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.

 

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

 

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

 

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

 

November 2012 — Points to Ponder

What is happening in our economy …………. How is the property market doing …………….. And the loaded question ‘What is the Value of a Property’ ……………………

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 August 2012 Article (“What is Money”) and the September Article (“If it is Too Good To Be True”). To all the over 55’s out there, in particular, please take note and make wise judgements when investing your hard earned money.

My apologies for missing the October Blog. I had urgent Family commitments. I was advised, for the sake of continuity, to do a ‘cut & paste job’ …….. I refused. Originality is more important, I thought. Hope my honesty is appreciated.

It is nearly end of Calender Year 2012, The Christmas break is coming soon …….. What is all the ‘Daily Media noise’ telling us ? …….. What are you hearing ? ………….

The Big Picture

Europe and the Euro Zone is slowly trying to manage its way back towards growth and better times, some are saying.
Others have consistently argued that the whole concept of the Union, especially the Euro Zone, is a flawed concept to start with.
That many of its members are, if they were treated as independent private entities, already insolvent. That the Centrepiece of this Union, Germany, is in itself under severe strain trying to support a collapsing structure.

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

The US – Recent presidential election was made out to be a contest between two opposite Ideas & economic thinking …………. But is it ? ………..
What are their major differences on things that really matter – The Economy, Monetary Policy, Foreign Policy, Budget Deficits, National Debt ? ………….
Some say the US economy is bottoming out and can only get better. That wise elected leaders will have to ‘compromise’ and will work out solutions.
Others say the US economy has already fumbled over the “Fiscal Cliff” …….. That no ‘Compromise’ by the two sides in politics will solve anything ………
That the majority of legislators do not even understand what the problem is, let alone start to think of rational solutions ………….
That the US central bank (the Fed) cannot borrow and print (create money & debt) forever …………
The common sense, which even smart kids realise, that ‘you cannot rescue a man drowning in debt with a burden of more debt’, is not visible anywhere ……….

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

China – Which we in Australia see as our big white hope, is engaged in a ‘Change of Leadership’ process. There is talk of a bottoming out of its slowdown. That demand (for our commodities – stuff we dig up and ship to them for dollars) should pick up soon. What is this optimism based on ? ………….

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

Australia – Our local economy, in spite of its current management, and uncertain world economy (please refer to the first half of my July 2012 Blog for more details), is reasonably stable.
Both Commodity prices and volumes are down, some say it will be so over the medium term (3-5 years).
The big hope, that ‘Consumer Demand’ will take up this slack, did not happen. The current big hope is for the ‘Infrastructure & Property Sector’ to pick up the slack ………… This is in the background of continuous flat / deflating property values.
Some say ‘Property Prices’ are holding well and rising ….. with expected growth in the near future.
Others talk of ‘flat’ prices over the medium term, with chances of up to 10% fall, in the medium term.
What are you hearing ? ………….. What do you know ? ………………….

This brings us to the topic of the month – “What is the Value of My Property”?

Go to any BBQ, party, Get-Together, etc. and soon enough the subject of property & value crops up. This fascination with the “Property Market” is valid, most of us own (or we pretend to – our banker does) our home, or a property (directly or through our investments & super).

A recent conversation with a young couple, trying to educate them on ‘Property’, the ‘Market’ and ‘Value’ started me thinking. I have tried to open a discussion on three basic questions;

What is the ‘Property Market’, if there is any such thing ? …………………..

What is “Property Value’ and who decides it ? ……………………………..

And the shockingly obvious question – Does it Matter ? ……………………

The Property Market

This is a very broad concept, easy to generalise, but can be misleading when used in relation to a particular property.
Firstly, there are Global Regional property markets – Europe, North America, Latin Americas, Middle East, Asia, Oceania (Australia & surrounds), etc.
Under this would come individual National Property Markets.
Another Classification would be broad Purpose – Residential, Commercial, Office, Industrial, Rural, etc.
Within a National Property Market are sub-regional Markets – Different States & regions within the country.
Within Each State there are differences – Capital City, Other cities, Towns, Villages, etc.
Within Each City, Town & Village will be various Suburbs.
Within Each Suburb will be ‘Sub-Markets’ – Based on Type (Detached House, Unit/Villa/Town House, High Density, etc.), Location (A subjective choice based on demand & ‘Prestige’, Socio-Economic mix & background of current residents, etc.), Proximity (To Main Roads, Public Transport, Recreational Facilities, Educational Facilities, etc.).
And Many more of similar minute criteria & preferences.

Now imagine a complex mixture, of varying degrees, of all of these criteria. Then add in various statistics, opinions, projections, agendas, hopes & wishes of everyone who care to comment on this subject ……..

