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July 2013 – Points to Ponder


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

Hari

 
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Posted by on July 29, 2013 in Uncategorized

 

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April 2013 – Points to Ponder


What is happening in our economy … How are financial markets doing … And a story on  “Risk & Protection”

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.

One of our readers, an ‘experienced blogger’ and ‘twitterati’ (yes, he does have crooked thumbs, and is prematurely hunchbacked … Ha Ha) recently commented that the normal attention span of ‘online content scanners’ (people who browse & read online content) is getting shorter and focus is on single subjects, rather than a wider range of comments.

I also attended a Google seminar recently, which backed this observation …

We have taken this hint … and will focus on single subjects in our monthly blog.

A recent real event within my professional circle has made me write this article.

Topic of the Month – Risk & Protection

I introduced a young couple, Shaun & Sarah, to you in the December 2012, Jan 2013 and Feb 2013 blogs. Let us use these characters as the main players in this story.

Act 1

Picking up the story midway from the Feb 2013 blog (see Feb 2013 Blog for details) ……

A friend/family member/well-wisher introduces them to this guy Hari. They listen to what Hari has to say, ask a lot of questions, discuss various options, and decide on a course of action………

Hari has brought up the subject of Risk Protection and posed a few questions to think about …

Do you have financial liabilities ? (mortgage, debts, etc.)

Is your current lifestyle funded by your income/salary producing activities ?

What if, for some reason, you are unable to work/function normally ?

How would you fund your debt obligations and daily lifestyle ?

Bottom line – How many days, weeks, months can you financially cope without having to sell your hard earned assets ?

Shaun & Sarah have a chat …..

We have been Ok so far ……

Nothing will happen to us …..

Why pay for insurance …. dead money ….. can do better things with our money …..

Did you say something about insurance in our super ? ……

We’ll be all-right …..

Time goes by, life goes on, till one day Hari gets a call from Sarah …… Shaun is in hospital, We need to talk

Now let us rewind ………. Pretend we are back where Shaun & Sarah are having a frank discussion on Risk Protection ……….

Act 2 – Shaun & Sarah have a rational discussion on what Hari has brought up – Risk Protection …..

Yes, we have a mortgage and other commitments.

Yes, our current lifestyle is solely funded by our income/salary.

Yes, We will have to use up our hard earned savings, if We are unable to work/function normally.

No, our savings would not last us for more than a few months.

What about our long term goals, if we use up our savings ?

Bottom line – Hari is right, We need to have suitable protection …..

Shaun & Sarah Discuss their needs with Hari and decide on adequate Risk Protection. Hari organises cover and helps set it up for Shaun & Sarah.

Time goes by, life goes on, till one day Hari gets a call from Sarah …… Shaun is in hospital, We need to talk

Hari assists Sarah and helps them with their claim. Financial assistance from the claim helps Shaun & Sarah to cope well. Life goes on, with minimum disruption ….. A satisfactory outcome.

Moral of the story – We cannot predict what tomorrow will bring, but We can try and take sensible action to cover and mitigate.

As the famous saying goes ….. Wishing, and hoping, and crying, and praying will not help …. But your Insurance Policy just might …..  

 Looking forward to hearing from you

Hari

 
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Posted by on April 17, 2013 in Uncategorized

 

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Responding to broker criticism – A Finance Professional’s View


There has been a lot of heat and noise about various articles written by News Ltd Journalist Jessica Irvine over the last few months.

While a lot of us, understandably, react to these sensational headlines, I have attempted to take an objective look at what the newspapers are saying about mortgage brokers and the industry as a whole.

Over the last few months, the various newspaper articles have suggested that the big four have grown a lot more powerful since the GFC.

In addition, the newspapers have suggested that the big four have taken over many of the smaller banks, aggregators, and financial services businesses.

Ms Irvine and other journalists also imply that the banks aim to offer, and profit from, multiple products to their clients and that mortgage brokers may not offer the best deal to their clients.

Without going too much into the history of banking in Australia, reforms in the 80’s opened up our economy and banking sector, leading to de-nationalisation, reorganisation and consolidation.

The fact of the matter is, as consumers of financial products, we have to make suitable choices and informed decisions that are in our best interests.

We live in a free market, and like the overall economy, change, mergers, acquisitions, consolidation, is part of how our economy works – and the banking and financial services sector is no different.

We must ask ourselves: Do most businesses aspire to a bigger and bigger share of customers?

Of course.

