out bigger loans and the banks make more.

Originally Posted by Beardy
Housing prices are dictated by demand largely by the owner occupiers who are the majority of buyers. Investors just fit into that pricing structure looking at price they need to pay V rent dollars the market will tolerate and will purchase only if it is deemed a good investment. Demand is largely controlled by the banks willingness to lend money.

I would rephrase that last sentence as:
Demand and price are almost totally controlled by the banks willingness to lend money and the interest rate they charge.

Originally Posted by woodPixel

Correct. I was reading about the history of the East India Company.

What a bunch of looting pirates they were. Their history is utterly despicable.

An extraordinary history of corruption, pillage, looting, murder, manipulation, plundering, enslavement and governmental deposement.
......

Absolutely true. And the demise of the company was so quick and absolute.

At the height of the British East India Company's power (c.1800-1850) the company's army was considerably stronger than the British military.

The Dutch VOC were their model - just as ruthless.

Originally Posted by doug3030

Think about who actually benefits from housing prices being over-inflated.

Not the owner-occupiers. When they buy a house they do so at market rate. When they sell a house they do so at market rate again, regardless of how much the perceived value has risen. But then they buy another house in the same market conditions, so in effect the appreciation in price on buying and selling really makes little difference to them. Th eprice may have risen at 1% per annum or 30% per annum and the difference is minimal to them because they are buying again in the same market they sold in.

State Government make money when someone buys and sells a house through stamp duties, and the higher the price the more stamp duty is paid. Local governments charge rates based on the land price, which is in reality the total cost less the price of building the house on it. As prices go up the price of land goes up so councils benefit by charging higher rates to everyone - not just thee ones who bought at an overinflated price. Every time someone buys a house at a higher price in an area local government benefit.

Investors benefit because they move their money in and out of different types of investments depending on where the greatest gains are perceived to be made, so they will ride a housing boom, capitalize their investment and then move on to shares or whatever next. Owner occupiers do not do that.

When the prices are going up it is investors that are driving them up and owner occupiers coming for the ride.

Federal government wants the states and councils to benefit from high property values so that they have a sustainable revenue base and require less federal support. Banks benefit from higher prices because people take out bigger loans and the banks make more.

Yes no doubt the big winners are the government and the stamp duty collected
My father in law was a real estate agent and I remember when they bought in the first homebuyers grant of 20k I think it was and he said that prices at auction basically went up by the same amount overnight. It is human nature to stretch to get the most you can with what you have available. ( back then you could buy a one bedroom unit in Sydney for 100k)
I personally don’t agree with the way they do grants as all it does is push up prices ( which I know that is what they want it to do to increase their revenue)
If they really wanted to help first hone buyers I think they would be better off subsidising their outgoings like council rates and interest rates over the first five years rather than giving them a lump sum upfront.

With respect, WoodPixel, I cannot work out if you are being totally provocative or incredibly naiive with this post. My comments irespective:

Originally Posted by woodPixel

On housing, I've a few thoughts.

-- Houses are for people
-- They are NOT investments

True, houses are for people, and my dog, but people also invest in houses. Currently I invest in our home and in the past have invested in rental property and I have also chosen to be a tenant.

At present the Aus housing ownerships stats are:

• 30% - owner occupied without a mortgage,
• 37% - owner occupied with a mortgage,
• 32% - rental property, and
• only 3% of property is owned by a Housing Commision (however titled).

https://www.abs.gov.au/ausstats/[email protected]/Lookup/by%20Subject/4130.0~2017-18~Main%20Features~Housing%20Tenure~3

Where do the renters go? Do you really want to de-house 32% of the population?

When I was a student, I chose to rent knowing that I would be in that city for only a limited time.

At various times in my career, I chose to rent because I knew I would be moving on.

When I was working overseas, in some countries it was illegal for me, as a foreigner, to own real estate.

An aunty, now retired but once a prominent and very well remunerated lawyer, sold her only property over 50 years ago and has chosen to rent because she does not want the hassles of owning a property. My guestimate of the current market value of the place she has leased for the last 20+ years would be above $3 million. Its not about affordability.

-- Negative gearing, tax deductions and depreciation should be cancelled, now

I owned several rental properties when Paul Keating abolished negative gearing; initially I was unhappy, and many investors sold their properties reducing the supply. Rents went up by an unprecedented 20% in our area within two years. I was happy, the banks increased my interest rate so they were happy, I was no longer negatively geared so the tax man was happy; the tenants were not happy but all chose not to find alternative accomodation.