I think we are getting closer to the question – What is a Property Market ? ………………………

For the sake of Clarity I have limited this blog to Residential Property

So, How is the residential Property market doing ? ……………..
At best you could quote a much generalised trend, based on statistical figures sliced & diced to suit any particular agenda.
At worst, if this trend is directly applied to A Particular Property, it could be misleading.
The right question could be – ‘How is a particular type of property (Detached House, Unit, Villa, Town House, High Density, etc.), in a Particular Suburb, trending over a particular period of time (till today, future predictions should be taken with a pinch of salt)’.

Residential Property & Value

What is Value ? – The Oxford Dictionary, in part, states “The Material or Monetary Value of Something”. A wise man would say “Value is; Worth in One’s Judgement”.
A moral man would say “To put a Price on Every Thing is to Value Nothing”.

Think of a rubber band between your hands; Think of the left hand as the “Buyer” and Right hand as “Seller”.
The band can be stretched in many ways, sometimes by the left hand, sometimes by the right, other times by both. Some times less stretched & other times a bit more …………………
And while doing so, ask yourself the question “What is the value of My Property” ?

Perception, Sentiment, Past History, Future expectations …………. Of the overall economy, of Current Circumstances, of Future Expectations, etc. affects current perception of Price & Value of Property.

Consider a Particular Property. Ten different buyers (or a hundred, the logic remains the same) may have many different reasons for paying different Prices for this property – Because they see Value in it – for various reasons;

‘I love the property, don’t ask me why, So will pay “A” for it’. (Emotion driven decision)
‘It once belonged to my ancestors, will pay anything to get it back, so will pay “B” for it’. (Decision based on pride of ownership, not price or value)
‘My wife’s friend lives in a similar property in this suburb, So why shouldn’t We ? Will pay “C” for it’. (Living up to the Joneses)
‘Seems a lot of people are ready to pay higher price for this property, they should know something. They should be right, so will pay a bit more …… Will pay “D” for it. (He dunnit, She dunnit, so will I)
‘My research and numbers add up, will pay only up to “E” for this property and no more’. (Rational decision)
And there will be variations & combinations of many more reasons ……………

Price & Value is decided by the Market; Based on stock supply, current demand, willing buyer and willing seller ……..
Add a bit of marketing savvy, and a good dash of ‘luck’ and you are getting closer to the question “What is the value of My Property” ?

Now the contrarian question “Does it Matter” ?

You would, by now, be saying “Don’t be crazy Hari, of course it does …… What do you mean, does it matter!!! …………
Hold on, let me explain.

Let us look at your home.
What is its primary purpose ? To live in.
Who owns it ? Most probably your bank (mortgaged). You pay the bank ‘Rent’ (Interest) for the privilege of living in the property.
What if you did not have your property ? You would probably be a tenant and pay ‘Rent’ to your landlord.
Do you derive an ‘Income’ from your home ? No, obviously.

Let us assume you expect to live in your property for at least 5-10 years. Assume you paid “X” for the property. You may hope and expect a gradual increase in the value of your property over the long term, no harm in that expectation ……..
But, does it matter what the ‘Media Noise’ is saying about price & value on a weekly, monthly, yearly basis ?
Suppose you hear (and are convinced) that your property has gone up 10% …….. Does it matter ?
Has your property (or land size) grown by 10% ?
Has your income suddenly grown ?
Has your bank account become bigger ?
In reality, what exactly has happened ?

It can matter, if you Feel (perception, not actualised reality) that you are somehow “Better Off”, “More Wealthy”, are of “Higher Net Worth” because of general rise in property values around you.
It can make you feel good ……… This is called the ‘Wealth Effect’.
And everyone around you is talking about it.
And the ‘Media’ reminds you of it daily ……….
And all those sellers of dreams (products, gizmos, toys, lifestyles, holidays, you name it) ………
And your Friendly Bank too …………….

There is a risk of ignoring (or sidelining) rational concepts of Thrift (living within your means), of Saving, of thinking long term ………….
‘Why bother to save, my property will automatically make me wealthy’ ………
‘It’s ok to borrow & spend more now, I feel wealthier’ ………..
‘Live for Today’ ….. ‘Improve your Lifestyle’ …… ‘You deserve more’ …… ‘Just Do It’ ……….

And so it can get to you, and you may end up in more debt (borrowing against the ‘Higher Equity’ in your property) for today’s consumption ……….

It can also matter, if you do not let the ‘Wealth Effect’ get to you.
If you use this ‘Higher Equity’ for a productive purpose (not immediate consumption).
If you continue good habits of Thrift (living within your means), of Saving, of thinking long term, etc., ignoring the ‘Wealth Effect’.

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.

Looking forward to hearing from you …………

Hari

 

September 2012 ——— Points to Ponder

What is happening in our economy ….. Is it spring time for our property market …… And on the matter of scams – ‘If it is too good to be true” ……..

