Australia Faces Its Demons

[aussieboy]

This doesn't strike you as odd?

Does the distribution of the price of houses match the distribution of household income / wealth?

[aussieboy]

I think you will find that not everyone who is a bear desires economic catastrophe. I, for one, would have preferred a situation where economic catastrophe was not on the cards. I am fully aware of the impact of a financial crises on my personal circumstances. To be fair, I did not get hit too badly when it all went tits up in the UK and I probably will not be when it all goes tits up in Aus. But, at the same time, I would much prefer to live in an environment where the was no danger of it going tits up in the first place and the banking system was not allowed to play fast and loose with peoples futures.

My main objection to the whole house price madness is that I think it has an extremely negative impact on society. I also do not want to buy in to a financial model that is clearly flawed. There are a lot of people out there in the financial services industry trying to sell people on to the idea that buying a house right now is a good idea. I think that they are wrong and my arguments are an attempt to address that view.

That isn't how you come across to me. There are plenty of those seemingly willing to sacrifice the economy for a cheaper house.

What I'm hoping for is:

- stability in the economy and in the housing sector (probably the same thing)

- lack of hyperbole from both bears and bull with opinions based on informed analysis or interesting anecdote rather than wishful thinking

[aussieboy]

Thanks for the long post, D'oh - only courteous to respond.

I'm not wishing financial disaster on anyone (except for those who took out or knowingly sold liar loans), nor on my country. However, what I wish is neither here nor there. I'm just trying to get a picture of where all this is going and doing my best to dodge the biggest boulders in the avalanche. It's why I post on here, and although I do take a bearish position I'm also here to see what those who have come to a different conclusion have to say and how they react to my posts. You don't learn anything unless your beliefs get challenged etc.

Quite - I've argued both sides in the past due to my views on the market changing. Given that the market cycles too, it would be a bit daft to stick with the same outlook of the market all the time. Can't beat informed debate.

I agree with you as to who is going to suffer most. Many of Mrs D'oh's friends and some of mine, though I am 40 so part of the cohort that did well, are one pay cheque or a few interest rate rises away from absolute financial ruin. All of them work hard. Most of them are frugal. I truly fear for them. Most of them, had they been born 10 years earlier would be in completely different circumstances. Then there are the 20 somethings who I know, either through having taught them, or through various clubs etc. who are in even worse shape. Really bright kids who worked hard, did all the right things and are in dead end jobs earning less than Mrs D'oh does working on the register at a farm shop!

Funny thing is, this seems to have been the way of things for decades. I was in school in the UK in the 80s and fully expected to be on the dole. Contrast this with the generation leaving school in the 50s or 60s - guaranteed jobs, lodging and sixpence change for the bus home. People normally seem to muddle through - unless this time it's different.

Currently, I consult for various firms as well as develop my own software. I fully expect that a lot of my contracts are going to dry up, as in the end the money flows from the government and even if the particular projects I am involved in aren't scaled back, the companies involed are losing business elsewhere and will bring more of their work in-house to keep their permanent staff busy. It will also be difficult to sell optional software to businesses and individuals when times are tough. So, as I said above, I wouldn't wish what I think is coming on anyone, especially myself.

Fair enough - I hope it all works out well. I find it hard to wish failure on anyone, particularly an amorphous heterogeneous mass of individuals (eg "bankers").

So, why don't I own my own home? Quite simply, I stayed in education and held short term academic contracts too long in one of the more expensive parts of the UK. I also underestimated how willing governments would be to let this bubble get out of control.

I didn't finish my D.Phil. until early 1997, then spent some years as a research fellow. At the time, mortgages from high street banks required that you had a job for 5 years. Fellowships were for 4 years at most, except for Royal Soc. fellowships, and at that point in time I was excluded from those by nationality rules, and the university wouldn't provide guarantees in case they came back to bite them. I must admit that money was not the focus of my life at that time, and I never thought of going to a specialist mortgage broker, so I worked on my career for a good few years.