Do most businesses aspire to a bigger and bigger ‘market’ share and faster growth?

Do most businesses aspire to higher profitability per client?

Do most businesses aspire to sell multiple products per client?

At the end of the day, the answer to all of these questions is yes.

Are consumers free to choose who they want to deal with, buy from, bank with, borrow from, and make decisions solely based on their choice and needs?

Absolutely.

Do all of them choose to make informed and objective choices and decisions at all times?

Most of the time, yes.

As a finance professional, I know we must practice within the confines of a regulatory framework.

In addition, we are bound and guided by relevant ‘industry bodies’ and associations.

In most cases we run businesses and in a free society we would not survive, let alone thrive, if we were not ‘doing the right thing’ by our clients.

Does a finance professional listen to, and discuss, a client’s current situation, wants, future needs, and goals?

Yes we do.

Do we help clients analyse their situation, wants and needs, and provide practical solutions?

Yes.

Do we discuss with and assist clients make appropriate decisions, based on offered solutions?

Do we assist clients with structuring their borrowings and loans to suit their needs?

Do we then, and only then, discuss possible lenders/product providers who may be suitable?

The answer is of course yes!

While there will always be a few bad apples the fact is that the vast majority of brokers work with the client’s best interests in mind and people who argue differently are ill-informed.

So why do some journalists/commentators/regulators write negatively about us? And would these articles be fewer or non-existent if all the bad apples were removed?

Food for thought.

 
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Posted by on March 12, 2013 in Uncategorized

 

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February 2013 – Points to Ponder


What is happening in our economy …………. How are financial markets doing …………….. And a story titled “What If” ……………………

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. I look forward to more of your active participation.

The Big Picture

The US Nothing much has changed in the US economy or future outlook (more details in our previous monthly blogs).

The US Fed’s indication of a ‘Perpetual Quantitative Easing’ (money out of thin air??) policy, roughly 85 Billion USD per month, is worrying a lot of people.

The logic of ‘Increased money supply = Increased uptake of debt by the economy = increase in GDP/growth’ is debatable ……… to say the least.

It seems it took 3 Dollars of money supply (into the economy) to show up as 1 Dollar worth of GDP growth, in the good old days (1970’s) ……………. Some are now saying it takes up to 20 Dollars or more for the same 1 Dollar worth of GDP growth ………. Not much bang for the 20 bucks ………..

And an indication of the Fed even thinking about looking at an exit to this ‘ongoing Quantitative Easing’ created a ‘wobble’ in worldwide stock & bond markets ………….

Europe The saga continues on ……… More and continuous bailouts, more unrest, unstable governments, elections in Italy ……. Nothing new or positive to write about.

The ‘BRICS’ In most cases have imitated the west (US & Europe) ……… More intervention by central banks in the economy & financial markets, more ‘central planning’, more ‘wealth distribution’ policies ………

There seems to be ‘competitive currency manipulation’ (some are calling it ‘Currency Wars’) by individual countries, to support & benefit from export led growth.

There is much talk of political uncertainty and allegations of corrupt practices, undermining confidence.

Some economists point to inadequate national savings, leading to increased dependency on overseas borrowings to fund much needed infrastructure & other investments.

Emerging economies, mostly modelled on export driven growth, need demand growth from the west (US & Europe), which is not happening  ………. A chicken & egg situation??

Australia Not much has changed in the past few months. Our economy seems to be treading water, in spite of dubious government policies and economic management.

Elections are round the corner, with hopes of a clear mandate and majority in parliament …… A fresh & objective look at better managing our economy, and hopefully, improving overall economic confidence.

What is all the ‘Daily Media Noise’ telling you ? What are you hearing ? What do you think ?

Topic of the Month

What If – A story

I introduced a young couple, Shaun & Sarah, to you in the December 2012 blog. Let us use these characters as the main players in this story.

Act 1 – Shaun & Sarah are both in their early/mid 20’s, have grown up in comfortable, loving homes,  have been gainfully employed recently, and are now planning to move out and make a nest for themselves.

Let us assume both have an average income of $70,000 each, over the next 10 years (they may start off on 50k in year 1 and reach 70k or more in year 10).

Both have studied hard and have landed good jobs, they have a lot of dreams, wants, wishes, etc.

A lot of things to catch up to – That dream car, clothing, gadgets, and lifestyle. They want to live it up – NOW

A friend/family member/well-wisher introduces them to this guy Hari, but they have no time

They decide to rent, in a fashionable and sought after suburb. Both lease the latest high end cars, and upgrade models every 2 years.