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.

It is the end of winter and start of spring …… Will September be the beginning of better tidings for our economy in general and the property market in particular …………?
We do not see any specific signs to be very optimistic about.
A subdued world economy relying heavily on ever growing debt and artificial stimulus from governments …….
A slump in commodity prices reflecting weak demand, and a cautious market biding time – unwilling to take risks ………. In short, the economy seems to be treading water, waiting for ‘someone to do something’ to raise ‘confidence’ ……….

And when times are tough, cash flow is constrained …… We all are, sometimes, tempted to let our guard down a little bit – to perhaps not think wisely before we leap …… And if something is too good to be true ………

I recently heard a conversation between an elderly couple discussing loss of money due to an online scam …….
The distress, anger, embarrassment and helplessness I sensed in the couple made me think …..
Later on, bringing up the subject of scams with a few others brought up a wider range of problems out there …. And started me working on this article.

I have tried to cover a wider range of temptations, for most age groups, with the hope of informing and assisting a broader range of readers.

But what has this got to do with money, finance & CleverCall ??? You will be wondering……

As I have mentioned in my previous blog (April 2012), and on the introduction on my website http://www.harionmoney.com.au & http://www.clevercall.com.au, like it or not, money is the other half of everything we do ……. Every transaction we go through in life ……

Too Good To Be True
We all would like to have a little bit more money …… And the easier we can ‘Make’ it or ‘Get’ it, the better ……
And then there is the question ……. what flows more easily – money or water ??? …… We want to spend as soon as we have it ………. Even better …….. Before we have it …….

You might be wondering – But what is wrong with all this ??? We only have one life …… Every day is precious …… Who knows what happens tomorrow …….. Live life today & be happy …… And ‘things’ make us happy ……. And there are a lot of things we want, Right Now ….

So, we want the ‘best bang for our buck’ ……. The smaller our ‘Buck’ and the bigger the ‘Bang’ we get for it, the better. Perfectly true ……..
But we have to keep in mind the old saying – If it is too good to be true ……

The media and its message
Progress, development, technological advancement, information revolution …… In general it has been mostly for the common good of all of us ……
But like most things, Ideas, Inventions, Discoveries, etc. All these things, by themselves, are morally neutral …… Neither good Nor bad …. Only its application – how we use (or abuse) it – has good or bad consequences ……

As mentioned in my July 2012 blog, There is a tremendous amount of ‘Information’ – ‘Noise’ directed at you …… very cleverly targeted ……tempting you with Ideas, Offers, Opportunities, Bargains, Deals …..
And life is hectic, competitive …… And we are tempted to try anything out, give anything a go – ‘Just Do It’ …. As the famous Nike Ad best describes it.

Now let us look at some of the things we come across and how we could deal with them.

For the very young (and young at heart)
Peer pressure & the Mobile phone – ‘Peer pressure’ is an age old concept. We probably are more likely to succumb to it when we are ‘younger & more impressionable’, but all of us, young and old, can be vulnerable to it.
And we all have mobile phones & devices with cameras ….. Even starting at the age of 9 ???

“Do this if you want to be ‘Cool’ ….. To ‘Fit Into the group’ ……. Easy money to be made, nobody will know about it” ……

It could be a ‘Dare’ to impress your mates, a bet (money) if you dare do something you would normally not do – Alcohol, Drugs, ‘Modelling’, ‘Escorting’ …… Many more temptations & inducements out there.

Social Media – And then, to compound your folly, and to broadcast this to the whole world, in many cases destroying reputation ….. Not knowing who has the information/content, what is being done with it ….. And you may end up having no control on it …….
Anybody & almost everybody have access to this tremendous tool at their disposal – Welcome to the age of Social Media.
Hacking, intrusion & distortion of your personal web space/content, stealing your money online, identity theft, fraud committed using your name/identity …………. All of this is possible.
Predators – Offering Friendship, Romance, Relationship, access to your most cherished dreams & wants (Cars, Careers, Instant Fame & Fortune, Holiday destinations, etc.) …..
“Saw you on ….. You look awesome ….. Desperate to meet you …… (Usually with a fake photo & flattering details) ….. Meet me at” …..

Students – You aspire (or have been convinced by your parents/well-wishers) to further education beyond high school …… Most probably financed by a big student loan …..
And there is the ongoing cost of University – Fees, Transport, Food & clothing, and lifestyle …….

Some of your mates are already in the workforce, have plenty of ‘cash in hand’, cars, clothes, food, friends & parties ….. And you are tempted ……..
“Wish I could have my education, and my mate’s lifestyle too … Right Now”

There are many tempting, attractive, ‘Easy’ offers out there, shouting at you …..