Sometime around 2000/2001 I noticed that house prices were getting a bit crazy (imo). I think it was in March 2001 that the FSA pointed out that mortgage multiples were getting beyond historically safe norms. Two bedroom flats on the edge of the Oxford ring road by that time were 8 to 10x my salary as a junior fellow, so completely beyond me. I had a couple of friends who turned down tenured positions at southern universities at that time because they could not afford to buy a house or even a flat on the salaries offered,

SNIP

As an ex-academic, I hear you brother. I cut my losses very early in a poorly advised academic career a while before you. I bought somewhere asap even on a very low salary. Even then, I looked at what could be earned as an academic vs as a clinician vs as an I banker and took the view that the academic role was a mug's game with the sole compensation of flexible hours in which to play 5 a side football or touch (depending on which country I was in at the time).

(Interestingly, I had a conversation with a slightly older fellow in 2001, and his conclusion was that the bubble would not begin to pop until 2007. He was very precise and gave reasons at the time. I can't remember them now, more's the pity. Another conversation that I was glad I had was in 1995 with a solicitor friend who was a partner in one of the big London firms who specialised in real estate who got horribly burnt in the late 80s early 90s crash, buying a house with a friend to "get on the ladder.". What reassured me that my concerns weren't completely unwarranted was that the things he told me that happened back then, the bank of mom and dad etc., started happening again.)

By 2004 the whole thing was becoming unbelievable. Crappy 2 up 2 down houses in East Oxford were 10x a new lecturer's salary, yet most people around me couldn't see that there was a problem. That is when I googled to see if there were other people thinking similar things, as I was beginning to think it was me who was mad, and that is when I found HPC and started to lurk on the boards (hallelujah!) That is also the point in time I decided to get a financial and economic history education. Wish I had had done it sooner.

I, along with others, thought that the market was going to turn in 2005. When the BOE dropped rates in August that year for reasons that seemed out of their remit and gave the impresison to the housing market that there was a put in place, I knew this had to end very badly. At that point I quadrupled my gold holding, which was one of the best decisions I ever made. Since March 2007 I have spent an inordinate amount of time managing my investments, with good reason. If my savings had been in cash I would probably have about 1/3rd of the money (measured in AUD say) I have now. Much of that relative gain has been due to ideas that came from reading some of the posters on here whose opinions I value, together with the many articles etc. linked from here.

I though the same in 2004 / 2005 and bought a place whilst sentiment was bad for a reasonable price - to live in, not as an investment. At the time, HPC had fewer economic cranks, more borderline racists cranks IIRC but there was a lot of front line info which was useful when trying to plan things. Then I saw what was happening in Q1 2007 which turned me more bullish... and sold the lot to come back to Australia. Whilst selling, I saw the market turn in a matter of three or so weeks in London. EAs stopped returning my calls.

However, this is not something one should have to do in a reasonable society, and I resent it as a waste of my life. I have many other things I would rather be doing than keeping an eye on the next wave of crap to hit the markets. Yet those around me who haven't been on the ball or have believed the hype have seen their pensions and other investments slaughtered. In one case, an uncle of mine saw the value of his retirement fund, built up over 50 years of running his own business, halved in 6 months.

On a personal level, apart from not having bought a house in 1995, I'm in a very lucky position. I'm an only child. Mrs D'oh and I live in property owned by my parents (rent and bill free) who have done very well out of the housing boom, having sold for cash up front a lot of land for prime development a few years ago. Unless something drastic happens, it is unlikely I will end my days in penury. That is a great security, but it is all a bit of luck and not something that was expected until recently. In any case, like most people I want to make my own way.

It's tricky not to develop analysis paralysis - there's only ever one "best time to buy" and it's madness to put your life on hold waiting for that moment unless you're an investor.

I don't want to see people harmed, but my belief is that it is quite likely and it is beyond my control, and all I'm trying to do is to see where the future lies and what I should do about it to protect myself from a pathologically out of control society. I've now returned to live in Australia. My current belief is that taking out a huge loan at present to buy an illiquid asset at an historically, relative to many measures, outlier price is a dangerous thing for me to do. I just do not see how, unless interest rates stay low for a long time, current rental returns make any sense, especially as I do not think there is room for much more capital appreciation without significant wage inflation. I presume Bardon thinks wage inflation will kick off like it did in the 70s. I'm not convinced it will this time. Of course, Australia isn't the UK/Europe, but I'm just not convinced of the Asian tiger in the short/medium term. We will do well in the long term as I believe we are in a long term commodities bull market, but my view is that there will be a major hiccup before the long term rise in Asia, and Australia will suffer for that.