They borrow to furnish their rented accommodation, in the best of style, and upgrade it every few years, on credit. They enjoy the latest gadgets, clothing, footwear …….

They eat out in the best joints regularly, exotic holidays every few months ……. An aspirational lifestyle.

Their friendly Bank is more than happy to provide easy access to credit ……. Credit Cards with ever increasing limits, Leases, Personal loans, overdrafts, and more ……..

Shaun & Sarah have always managed to keep up with required minimum payments on their various debts ……… Just so ……… Once or twice having to cut back on a holiday, car upgrade, etc.

They have sometimes talked about savings, property, assets …….. With friends & family …….. But life has been hectic & fun …… and 10 years have passed so quickly …….

Shaun & Sarah are now in their early/mid 30’s …… They are increasingly aware of many of their friends & family having kids, living in their own homes or investing in property …….. Concepts of savings, investment, property, assets, etc. are making increasing sense to them.

One fine day they remember this guy Hari and get in touch with him. Hari encourages them to work out a balance sheet, of what they own and what they owe ………..

We have two late model cars, but we owe money against it …… Monthly interest payments

We have a lot of furnishings, gadgets, clothing …….And personal loans …… Monthly interest payments

We live in a posh place, in an upmarket suburb …….. But pay high monthly rental payments

Bank Savings, investments, etc. – assets? ……….. We have each other, that’s it

Cash Flow? Yes, we work hard for our cash ………. but it flows out faster than it comes in

Now let us rewind ………. Pretend we are back 10 years in time ……….

Act 2 – Shaun & Sarah are both in their early/mid 20’s, have grown up in comfortable, loving homes,  have been gainfully employed recently, and are now planning to move out and make a nest for themselves.

Let us assume both have an average income of $70,000 each, over the next 10 years (they may start off on 50k in year 1 and reach 70k or more in year 10).

Both have studied hard and have landed good jobs, they have a lot of dreams, wants, wishes, etc.

A lot of things to catch up to – That dream car, clothing, gadgets, and lifestyle. They want to live it up – NOW

A friend/family member/well-wisher introduces them to this guy Hari. They listen to what Hari has to say, ask a lot of questions, discuss various options, and decide on a course of action.

Hari assists them to work out their current financial position, current wants, future needs and helps them set long term goals.

They decide to board at one of their parents/family home.

They prepare a monthly budget and a practical savings plan.

They agree to monitor their monthly expenditure and save a healthy part of their net incomes …….

Yes, they have reliable transport and choose to buy cars with Money Saved, not Debt

Yes, they have adequate personal belongings, but Bought with Cash – Not Debt

Yes, they have credit cards, but Do Not Pay Interest on them

Yes, they enjoy a good lifestyle, but Within Budget and Not with Borrowed Money

Hari reviews their financial situation annually and in 2-3 years Shaun & Sarah have saved up to $90,000

They now decide to buy their first property. With prudent advice they decide to buy a unit for up to $300,000. They use most of the saved $90,000 towards a deposit and costs of purchasing their home.

Shaun & Sarah have been assisted in choosing the most appropriate loan product, interest rate, term, features, etc.

Hari encourages them to rework their altered financial position, rethink their current wants & future needs, and update their long term goals.

Hari assists them to manage, effectively, their home loan, debts, expenditure and outgoings

Hari reviews their financial situation annually and assists Shaun & Sarah in maintaining budget discipline, cash flow management, etc.

In 3-4 years Shaun & Sarah have succeeded in managing their cash flow very well.

They have managed Not to Incur Any New Debt

They have managed Not to Pay Interest On their Credit Cards

They have Upgraded motor vehicles, With Savings, Not Debt

They have managed to Pay for all Unforeseen/One off Expenditure with Cash, Not Debt

They have also managed to save up to $60,000, with relation to their home loan & mortgage product.

They now decide, after active consultation & discussion with Hari, to buy an investment property.

They buy property for $400,000 using built up equity in their home plus available funds of up to $60,000 to fund deposit and costs of purchase.

Shaun & Sarah have been assisted in choosing the most appropriate loan product, right structure, interest rate, term, features, etc., by Hari.

Once again, Hari encourages Shaun & Sarah to rework their altered financial position, rethink their current wants & future needs, and update their long term goals.

Hari reviews their financial situation annually, and assists Shaun & Sarah in maintaining budget discipline, cash flow management, etc.