Downloading Content, Data, Software, etc. without legal consent or paying for it ….. It could get you into legal hassles, and also could be a way to breach your device & take control / misuse it.
“You are a winner!!!!! – ‘Congratulations, You have won the latest Gizmo ….. Just send us a hefty processing & postage fee, ASAP”…. and probably never hear from them again.
You may get offers of ‘Borrowing (or outright theft) your identity’.
Or it could be ‘That Dream Scholarship / Aid’ (Apply here and pay ‘Processing Fee’, Now, or miss out)
Or offers for ‘Easy Student Loans’ (‘Pay hefty Fee Upfront, Now, or miss out’).
Or that ‘Dream accommodation / Rental Place’, so cheap, (Pay hefty deposit/advance, Now, or miss out)
Or offers of ‘Dream job for Students’ (selling fraudulent products/services, raising money for non-existing causes, etc.). And we haven’t even started on the ‘Work from Home’ Scams out there …….

‘Job’ opportunities – You are young, innocent, full of energy, need money desperately, and job opportunities are hard to come by ……… A perfect mixture for scamsters …….

Be it ‘Work from Home Schemes’ – Call this ‘Special Number’ for more information (high cost per minute charges).
Or ‘Processing & Editing Emails’ (pay hefty ‘training fee’, never hear from them again … or get instruction to spam/forward emails to everyone & anyone – breaching spamming laws).
Or ‘Offshoring / Outsourcing Services Business’ (pay hefty fees for start-up/training/software, never hear from them again …or getting a list of non-existing/not interested ‘Ready to Employ’ businesses).
Or ‘Your Computer Turned into a Money Machine’ (Email/Data processing – Spamming).
Or ‘Chain Letter & Envelope Stuffing’ – Prepare, process and post envelopes for cash …. (Pay hefty material & training costs Now, and never hear from them again).

For families (especially stay home mothers) – On top of most of the scams mentioned above there are many more targeted at you – stuffed into your mailbox, emails, in magazines ……..

Lottery & Award scams – ‘You (or your kids & family members) have won this exotic Lottery ….. Probably many Millions ……. We need your bank account details along with processing & transfer fees …… Immediately ….. Don’t miss out …… Don’t tell anyone’ ……You will probably never hear from them again, and find some money missing from your bank account.

The Nigerian (and many other Callithumpian) Letter Scam – ‘I am the Son/Daughter of His Highness/Excellency ……… I have inherited Zillions …… But cannot get this money out due to political problems in my country ……. You are the chosen one to help me get this money out …… This is top secret/confidential ……. We need to get this done by yesterday ……You will get a big cut of my assets, probably Millions, if you help me succeed ……. Send me your bank account details ASAP ….. And don’t tell anyone’ ……. You will probably never hear from them again, and find some money missing from your bank account.

Multi-Level Marketing (MLM), also variously called ‘Network Marketing’, ‘Consumer Direct Marketing’, ‘Pyramid Schemes’, ‘Ponzi Schemes’ – Usually involves buying & selling products/services, building a network of participants, expanding and deepening networks/participant base, expectations of multiple sources of revenue & income, Uplines & Downlines, etc.
“Time Freedom, Unlimited Income Possibilities, Perpetual & Residual Income Potential” ……. These are some of the catch-phrases you may come across frequently.
A sobering thought – I recently came across a research finding on these schemes ….. Up to 99.7% of participants will probably lose money, and give up …….

Read books & Make Money – ‘We know you are an expert reader of children’s books, or Cookbooks, etc. ….. Use your expertise to earn megabucks ….. Book editors job ….. No experience needed ….. Work from the comfort of your home’ …… (Pay hefty start-up fee …… and never hear from them again).

For the elderly – The most vulnerable, in many cases rich in assets but limited cash-flow, craving companionship / attention, technologically less able, more trusting/obedient towards ‘Authority & Officials’, prone to keeping cash at home, prone to diminished memory, reluctant to report/complain …… You are prime targets for scamsters.
Most of the scams listed above also affect the elderly. There are many more ….. A few of them listed below.
Fake ‘Official’ letters/correspondence from utilities, government departments, etc. – ‘Your telephone / power supply / water / gas / etc. needs to be inspected/rectified/replaced …….. Our staff will visit you on …….. Please co-operate & follow directions’ ……. A fake turns up (or sometimes an errant employee) and demands a hefty fee for service (best case scenario) …… Or might demand & steal money & property (worst case scenario) ………
Attractive Lady / Gentleman needs companion – A nicely written letter, with attached attractive photo …. ‘I am ….. from ….. looking for a life companion ….. Ready to join you immediately ….. Please sent preparation & Airfare costs immediately’
Child needs urgent medical attention – A heart rendering letter, with heavy technical jargon, many doctors/expert opinion & comments, with dramatic photos attached ….. ‘This child will die within …. It is in your hands to save it …… send money immediately’
Fake/Non-existent products (sometimes samples not meant for sale), mostly health & medical related, ‘Sold’ to the elderly at exorbitant prices.
Unnecessary and/or fraudulent medical services, tests, procedures – prescribed, conducted and billed.
Elderly person’s identity used fraudulently to obtain prescriptions, medication & drugs.