So, that is where I'm coming from. All I, like most people want, is a stable economy in which to live a life doing something productive and/or interesting, as well as preparing a secure nest for when I am too old to work. Unfortunately, the world doesn't seem to want to provide me with that, so I have to spend time trying to stop myself getting shafted like everybody else.

That's all fair enough, of course. Eventually, you may have to weight up the pros and cons and bite the bullet if you want to be a house owner (home owner). If you're happy to rent, then good luck to you, but to try to time the market for more than 10 years would drain the will to live from me.

Which raises the question, why did you join HPC? This place is a bearfest, so why would someone who seems quite bullish choose to spend time posting on this site?

Why?

1) You don't need to be a bear to appreciate the information you can derive from this site (although frankly it's gone a downhill recently)

2) I have housing assets and like to see what's going on: "The other place", where I went to follow TTRTR when this place became a bit too BNP in 05 and starting moderating the bulls which stifled debate, closed down leaving this as the only Australian HP place

3) My view on the housing market has changed over the years: I don't understand this "born a bull, die a bull" attitude. You'd have to be blind or pariticularly stubborn not to notice that house prices go up and down. And sideways. (see above)

4) I'm neither bull nor bear but a bit picky so find myself in devil's advocate roles

5) So many of the people on these boards find it easy to blame and hate people or groups of people they have never met. I was a banker for a decent period of time (albeit not in securitisation) so I find it interesting to see how people's views change when they have to make a rational cause for hating 100 people for the sins of 1. I find it particularly galling when someone in an Arc #2 job starts criticising the contribution of others to society.

6) Perhaps I have something to add to the debate... perhaps not.

7) Habit

[aussieboy]

Not particularly.

If you really think about it Its just a matter of time until everyone lives on Millionaires row.

...then billionaire's row etc etc

[Tiger Woods?]

...then billionaire's row etc etc

Normally they start knocking zeroes off the currency by that time, at least in decent 1st world countries.

Bardon, let me put it another way; do 1/7th of the population of Melbourne earn $250kpa+?

[aussieboy]

Normally they start knocking zeroes off the currency by that time, at least in decent 1st world countries.

Bardon, let me put it another way; do 1/7th of the population of Melbourne earn $250kpa+?

Household income, D'oh.

And why should id be 4x personal income?

[aussieboy]

Normally they start knocking zeroes off the currency by that time, at least in decent 1st world countries.

SNIP

They probably said that in 1940: "Eeh, imagine when a car will cost $1000... a house will be $10,000!! We'll have to knock some zeros off etc"

[Tiger Woods?]

Household income, D'oh.

And why should id be 4x personal income?

I was being generous at 4x personal. Household income used as a measue is a relatively recent phenomenon. Loans used to be 3x main income + 0.5 times 2nd income, or 2 x household income etc. (even lower ratios in the not too distant past) So main breadwinner personal income was, for a long time, the usual measure. Making standard sorts of assumptions about long term interest rates etc., the time taken to pay off a loan extends quite quickly once one gets beyond 3 to 3.5 times earnings (assuming 1/3rd of gross salary goes towards loan repayments).

However, the world has changed and I'd make the same assertion about household income.

So, returning to the main point, do 1/7 household incomes amount to $250,000? I suspect not. Where I am, which obviously isn't Melbourne, household incomes average at $50k-$60k yet houses average at over 8x that.

The closest I could find quickly were the 2008 figures for Victoria.

http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6523.02007-08?OpenDocument

The disposable income of the those at the bottom of the top 10% households was $1371pw, which equates to no more than a household income of $125kpa. Again, top end houses seem to be averaging at about 8x time top end houeshold earnings. This 8x figure seems to be popping up everywhere. It was about what average households were paying where I was in the UK until recently. SImilarly top of the range houses in the UK seemed to be selling at about 8x top of the range household incomes.

These prices are not normal and not sustainable in the long term, unless there is significant nominal wage inflation, interest rates and returns on other "common" investments remain low, or there is a continual supply of money flowing into Australia from overseas property investors/immigrants. 8x household income means that, at mortgage rates of 8%, 64% of gross household income goes in interest payments. Impossible. Okay, you might argue that people will have to save larger deposits, but for them to be able to do that, then the landlords will have to accept low returns. Landlords would be better off finding somewhere else to put their money. You might argue for higher inflation to errode the debt, but then there would be concommitant high interest rates to go with it putting the squeeze on relative houseprices from the other direction. However you want to paint the picture, and I obviously haven't considered all scenarios in this post, relative to household wage, these price levels are not sustainable. Something has to give. I can't see low interest rates forever. I cannot see huge wage inflation in the near term.