Shaun & Sarah are now in their early/mid 30’s, and take stock of their financial position. Hari encourages them to work out a balance sheet, of what they own and what they owe

We have well maintained motor vehicles, with no debt or interest payments

We have adequate home furnishings, gadgets, clothing, etc., but no debt or interest payments

We live in our own home and pay our mortgage, not a landlord’s mortgage

We have property assets worth in excess of $900,000, with well managed debt against them

We have additional savings/funds available on hand for contingency (Unforeseen/One off Expenditure)

We have plans of diversifying our investments, in the future

Our Cash Flows in faster than it Flows Out, accumulates, and …….. We make it work for us

Time to ‘Pause’ the Video ………… and have a chat about the Story …………..

A lot of thoughts may come into your mind ………………..

Nice story, not possible in reality ………….. (Hari can provide many real life examples)

Lot of unforeseen things happen in 10 years, you can’t plan for all of it …….. (Exactly – If we fail to plan, and review it regularly, and change it if need be ……. We are planning, by default, to fail)

We are not in our twenties (wish we were), it’s too late ……. (Not so …. The older you are, more important it is to act – Talk to Hari – We can take stock of your current situation, look at where you are, decide on where you want to be, and work on a practical course of action ….. It is never too late)

I have made some counter comments, to start off a conversation with you. I am sure you will have many more counter arguments & points to make. I will look forward to a robust discussion.

Please note I have made many assumptions and have done detailed calculations to arrive at all above figures. Pl email Hari, I will be more than happy to work out specific scenarios with you.

I hope the blog is challenging enough to start all of you thinking ……………..

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, share your ideas & experiences …….

I look forward to your opinion, counter argument, response, constructive criticism, feedback, etc.

PS: Don’t worry, Act 1 was a nightmare Shaun & Sarah had, Hari made sure their story was similar to Act 2  …………

Looking forward to hearing from you

Hari

 
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Posted by on February 26, 2013 in Uncategorized

 

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January 2013 – Points to Ponder


A new year is upon us ……. How will the economy perform this year …….. How will financial markets perform ……… What about the property market ………..

Dear Readers,

Welcome to 2013 and may we all have a healthy, prosperous and fulfilling new year. Thanks to all of you for your continued interest, support, participation & feedback to this blog. Your positive feedback inspires me to explore new ideas & topics. I look forward to more of your active participation.

There has been a lively exchange of comments over my observations in the November 2012 articles (“What is the Value of my Property”) and December 2012 (Is your Home an ATM”) ……. Some of it quite emotional, others hilarious, and a few insightful ………. It made the year end get-togethers a bit more interesting.

The Big Picture

The US FED policy of ‘Perpetual Quantitative Easing’, along with ‘Interference in the money & bond markets’, continues with no end in sight. It is as if the only consistent theme behind the FED’s thinking is “Let’s learn & improvise as we go along ………….. and hope for the best”.
The US Government’s Fiscal position is not getting any better, amidst all the dramas of Cliffs & lemmings ……… Mind boggling figures of Trillions (more than 16 of it) continue to do the rounds, with farcical arguments over balancing the books in 20 or 50 year’s time ………
Is the US dollar being world’s De-Facto Fiat currency make it possible for the Fed to ‘Create USD out of Thin Air’ and get away with it ??
Is the Fed’s actions encouraging investors to accept more & more risk, with ever diminishing returns ??

What is all the ‘Daily Media noise’ telling us ? …… What are you hearing ? …… What do you think ?

Europe continues down the slippery slope ……….. More bailouts, stimulus packages, in short – Band-Aids on deep rooted fundamental political & economic problems ………………
Alarming unemployment & underemployment numbers, with youth unemployment closer to 50% in some places.
Major participants reconsidering their commitments towards the European Union ……… while mounting pressure building up in the UK for a referendum ………..

The ‘BRICS’ seem not to be as firm as they are claiming to be. Most of them seem to have played the same game as the US …….. Bailouts, economic & fiscal ‘support’, and ‘managing’ their currency & money supply …….
Some see a ‘Currency War’ coming, and others say it is already in progress.

