July 2013 – Points to Ponder

29 Jul

What is happening in our economy … How are financial markets doing … And a story on “True Cost of owning your Home”

Dear Readers,

Thanks to all of you for accepting our invitation, for accessing our blog, and for your participation & feedback. Your positive feedback inspires me to explore new ideas & topics. We look forward to more of your active participation.

You have read our understanding of the meaning of “Money” and a brief history of its evolution over time (August 2012 Blog – “What is Money”)
You have read our thoughts on how the concept of money has been distorted and manipulated, over time, and the unsatisfactory ‘Paper Based Fiat Money” we currently have (Various Blogs – Nov 2012 to April 2013)
You have read our discussion on the most important asset we are likely to buy in our lifetime – “Our Home” – And some thoughts on how to go about decision making (July 2012 Blog – “Is it the right time to buy property?”)
You have noted our thoughts on the subtle difference between “Price and Value” of any asset, especially your family home (November 2012 Blog – “What is the Value of My Property?”)
You are now familiar with the young couple Shaun & Sarah, who share and benefit from our stories and thoughts (December 2012 Blog)
This month’s blog is a response to recent “News” in Media about “Advantages of Owning newer Units/Apartments in preference to individual houses”.

The Big Picture

Let us quickly look at the global and local (Australian) outlook on the economy and property market. We see not much cheer in Europe and the US economy.
The huge and unprecedented “Money supply/Printing” by Central Banks (Mainly the US Fed, the EU and Bank of England programmes) have resulted in very little benefit to the “Real Economy”, while creating new bubbles (and further inflating and distorting existing bubbles) in various asset classes (Bond Markets, Property Markets, etc.).
More worrying is the recent “Competitive Currency War” being subtly played out by China, Japan and other BRICS countries – A downward spiral game of “Beggar Thy Neighbour’s Competitive Trading advantage”.
On top of all the Trillions of Dollars “Created out of Thin Air” and pushed into the global markets, the US Fed has been (since last few months) pumping an additional 85 Billion Dollars, Monthly, to add fuel to the monetary fire waiting to spread out of control.
Even a hint of “Possibly thinking of, maybe, reducing this “85 Trillion per month” in future, set off a minor earthquake in global asset markets.
And all this “Money” is not doing much (some would say nothing) for the real economy – The Banks do not want to take risks and lend it out ……

But how does this affect me? What is the connection?
The GFC (Global Financial Crisis) which hit us in 2007-08 has not been, in our view, properly understood. The panic reaction in 2008 was to throw money (Literally – Think of Billions of dollars of handouts to the car industry, handouts to various other manufacturers and exporters, disastrous Govt programmes – like ‘Pink Batts’, Building the Education Revolution’, etc., – Direct cash transfers to families and children, and much more).
Our (Australian) economy is a lot more unhealthy today compared to 2007-08. Producers and consumers are low on confidence. Investors and entrepreneurs (both local and overseas), who create wealth and jobs, are closing shop and paying off their debts.
Our national debt looks to be around 260 Billion (A record) and growing. This debt is in our name and we are all, indirectly, paying interest on this debt. How and when are we going to repay this debt?
And now, well, they are hoping that we mugs (consumers) will go out and borrow more and more (We are already drowning in debt) and, somehow, magically, “All will be well again”.
(Please read December 2012 and January 2013 Blogs for more details)

Topic of the Month – True Cost of Owning your Home

We have discussed, in detail, our thoughts on Price and Value of your property, including some thought provoking questions in our November 2012 Blog – “What is the Value of My Property”. Please read this for more details.
In our December 2012 blog “Is your home your ATM” we discuss the story of Shaun & Sarah, and some facts of real costs of ownership of your home / property.

Recently, I had an interesting conversation with a couple wanting to buy their first home. They had been enticed to look at buying a recently built unit in a block with extra amenities like security cameras and access, lift, “elaborate recreation area”, gym, pool, sauna, etc.
They requested my assistance in comparing this unit with an simpler unit without all these “fancy” add-on’s.
Location, size, access (to recreational venues, shopping, major roads and public transport, etc.) quality, etc. of both units were broadly similar.
There was one major difference – Quarterly Strata cost for the older unit was upto $300, for the ‘fancy’ unit – upto $1200.

‘How does this affect us over the long term’? Was the obvious question; Here are some numbers;

This is an extra cost of $900 per quarter (ongoing and possibly increasing, over the long term).
This worked out at upto $3600 per year ($1200 minus $300 times four).
Assuming that you own this ‘fancy’ unit and live in it for 10 years;
And you would have used this surplus $3600 towards additional repayments towards your mortgage;
And your average mortgage interest rate, over the next 10 years, would be 7% per year;

The total cost, compounded, over the 10 years of owning and living in this property would be upto $53,000 ……… (And we are ignoring inflation and other factors).
This works out Approx. $445 per month.

Several interesting questions / responses (some of them emotional) were raised;
Why are some properties, built recently, comparatively more ‘Expensive’?
Why are strata charges on some properties, built recently, comparatively higher?
Do the “Add-Ons” not enhance appreciation of property values over the long term? Will we not get a higher resale price for our property in the future?
Will we not use the “Add-On” – The swimming pool – and will it not add value to our lifestyle?
Will we not use the “Add-On” – The Sauna – and will it not add value to our lifestyle?
Will we not use the “Add-On” – The Gym – and will it not add value to our lifestyle?
How can this affect our long term financial goals?

Watch out for next month’s blog for some lively feedback and answers to points raised above.

I will leave the forum open to you now ………… What are your thoughts on all of this?
What is your experience?
Come, join the discussion, and share your ideas & experiences …….
I look forward to your opinion, counter argument, response, constructive criticism, feedback, etc.

PS: ‘Tax Returns’ time, end of year, I am sure you are all going through the process. Where is that ‘Tax Return Cheque’? Would you rather spend it or save?

Looking forward to hearing from you


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Posted by on July 29, 2013 in Uncategorized


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