(Before anyone responds that not every household should be able to afford a house, one can take the argument backa step and look at investor returns. Investor owner houses have people living in them, and they pay rent. These rents are, in the end, tied to wages. This has to give the owner a return that makes the investment worthwhile.)

[Tiger Woods?]

and lets not get into the mind boggling smashing of paradigms when it comes to rental price inflation..............

It still has to be tied to wages as someone has to pay the rent.

I'm happy to accept that nominal house prices may be maintained in Australia if there is significant wage inflation. I am not happy to accept that houses will increase their price at a rate greater than wage inflation...in fact I would assert that the ratios must drop. In this latter case, there must be better investments than housing.

Edited May 30, 2010 by D'oh

[Tiger Woods?]

You are forgetting about equity.

Either way it is possible and is happening now.

This is a fact, not sepculation.

Your argument works in the short term, which is why it has happened. It does not work in the long term.

One can look at it another way. in the 70s and early 80s (I'm giving UK figures here, but suspect somehting similar in Australia as payment mortagges back then were 8 to 15 years), the banks had 17-19% of the value of the nation's property under mortgage. Now, the figure is something over 40% iirc (it matches well with Aussieboy's suggestion of average LTV being 60ish percent). But this is 40% of 8x household income instead of 4x income as it was in former times...which is about 3.2 times household income. I would argue that this is close to the full amount (80%ish) that, under ordinary circumstances (1/3rd income on housing and assuming long term average interest rates and working lifetime), can be extracted from the value of a property. That is, over the past 30 years, the banks have taken control of the full earning potential of property, and given the fact that mortgages have a distribution associated with them, this is probably even more than can be sustained long term.

I know it is a cliche, but:

"If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered." Thomas Jefferson, Letter 1802 to Secretary of the Treasury, Albert Gallatin

The figures suggest that the banks have succeeded. There is no more blood to be squeezed from property given the figures.

I would actually argue that most of the damage has been done in the past 15 years. Houshold earnings have increased by 75% or so since 1994. The cost of a house has gone up by 200-300% in the same time frame. This fits well with the figures in the above paragraph. That cannot go on forever. You may have equity, but the proportion of household income that goes on housing has been pushed ot the maximum. It is, on a national scale, "fake equity", that can only exist in a low interest rate environment.

If we want to stop going around in circles, then you and aussieboy need to explain why you think interest rates are going to remain preternaturally low for the foreseeable future, or there is going to be 100% wage inflation.

Edited May 30, 2010 by D'oh

[wherebee]

And as I keep saying ozzie house prices will on average continue to increase at 7-10% pa over time. This is my base case, it is factual, most bears simple speculate that the world will stop spinning on its axis and fall off. The burden of proof is upon those that say that things will change, not those palying it safe and sticking to the market norms.

I find it really interesting to be in the Aussie bubble having been in - and left - the UK bubble in the last 2000s (bought last house in '03, got out before the crash, but made no profit once moving and legal/tax costs taken into account). Exactly the same arguments on both sides, exactly the same lack of leadership from the government, going to end in exactly the same way - but who knows how long away the crash is?

I suspect that the government in Australia - no matter who is in power - will work just as hard as the UK government did to keep the housing market from visibly collapsing. In the UK, the massive devaluation of the pound has hidden a real fall in house prices of 40-50% since I left in 2007 - what will happen in Australia?? with China continuing to want to buy the western half of the country, it's hard to see how the Aussie dollar can collapse unless China goes down.

As a renter, I budget $2000 for each house move (max once per year), but on the upside have no repair/upkeep costs. I'm renting at $1800 a month a house which would cost $500,000-$650,000 to buy, excluding legal and stamp duty costs etc. A repayment mortgage on amount that would be around $3600-4000 a month. Yes, there may be some equity in there bringing the mortgage payments down, but that's money not being used to generate a return on investment. I know first time buyers who can't afford to have a meal out over $25 a head due to the mortgage debt they have saddled themselves with due to a panic to get on the ladder. Overall, I'm happy to continue to rent as at the moment the figures just do not add up for anyone who has an understanding of the downside risks of holding an illiquid asset against masses of debt on which interest rates can only go up.....anyone think I am being mad?