Telephone & Telemarketing Scams – ‘This is ….. Senior Bank Manager …. Your account needs to be inspected/checked/audited immediately to prevent loss of funds …… Please provide your password’
Or, ‘I am calling from ….. Charity ….. Need urgent funds to save ……Please transfer fund immediately’
Or, a sweet talking Con with a modified version of the Fake ‘Official’, the ‘Attractive Lady / Gentleman’, ‘Child needs urgent medical attention’ story.
Or, ‘This is …. Calling from ….. Bank/Investment Corporation ….. Exclusive investment opportunity ….. Highly Confidential ……. Need to act by Yesterday …… Need you to deposit funds immediately …… Do not tell anyone’ …..

Internet Scams – Many of the elderly are now on the net ….. And are vulnerable to all of the internet based scams listed above. Being less tech savvy they are prone to additional scams.
Fake Email Alerts – ‘This is …. From ……. Systems ….. We have identified a serious problem with your Hardware/Software ……. Critical …… Action needed immediately …….. Need access to your Passwords & account details’.
Computer taken over – Hacked & accessed – Threatening warnings & messages …… Possible theft of personal & banking details.
Or, Phone call from ‘XYZ Systems’ ….. ‘Could you please confirm that you are ….. Your Home address …….. We have identified a serious problem with your Hardware/Software ……. Critical …… Action needed immediately …….. Need access to your Passwords & account details’.

Conclusion
I will start with an old saying – ‘No one can fool us without our consent’ ……………….

‘What do We want – Everything ….. And when do we want it – Now’ ……..
And we believe that ‘Things’ can make us happy, important, respected, loved ……….
And the more ‘Things’ we have the better ………
And everyone is doing ‘it’ (or you feel they are), and so it should be right ……..

Hari’s Health Tip – A good dose of scepticism with your daily morning coffee could be the best health supplement you would ever take regularly ……..

“But what is the solution …… How can we eliminate this problem ?????? What is the answer ?????” …. You would be wondering, impatiently …………

Patience my friends ……. Cons, and their schemes, in one form or the other, has been with us since time immemorial ………. And is here to stay.
Eliminate it ???? An ambitious thought indeed …… I suspect it is not possible …….

Solution ? We have only scratched at the surface of the problem ……. I will address this in coming articles.

What are your thoughts on all of this ?
What is your experience ?
Come, join the discussion, share your ideas & experiences ……. And we shall start looking at solutions together. I suggest we look at possible solutions under two broad headings …… Prevention, and Cure.
But I am jumping the gun ………..

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

 

August 2012 …… Points to Ponder

What is happening in our economy ……… In financial markets ……. To interest rates …… And an interesting question – What is Money ………..

Dear Readers,

Thanks to all of you for accepting our invitation, for accessing our blog, and for your participation & feedback. I look forward to more of your active participation.

August is upon us and let us take a look at what is happening around us, and what to expect in the months ahead.

The Markets

Overall sentiment and activity is flat or weak ……..

There is talk of falling commodity prices (stuff that we mainly dig up & export) due to lesser demand from our major trading partners, and plenty of competition & capacity (all the investment in mining & agricultural infrastructure over the last 10-15 years, worldwide). What are you hearing ?

Property – As we observed in the June blog, we see a huge amount of conflicting data ………. Some are claiming a shortfall in housing stock, and others say there is a too much stock. What do you think ?
There are claims & predictions of a cooling of rental demand for up-market properties, due to ‘tightening’ of allowances/concessions to certain employees. What do you know ?
Property auction rates, some claim, are flat, or steady …….. We are seeing figures quoting 50-55% all over the press & media ……… While a few contrarians question the relevance & accuracy of data behind these figures. What is your observation ?
We hear the ‘Credit Crunch’ for builders is getting worse, and an increase in foreclosure & bankruptcies of building related companies. What are you hearing ?
Could we see this as a sign of ongoing weakness in the property & construction sector, or a healthy sign of the market correcting & sorting out distortions ….. What do you think ?

The Economy

Different Australian state governments have tweaked tax policies, over the last 12 months, to encourage, incentivise, and guide growth in activity within the property sector.
As discussed in the June 2012 blog, our local economy (NSW) is dependent on the performance of our national economy, and in turn on the global economy (our trading partners).
Our dollar, compared to US Dollar & other major currencies, is on a high and getting higher ….. Some are predicting even higher ….. Even parity with the euro, in a few years time …….. Good if you are going on a holiday ……. But what will the high AUD do to our manufacturers, producers & exporters ……. ?
Unemployment figures are stated to be around 5% ……… But how relevant is the data, criteria & measurement behind these general claims ……… There are contrarians who talk about much higher figures …….. What do you think ?
And the most important thing is ‘Sentiment’ – The way we hope, think, wish and guess things are going to be in the future …… This will play a major role in what we do, and how we spend ….. What are you thinking & feeling ?