Australia – We seem to be doing OK, in spite of our political & economic leaders doing all they can to undermine confidence, sound fiscal management, less govt intervention and a freer market economy.
Commodity prices, mainly Iron Ore & Coal, have seen huge volatility in price and uncertain signals on consistency of demand, from our major trading partners ……. and many say there is more volatility to come.
We seem to be thinking up more creative taxes, and gearing up for more and more ‘Redistribution of Wealth’ ……… hoping for a perpetual commodity price boom ………
There has been ever growing investment, worldwide, in ‘Mining & related infrastructure’, over the last 25 years or more.
Slackening of demand for, and volatile price swings of, commodities, combined with all this ‘Infrastructure’ …… Does not look good, does it ??

What are you hearing ? …… What do you think ?

Our ‘Property Market’ seems to be holding up OK, for now, but what about consistent growth in volumes and sustainable long term prices ??

Topic of the Month

Some interesting questions emerged, over the Xmas holiday break, in reaction to my observations in the November 2012 articles (“What is the Value of my Property”) and December 2012 (Is your Home an ATM”).

One of them was a lively discussion on how a young couple’s savings/investment/lifestyle choices, over a period of 10 years, affects their ‘financial health at the end of this period ………

Look out for some interesting, and sober, facts in the February 2013 blog ……….

Let me throw open the discussion to you. I look forward to your opinion, counter argument, response, constructive criticism, feedback, etc.

Looking forward to hearing from you …………

Hari

 
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Posted by on January 25, 2013 in Uncategorized

 

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December 2012 – Points to Ponder


What is happening in our economy …………. How is the property market doing …………….. And a question – ‘Is your home your ATM???’ ……………………

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. I look forward to more of your active participation.

A particular thanks to all of you who called up to comment and chat about the November 2012 Article (“What is the value of a Property”). A few of you were quite stirred up ……. Well, we started a conversation and got a few thoughts flowing ……… My purpose achieved.

One common thread, in the conversations we had, touched on how we saw our home as a store of value …… How we defined our financial well-being based on our home value …….
How we tend to depend on our home value to provide for our current and future cash flow needs ………
A sort of perpetual Credit Card or ATM ???? ……..

Part of a conversation with young couples ……… One of many I regularly have, got me thinking on the subject of this month, and a thought to ponder over the holiday season ……….

The Big Picture

Nothing dramatic has happened since the November 2012 article was written.
Europe continues in a limbo, the same old remedy of stimulus & debt making lesser impact ………
The non-election in the US, and stalemate in Washington, offers no fresh ideas or plan towards understanding and solving economic problems ……..
The “Tiger’ economies, in particular, and other global emerging markets in general do not yet show any trend towards sounder, long term growth strategies …………

The Australian economy, as explained in my previous blogs (July 2012, August 2012, November 2012), continues to flounder on, highly dependent on world commodity demand & prices …….., misplaced hopes of a consumer demand driven growth ……….., Mediocre economic management by our government …………, and now, a desperate hope that ‘infrastructure and construction’ activity will somehow lead our economy towards better growth.
The RBA has cut interest rates to a record low (GFC level) hoping to somehow stimulate the economy towards more debt, consumption, ‘investment’ and growth ……….
What is all the ‘Daily Media noise’ telling us ? …….. What are you hearing ? …………. What do you think ? …………..

More borrowing, more debt, more consumption ………. All of us are being told, is THE magic solution to overcoming our current problem ………. Which is partly a result of …….. Too much borrowing, debt and consumption …………..

This brings us to the topic of the month – “Is your home your ATM”?

‘My Home is my Castle’ – This timeless saying is a bedrock of our thinking. We are a nation of home owners, and the Australian dream of aspiring towards ‘The Dream Home’ is central to what we are and what we do.

Our home & property value is a predominant subject of curiosity, talk, speculation, etc. To buy, and borrow against, our property is probably the most prominent & biggest decision we make, at the earliest stage of our productive lives.

Our home, being central to our family life & well-being, gets a lot of attention. We take pride in what we buy, where we buy, how it looks ……….. And we are constantly aware, or being made aware, of home prices; current & future ………..

As explained in my previous blog (November 2012), we tend to feel the ‘Wealth Effect’ ……… Of being better off, more secure, wealthier …….. If we are convinced that our property is ‘worth’ more compared to when we bought it.

“We paid $500,000 for our home (contract price), we have done a lot of spending on it over the last few years, and they now say it is worth $600,000 …………. That’s a cool 100 grand ……… Not bad”.

‘They’ could be our neighbours, family & friends, Newspapers, Online media, our friendly local Real Estate Agent, etc. ……….. And it is reinforced regularly …….. We talk about it, a nice part of our conversation at almost any occasion.