-- Loans can not be provided to investors on residential real estate

About 80% of landlords are small investors, but they only own about 20% of rental properties - the old 80/20 rule. Rental properties are commonly the first investment of "learner investors". This is far easier for most people to understand and much less risky than the stock exchange or direct investment.

-- One house per person/family (as defined by family law and/or tax law)

Are family law, tax law, contract law and common sense in agreement?

-- Houses unoccupied for a period of time (say 3 months) are considered abandoned

So, when I worked as a management consultant and went on long term assignment and left the family home vacant for, say, six months, you would take the family home away from us?

And you would prohibit us from renting in the assignment locale?

-- All "portfolios" of people-housing must be broken up
.......

No comment necessary.

Originally Posted by Beardy

Yes no doubt the big winners are the government and the stamp duty collected.

My father in law was a real estate agent and ........

Coincidentally, in some states stamp duties and real estate agents fees on a property sale are roughly the same amount.

As is the average removalists costs!


Edit: some

Originally Posted by GraemeCook

With respect, WoodPixel, I cannot work out if you are being totally provocative or incredibly naiive with this post. My comments irespective:



True, houses are for people, and my dog, but people also invest in houses. Currently I invest in our home and in the past have invested in rental property and I have also chosen to be a tenant.

At present the Aus housing ownerships stats are:

• 30% - owner occupied without a mortgage,
• 37% - owner occupied with a mortgage,
• 32% - rental property, and
• only 3% of property is owned by a Housing Commision (however titled).

https://www.abs.gov.au/ausstats/[email protected]/Lookup/by%20Subject/4130.0~2017-18~Main%20Features~Housing%20Tenure~3

Where do the renters go? Do you really want to de-house 32% of the population?

When I was a student, I chose to rent knowing that I would be in that city for only a limited time.

At various times in my career, I chose to rent because I knew I would be moving on.

When I was working overseas, in some countries it was illegal for me, as a foreigner, to own real estate.

An aunty, now retired but once a prominent and very well remunerated lawyer, sold her only property over 50 years ago and has chosen to rent because she does not want the hassles of owning a property. My guestimate of the current market value of the place she has leased for the last 20+ years would be above $3 million. Its not about affordability.



I owned several rental properties when Paul Keating abolished negative gearing; initially I was unhappy, and many investors sold their properties reducing the supply. Rents went up by an unprecedented 20% in our area within two years. I was happy, the banks increased my interest rate so they were happy, I was no longer negatively geared so the tax man was happy; the tenants were not happy but all chose not to find alternative accomodation.



About 80% of landlords are small investors, but they only own about 20% of rental properties - the old 80/20 rule. Rental properties are commonly the first investment of "learner investors". This is far easier for most people to understand and much less risky than the stock exchange or direct investment.



Are family law, tax law, contract law and common sense in agreement?



So, when I worked as a management consultant and went on long term assignment and left the family home vacant for, say, six months, you would take the family home away from us?

And you would prohibit us from renting in the assignment locale?



No comment necessary.

Well said, we need private investors in the market to provide rental accommodation for those who either choose not to or don’t have the ability to buy.

When Keating abolished the negative gearing my father in law said a number of landlords sold their investment units and bought taxi plates as they gave a better return, rents went up substantially due to the shortfall

Maybe this is how it works!!

Stimulus package


It is a slow day in the small Saskatchewan town of Pumphandle, and streets are deserted. Times are tough, everybody is in debt, and everybody is living on credit.




A tourist visiting the area drives through town, stops at the hotel, and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs to pick one for the night. As soon as he walks upstairs, the hotel owner grabs the bill and runs next door to pay his debt to the butcher.



The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.



The pig farmer takes the $100 and heads off to pay his bill to his supplier, the Co-op.



The guy at the Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit.



The hooker rushes to the hotel and pays off her room bill with the hotel owner.



The hotel proprietor then places the $100 back on the counter so the traveler will not suspect anything.



At that moment the traveler comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves. No one produced anything. No one earned anything...



However, the whole town is now out of debt and now looks to the future with a lot more optimism.



And that, ladies and gentlemen, is how a Stimulus package works.

Originally Posted by GraemeCook

Coincidentally, in most states stamp duties and real estate agents fees on a property sale are roughly the same amount.

A quick check on a couple of online calculators shows stamp duty on a $650000 house in Victoria is $34000, whereas R/E commission on the same house would be $18000.

Queensland stamp duty $15000. Re commission $17000

WA stamp duty $24890. R/E commission $15600

I guess it depends on where you live and what you call roughly the same.