This brings us to a subject which is fundamental to every economic activity & decision, whether you are buying a loaf of bread, or trying to understand the Ongoing Global Financial Situation ………… Money.

Subject of the Month – What is Money ?

Let us start with the standard definition – “A medium of exchange, in the form of Notes & Coins”.
It is so simple & obvious ……… but is it ?
I will concentrate more on the other function of Money …… As a store of Value ….. Which we do not hear much of, these days ……

Origin of Money – Barter system – Thousands of years ago we moved on to a stage where we settled down, in little families or communities, and started to produce a little bit more than our daily minimum needs.
We soon discovered that one person, or family, or community was better at producing some ‘things’ but not other ‘things’ ……….. Or we needed something which others had, and they probably needed things we had …… We created a system of exchange of goods & services …… We called it “Barter”.
The barter system was good, but not perfect ………….
“I have sheep, he has wheat, I need fish, and he needs salt” ……………….. or, “I have plenty of fish, need salt now, he needs grain now, but may have salt next year” ………….

The concept of Value – As more people & communities started interacting with each other, there grew a natural “Market” for goods & services. Concepts of “standard weights & measures”, of the “relationship between time, effort & output”, of “quality & quantity”, etc. started to be better understood and appreciated. Some ‘things’ were easier to barter or ‘Trade’ compared to others ………….
Things that were most generally needed by all, things that had longer shelf life (or even non-perishable), things that were easier to store & transport, etc. ………… In short, these ‘things’ were in higher demand, and so had more ‘Value’.

Storage of Value – Commodities, generally, emerged as higher Value items – To generate (produce), stock and trade. However, problems remained with direct barter of goods, whether between two parties or in common markets.
Over time, people came up with the concept of an ‘intermediary’, some ‘thing’ in common, that you could keep in store without losing value ………… and then could be exchanged again for whatever goods or services you would need in the future.

Gold as Storage of Value – Many commodities were tried and experimented, no doubt, including Grains, Livestock, Salt, Hides, Beads, Feathers, etc. in ancient times. But metals, especially rare metals, Gold and Silver in particular, were the natural choice in most communities, all over the world.
Gold is rare, divisible, non-perishable, cannot be replicated (counterfeited), and most importantly has high aesthetic value.

Gold as Currency – You could now produce anything, anywhere, trade it anywhere for a common store of value – a ‘Currency’ – Gold. You could then transport Gold easily to anywhere, store it for any period of time, trade it for any other goods or service, anywhere and anytime of your choice.

There were various experiments, mostly by force & diktat, by various leaders, rulers, invaders, etc. to use other forms of ‘Currency’ ……….. Peppercorns, Leather Coins, Tea leaves ……….. and Paper (ring a bell ????), but Gold remained the most popular free-market choice of Currency.

Gold, Banking & Notes – One problem remained – Safety – Theft & seizure by force if you stored it in your house …… Theft & seizure in transit (traveling to various distant places), etc. ….. And ‘Security’ came at a cost ……. In short, carrying physical gold all the time was not ideal …………. And the ‘Market’ came up with a solution.
“I will build a vault with adequate security, you store (Bank) your gold in my vault, I will issue you with a “Note” or receipt stating your claim to a fixed amount of gold ……….. You use these ‘Notes’ to trade, anywhere, anytime ……… You can redeem (get back) your physical gold anytime, on demand, by returning notes issued to you…….. I will charge a small fee for this service”.
A win-win solution. You could bank you gold in safety and trade easily, exchanging notes as currency, then get back your gold from the bank anytime, minus a small fee.

Fractional Reserve Banking & Credit – You were now assured that your gold was always held in ‘Reserve’ …….. 100% Reserve (If there were 100 units of gold in the bank, there were only 100 notes in circulation).
You could now use your notes – “Money” – to produce, trade and multiply your wealth, based on your ability and market conditions. The Bankers income, however, was limited to the amount of gold held in the bank, and the frequency of exchange (deposit and withdrawal of gold & notes).
You, the banker, and many others realised, soon, that there was a lot of trade & business to be done …….. But you needed ‘Money’ (Gold, and, or, Notes) to profit from this potential.
The banker realised that he could make more money by creating & issuing (credit) a few extra notes, even though it was not backed by any physical gold ……..
“Surely there is not much harm” ….. “No one need ever know” …… “And it is unlikely everyone holding notes will come into the bank and claim all of their gold back, at the same time” …………. “And there is a genuine demand for this extra money, or “Credit”, in the Market” ………..
This meant only a fraction (or part) of the notes (money) circulating in the market was backed by physical gold ………. Not 100% anymore ………. Fractional Reserve Banking had arrived.