[aussieboy]

Your argument works in the short term, which is why it has happened. It does not work in the long term.

One can look at it another way. in the 70s and early 80s (I'm giving UK figures here, but suspect somehting similar in Australia as payment mortagges back then were 8 to 15 years), the banks had 17-19% of the value of the nation's property under mortgage. Now, the figure is something over 40% iirc (it matches well with Aussieboy's suggestion of average LTV being 60ish percent). But this is 40% of 8x household income instead of 4x income as it was in former times...which is about 3.2 times household income. I would argue that this is close to the full amount (80%ish) that, under ordinary circumstances (1/3rd income on housing and assuming long term average interest rates and working lifetime), can be extracted from the value of a property. That is, over the past 30 years, the banks have taken control of the full earning potential of property, and given the fact that mortgages have a distribution associated with them, this is probably even more than can be sustained long term.

I know it is a cliche, but:

The figures suggest that the banks have succeeded. There is no more blood to be squeezed from property given the figures.

I would actually argue that most of the damage has been done in the past 15 years. Houshold earnings have increased by 75% or so since 1994. The cost of a house has gone up by 200-300% in the same time frame. This fits well with the figures in the above paragraph. That cannot go on forever. You may have equity, but the proportion of household income that goes on housing has been pushed ot the maximum. It is, on a national scale, "fake equity", that can only exist in a low interest rate environment.

If we want to stop going around in circles, then you and aussieboy need to explain why you think interest rates are going to remain preternaturally low for the foreseeable future, or there is going to be 100% wage inflation.

That's an easy question: because the levels of debt are high, the interest rate required to put the brakes on the economy is lower than it used to be.

[Tiger Woods?]

I prefer the term cycles to circles.

And as I keep saying ozzie house prices will on average continue to increase at 7-10% pa over time. This is my base case, it is factual, most bears simple speculate that the world will stop spinning on its axis and fall off. The burden of proof is upon those that say that things will change, not those palying it safe and sticking to the market norms.

This is only possible if incomes increase at 7-10%. Yes, the average increase over the past 30 years may have been 7-10%, but incomes have not kept up with that. We've sent women to work, spent down savings and now indebted the nation to just about the limit it can take. There are a thousand topics on this forum that have addressed that issue and how it has been maintained and why it is different this time, the credit bubble being the last throw of the dice. A simple understanding of the exponential function shows why wages and houses have to remain more or less in sync over the long run. You cannot have a 5% annual differential for an extended period of time. What your argument is missing is that although there have been rises of n% p.a., these have been accompanied with significant underlying structural changes and I'm not seeing where we can go next to keep the balls in the air. I would argue (see previous post) that averaged across the nation, we are nearly at that limit, and the average mortgage holder (assuming average LTV of 60-70%) is past that point. There is little room to grow nominal prices without income inflation or sustained periods of low interest rates.

In my local area, housing has been a bad investment for the past 5 years. Gross rental returns plus capital growth have been less than what you would get in a Commonwealth bank term deposit. Net rental returns plus capital growth together would be about half of the returns you would have received from a term deposit. What seems to be happening is that suburb by suburb the buyers and speculators have been pushing the market up to the maximum of what can be sustained over time frames of the order of 4 years and then moving onto the next worst area. This is not constant annual 7-10% growth on a fine scale. There is now little differentiation between house prices in good and bad areas. If there was more slack in the system there would be differentiation in prices between these suburbs.

As for your banks, the system relies on increasing debt as this is where interest paymentscome from. If debt were not to increase how could interest payments be met ?

Err. No. That has been discussed ad nauseum on HPC.

[Tiger Woods?]

That's an easy question: because the levels of debt are high, the interest rate required to put the brakes on the economy is lower than it used to be.

This is under the assumption that we get to choose the interest rate. We don't except to fiddle around the edges. As has been said before, at the margin Australian banks are borrowing from overseas short term to fund mortgages. The interest rates on this are not in our control. Our base rate is not always in our control. It has been taken out of our hands before. It will be taken out of our hands again.