And it gives us a sense of achievement, self-congratulation ……. A sense of ‘We are doing alright’.

And, in most cases, this is the ‘Starting Out / Growth’ phase of our lives – Just started / Growing Family, Growing Career, Growing Kids ………….. And growing needs, wants, wishes, aspirations …………..

And there is never enough time, We want to do so much right now ………. We want to keep everyone happy ……… and of course, there is never enough money ……….

“Some things have to be done now, We need it, We want it, Let us just do it …….. If we need to borrow, so be it ………. We are all right, We can manage it” ………

‘The Wealth Effect’, in part, gives us this confidence ……….. Our perception of increased property value can assure & convince us to borrow more, go into more debt ……….
It can also, if we are unaware, balance out the caution we may naturally feel when borrowing more.

And our ‘Friendly Banker / Financier’ is standing by ……… ‘You have equity in your property, yes, we can organise something for you easily’ ……….

The Cost of Home / Property Ownership

Let me introduce to you Shaun & Sarah. Both in their mid 20’s, grown up in comfortable, loving homes, have been gainfully employed over the last few years, and are now planning to start a family of their own.
They have managed to organise a 5% deposit for their new home, and have decided to buy a property for $500,000.

Let us assume that they end up borrowing $475,000 to purchase their property …………….
Assume the $25,000 they have goes towards a deposit (Down Payment) ……………..
Assume the ‘Initial Costs’ of purchasing as approx. $37,000 …………..
Assume they settle down comfortably into a minimum monthly repayment schedule ………….

Now, let us fast forward to 5 years down the track ……….. Shaun & Sarah have managed a comfortable & relaxed lifestyle and are, on a weekend, discussing their wants & needs ………….

‘It’s a good thing we bought this property 5 years ago ……. We probably would still be living with Mum & Dad if we hadn’t’ …………
‘There are these few debts we have, on top of the home loan ……… and we want some more money to do a few things right now’ ……….
‘We will need to borrow a bit more, but it’s OK ……….. Look at what that Real Estate Agent said the other day’ ………
‘Seems our property could sell for more than $730,000 ………. Isn’t that wonderful …….. a cool 230 grand profit’ ……..
‘We are all right ………. Let’s just put all our debts onto our home loan ……….. And borrow a bit more that we need right now ………. And it should be all right’ ………..

Sounds alright, doesn’t it ? After all, it seems like they are sitting on an increased property value ………

But hang on ………. There were a few facts we missed ……… the property (and the mortgage) had to be managed/serviced over the last 5 years ……… Minimum monthly repayments have been made to the Bank over the last 5 years …………

Assume total repayments (over 5 years) towards the mortgage as approx. $193,000 ……….

Now let us add up the Total Cost of Ownership: $500,000 (purchase price) + $37,000 (costs of purchase) + $193,000 (total repayments) = $730,000 ………

‘But, that is the same as the current value of the property ………. You mean there is no profit’ ??? ……..

This is what the ‘Wealth Effect’ can do to us, if we are not careful. Yes, the property has gained in value over the 5 years.
Yes, the friendly Bank / Financier may be more than happy to lend Shaun & Sarah more and more against their property ……….. That is what Banks do for a living …….. Don’t blame them ……….

The gain in property value has already been paid for, in full, by Shaun & Sarah, with their hard earned ‘After Tax’ income, over the last 5 years ……….

Remember, an increase in our Property Value over time does not equate to money in our pocket ……… But, can end up as Debt on our balance sheet ……………

Come on Hari ……..
What if they did rent for those 5 years ………….
They repaid the loan with the $193,000, surely? …………
They would have saved the $193,000 over the 5 years, if they had not bought property ……….

I have made some counter comments, to start off a conversation with you. I am sure you will have many more counter arguments & points to make. I will look forward to a robust discussion.
Please note I have made many assumptions and have done detailed calculations to arrive at all above figures. Pl email me, I will be more than happy to work out specific scenarios with you.

I hope the blog is challenging enough to start all of you thinking ……………..
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, share your ideas & experiences …….
I look forward to your opinion, counter argument, response, constructive criticism, feedback, etc.

PS: Don’t worry, I will try my best to make sure Shaun & Sarah learn from this scenario …………

Looking forward to hearing from you and wishing you all a Very Merry Christmas, Happy Holidays, and a Prosperous & Healthy 2013 …………..

Hari

 
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Posted by on December 8, 2012 in Uncategorized

 

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