Money was created by individuals, in a free market, by mutual consent, trade & commerce, without intervention of any external parties or use of force.

Yes, there was a risk of some bankers overextending notes (creating excess of notes and lending it out to the market, to earn extra fees/profit) ….. And many indeed did so, probably with negative consequences for themselves and their depositors (owners of Gold) ….. But this was limited in scope, only affected locally (not the whole kingdom / nation / globally), and most importantly would not be repeated & perpetuated (Loss of banker’s reputation, fear of punishment & retaliation by depositors, etc.).

Central Banking & Fiat Money – Families & communities had now grown towards kingdoms, nations, rulers, kings, emperors …….. And governments …………
And rulers needed vast amounts of money to rule ………… Palaces, Institutions, Lifestyles, Armies, etc……..
Rulers and Governments do not “Produce” anything, like you & me ……….. They collect wealth (revenue) from the “Ruled”, the citizens, by force, called taxation. But there is a limit to how much you can tax citizens. This limits the activity & ambition of Governments.
They can borrow money, from their own citizens, from other nations, etc……. But there is a cost to pay (interest), the debt has to be repaid eventually, and there is always a limit to how much they can borrow (Trust – Creditworthiness).
The third option is to “Create” more money ……… But money, over time, has been based on a sound commodity ……… Gold ………. And there is a limited amount of available gold.

But what if governments declare, by force (by Fiat) that “Money” is now pieces of paper …….. And this is the only “Currency” permitted to be used by citizens, by law. Government & related institutions control the Supply of Money & Terms of Credit. Elaborate structures of Central Banks, Legislation, Rules & Regulations, etc. have, over time, delinked gold from money & currency.
Welcome to Fiat money and paper currency. And what is backing these pieces of paper (what is redeemable – what do you get back – if you are not happy with the management of this paper money system) ? How do you measure its value, against what, based on what standard ?

You could probably buy an ounce of Gold by paying approx. $35 US Dollars in the late 1960’s …… and approx. $20 Australian Dollars …………. Today you pay approx. $1600 USD or $1550 AUD.

It is the late 1960’s in Sydney ….. Let us say Grandpa Jim put 4 ounces of Gold & a $100 note in two separate tins, sealed them, hid it in his garden, and instructed his grandchildren Jack & Jill to open it in 2012 ………. Jack got the note and Jill got the Gold coins ….

Now we are in 2012 …. Pretend Jack & Jill open their tins today in great anticipation ….. Jill sells the gold and gets approx. $6100 AUD, but Jack is left with $100 …… ‘It’s not fair’ says Jack ….. What do you think ?

Recently I was chatting with  clients …… Seems one of their parents bought a quarter acre block around Strathfield, NSW, in the late 1960’s, for approx. $40,000 ……… Today you would pay close to a Million ……..

Conclusion – I have a series of questions …… for you to consider, think about and comment on ….. What is our paper based money system based on ?
Is it being managed well ?
What is the relationship between money, prices, value & inflation ?
What is inflation ?
What is Money Supply ?
Who determines terms of credit (interest rates) ?

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

 

July 2012 ….. Points to Ponder

A lot of points to ponder …… What is happening to the economy, in the property market, to interest rates …..  is this the right time to buy…. What do you think …..

Dear Readers,

It is July already …. Start of a new financial year. A lot has been happening, in the property / mortgage / financial services market, over the last few months.

Some say the property market is down and will stay there, others say it is flat, and others talk of an upswing underway as we speak !!!! What do you know ?

Interest rates have been stepped down, and we have seen a trend by the major banks to break away from following the RBA set rates. Various lenders are positioning their products with variable & fixed interest rates to win over you, the borrower, and your business towards them. What do you do & when ?

As usual, there is tremendous amounts of Data shouting at you, coming via Newsprint (Newspapers, Magazines, Newsletters, etc.), Audio & Visual Media (Radio, TV, Advertisements, etc.), Online Content (Blogs, Social Media, Etc.) and the old fashioned bush telegraph (chats at work, with family & friends, etc.). Then there is the bombardment via emails, sms, telemarketing, etc. How much of this is actual information ? How much, if any, contributes to your actual Knowledge ?

To make some sense out of all this let us first look at the wider Australian economy in general.

Some say we avoided a negative fallout of the 2008 GFC (Global Financial Crisis), and are in a better position compared to most of the developed western world ( US, Europe, etc.). Are we ?

Others say we overreacted to the 2008 GFC, spent hundreds of billions of dollars needlessly, and postponed (and increased) the problem to a few years down the track ….. Have we ?