Either way the Real Estate do some work for quite a sum and the government do nothing and generally get even more.

Originally Posted by doug3030

Think about who actually benefits from housing prices being over-inflated.

...

When the prices are going up it is investors that are driving them up and owner occupiers coming for the ride.

.....

This is a really interesting question, and another way of analysing it is to look at the way in which the banks' policies and interest rates impact on the prices of realty.

First, most of us, myself included want to live in the "best" house in the "best" locality that we can afford.

Second, banks manipulate the minimum deposit required as a means of regulating their own risk exposure. Often it has been 20%, sometimes 10% and occasionally in high inflation periods as low as 5%. What deposit rate they insist upon will depend on their current risk situation plus their assessment of your risk profile. If you are a "most favoured customer" then a lower deposit requirement.

Third, over the years, mortgage interest rates were often around 8%, presently they are unusually low at around 4%, but not so long ago they topped out at 17%.

Fourth, banks have often assessed you ability to service a loan as being 25% of the males after tax income. Quite recently they have started treating women similarly, and often use 25% of the higher income. Some will also increase the repayment figure to 30% of the higher income for dual income families. Rarely will they lend against the sum of the incomes.

These four factors set the limits for realty lending and, I would suggest, are the prime determinants of house prices.

A rule of thumb: Fore housing, banks make credit foncier loans, meaning that over the period of the loan there are equal payments of capital and interest, even though the capital is steadily reducing. In the first monthly payment the interest is calculated on the full amount loaned, in the last monthly payment then interest is calculated on the very low residual debt and is miniscule. The average interest is thus approximately half the interest amount calculated for the first month.

Let us consider a simple example of a family where the wife has an after tax income of $100,000 and the husband $75,000. The bank policy and risk assessment dictates a maximum repayment obligation of $30,000 and a minimum deposit of 20%.

If the interest rate is 4% then they can borrow as follows:

• $425,000 - Total loan amount,
• $1,417 - first month's interest cost (= $425,000 * 0.04 / 12)
• $708 - average monthly interest cost (= $1,417 / 2)
• $1,771 - average monthly capital repayment (= $425,000 / 20 / 12)
• $2,479 - monthly credit foncier loan repayment (=$707 + 1,771)
• $29,750 - annual debt servicing costs (= $2,479 * 12)
• $531,250 - Affordable house price ($425,000 / 0.80)
• $106,250 - minimum deposit required ($531,250 * 0.20) - 20% deposit.

Under that interest regime our couple will look for a house priced around $531,250 and will need a deposit of $106,250.

If the interest rate changed to 8% then the maximum debt that they could service would be $330,000, for monthly repayments of $2,475 and a minimum deposit $82,500. They would be able to buy a house around $412,500.

Similarly, by substituting different numbers into the above calculations, when the interest rate was 16$ they would be looking in the $287,500 range.

I would suggest that the impact of the interest rate regime on the house buyers ability to service a loan is the prime determinant of housing prices.

Originally Posted by GraemeCook

This is a really interesting question, and another way of analysing it is to look at the way in which the banks' policies and interest rates impact on the prices of realty. ... (rest of comment) ...
I would suggest that the impact of the interest rate regime on the house buyers ability to service a loan is the prime determinant of housing prices.

Well that's a nice history lesson on how it has been done, but this discussion is more about how things are going to change going forward from Covid-19. As we have been saying it could now be a totally new ball game.

Originally Posted by Dareen

Maybe this is how it works!!

Stimulus package


It is a slow day in the small Saskatchewan town of Pumphandle, and streets are deserted. Times are tough, everybody is in debt, and everybody is living on credit.




A tourist visiting the area drives through town, stops at the hotel, and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs to pick one for the night. As soon as he walks upstairs, the hotel owner grabs the bill and runs next door to pay his debt to the butcher.



The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.



The pig farmer takes the $100 and heads off to pay his bill to his supplier, the Co-op.



The guy at the Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit.



The hooker rushes to the hotel and pays off her room bill with the hotel owner.



The hotel proprietor then places the $100 back on the counter so the traveler will not suspect anything.



At that moment the traveler comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves. No one produced anything. No one earned anything...



However, the whole town is now out of debt and now looks to the future with a lot more optimism.



And that, ladies and gentlemen, is how a Stimulus package works.

That was a great read. Thanks

There was also a very interesting article today by Peta Credlin on the stimulus package and other fiscal handouts during this pandemic.