What we do know is that a large part of our economic health depends on our trading  & exports, mainly of commodities (mining & minerals, agriculture, etc.), and will be so, in the foreseeable future. Is this a fair observation ?

We have mostly been a net importer & borrower (we import more stuff then we export, and we borrow more money from overseas compared to our own savings), and will be in the foreseeable  future. Do you agree ?

Our economy is closely related to the wider global economy. We are highly dependent on the world to keep buying more & more of our stuff, and at higher & higher prices. Do you agree ?

This brings us to the question – How is the global economy (buyers of our stuff) doing ?

There is tremendous amounts of Data shouting at you, from all over the world. We hear daily about weak economies in the US, Europe, and most other nations.

We hear about how some countries (Asian economies, Japan, China, India, etc.) will save the world by making up for weaker western countries. What are you hearing ?

We hear about slowing Chinese & Asian economies, and of soft & hard landings. What do you think ?

We hear about government policies – economic policies (Fiscal & Monetary), Tax policies, Social policies, Political & Geopolitical policies, etc., and how the collective wisdom of politicians & officials will solve our global problems. Will they ?

We hear about Banks & Financial institutions, Too big to fail, their impact on global economic health, and various stories on their health, practices, shenanigans, executive salaries, share prices, etc. What are your thoughts on this ?

Some say Europe in general & the EU (European Union) is being fixed. That the EU & the Euro (currency) was & is a good Idea. What do you think ?

That economies & banks in Greece, Portugal, Spain, Italy, etc. can be fixed, and all will be well if we all just had a bit more faith and sacrifice a bit more. What do you think ?

Others say the whole concept of the EU & Euro was wrong to start with, and not sustainable. That many of the economies & banks in Greece, Portugal, Spain, Italy and even France, & Germany (even the UK) have huge deep rooted and structural problems. What do you say ?

Some say the US economy is stabilising and will start to get better soon. What are you Hearing ?

Others say there are deep rooted problems within the US economy. That the USD (US Dollar) dominates & distorts world markets. That US borrowings & long term commitments (both private & government) are unsustainable in the long term. What is your opinion ?

Subject of the Month – “Is it the right time to buy property”

I was having a chat with a client few weeks ago and the question popped up ….. Not for the first time …. Have been hearing this question, one way or the other, for more than 25 years …..

I see three central figures in this question – and will look at each of them in detail

The subject (person/s thinking of buying property or any asset)

Who is buying the property (The entity – You alone, with your partner/wife, your company, trust, etc.) ?

Why are you buying it (To live in it, investment, business purpose, holiday home, etc.) ?

What is your current financial situation (Your job/work/business stability, current income/s, future income expectation, current financial commitments & future expectation, etc.) ?

What is your current asset position (Your assets – savings & liquid funds, property/ies & value, superannuation balance/s, other assets & value, etc; Your Liabilities – short term loans, credit & other card balances, property loans, other debts & commitments) ?

Based on all of the above, what is your capacity to borrow ? But more important than that – What are your comfort levels (I call it the “Sleep Well At Night” test) ?

The Property or asset

Where do you want to buy ? – Answering this will be easier if you have done your sums well on the above questions ……

What do you want to buy (You know your budget, you know your limitations on what area/s you can afford to buy. This will help you narrow down on what is practical & affordable. It will now be a matter of individual choice – Location, access to amenities, type, style, etc.) ?

The third party – The market (within which the buying & selling is happening)

We have covered the questions of “Who”, “Why”, “Where” and “What” so far. You should be wondering – We have not yet come to the question we started with – “WHEN” is the right time ????

Patience my friends …… The whole point of this article is to suggest that there is no such thing as “A”, or “The” “Right” “Time” to buy …….

The “Property Market” (or any asset market for that matter) is a broad & highly general term, and it is difficult to form an opinion on timing your purchase based on this broad & vague term.

The property market consists of various geographical locations (Countries, States, Cities, Towns, Villages, Suburbs, etc.), various types (Residential, commercial, Rural, Industrial, etc.), various styles (Land, Freestanding, Units, Townhouses/villas, coastal properties, architecture, etc.).

Then there is the impact of the global economy (and sentiment / expectation of future health), Local economy (Australia), Government policies (capital gains, taxation, incentives, etc.) etc.

Then there is the perception, opinion, wishes, hopes, expectation, etc. – Of millions of people – Both property owners and people wanting to enter the market, which will impact on supply & demand.

Then there is the concept of ‘Price” and “Value” – This is a matter of interesting discussion by itself – for another day.

Conclusion – I think it is a matter of priorities. It would be ideal to first make sure you have satisfactory answers to the “Who”, “Why”, “Where” and “What”.

Once, and If, you have done your homework correctly, the “WHEN” is a bit more easier to decide upon.

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