Levels of debt being high doesn't mean that we only have to twiddle the dial a little less vigorously, it means we are going to have our eardrums blown when the 800lb gorilla standing over our shoulder decides he wants the music louder.

Edited May 30, 2010 by D'oh

[Tiger Woods?]

Certainly not mad.

in theory if you are going to rent then the higher value the hosue the better a deal you are getting.

Something you may not be aware of is that in oz we had a slump in 04. Also everyone who tries to compare the market with the UK on here has never got it right.

I don't know where you keep getting this 04 slump from. It may have been the case in Sydney, but it wasn't the case in Qld. That was the precise middle of the 2002-2006 boom.

[Alan B'Stard MP]

This is under the assumption that we get to chose the interest rate. We don't except to fiddle around the edges. As has been said before, at the margin Australian banks are borrowing from overseas short term to fund mortgages. The interest rates on this are not in our control. Our base rate is not always in our control. It has been taken out of our hands before. It will be taken out of our hands again.

Levels of debt being high doesn't mean that we only have to twiddle the dial a little less vigorously, it means we are going to have our eardrums blown when the 800lb gorilla standing over our shoulder decides he wants the music louder.

How are aussie mortgages financed in the main? What is the debt instrument? Seems to me they have to set their rates for such instruments way above what can be found elsewhere in the world.

[aussieboy]

This is under the assumption that we get to chose the interest rate. We don't except to fiddle around the edges. As has been said before, at the margin Australian banks are borrowing from overseas short term to fund mortgages. The interest rates on this are not in our control. Our base rate is not always in our control. It has been taken out of our hands before. It will be taken out of our hands again.

Levels of debt being high doesn't mean that we only have to twiddle the dial a little less vigorously, it means we are going to have our eardrums blown when the 800lb gorilla standing over our shoulder decides he wants the music louder.

Quite - and the assumption is correct. The fiddling around the edges is what others do, not the RBA, it being at the margin and all. For the big four, their deposits underpin a lot of their lending which is why lenders who borrowed the majority short or were backed by companies who did (eg GE / Wizard) were screwed in 08.

[aussieboy]

How are aussie mortgages financed in the main? What is the debt instrument? Seems to me they have to set their rates for such instruments way above what can be found elsewhere in the world.

See above plus http://www.loansense.com.au/historical-rates.html

[Alan B'Stard MP]

See above plus http://www.loansense.com.au/historical-rates.html

Not sure why you've posted a link about the RBA cash rate?

I was asking about the funding from the wholesale markets and where the debt is sited.

Are the assets all on balance sheet or are they securitizing mortgages - SIV etc etc?

Edited May 30, 2010 by Alan B'Stard MP

[JonoP]

Not sure why you've posted a link about the RBA cash rate?

I was asking about the funding from the wholesale markets and where the debt is sited.

Are the assets all on balance sheet or are they securitizing mortgages - SIV etc etc?

About 30% of Aussie banks day to day funding comes from the international monmey markets.

[Tiger Woods?]

Quite - and the assumption is correct. The fiddling around the edges is what others do, not the RBA, it being at the margin and all. For the big four, their deposits underpin a lot of their lending which is why lenders who borrowed the majority short or were backed by companies who did (eg GE / Wizard) were screwed in 08.

I do not see how that assumption is correct. It is correct at present, in the same way that the UK was setting its own rates until 2007...well, sort of; one cannot completely decouple from what US policy makers choose to do, ala Greenspan delaying a US recession in the early noughties. Events have a habit of overtaking policy... Do you think the US wanted Volker style interest rates in the early 80s, or Australia wanted 18% mortgage rates in 1990?

See link in post following this one. The native pdf is blocked, so I had to link to the google html version.

My understanding is that a lot of the money backing loans in Australia is short term money market stuff and it is on the record by the CEO of Westpac that any further growth in the mortgage market will have to be backed this way, so people should expect higher interest rates.

From your LTV figures, average mortgage debt is over 200k. More like $250k. Average gross household income of the 4th quintile (i.e. the penultimate 20% of the population...that is well above average earning households) is about 60-70k gross. 9% of 250k is about 22.5k p.a. The interest on the loan is chewing up the usual 1/3rd alloted to housing costs out of gross income, before we even consider paying back capital. We are pushing the upper limits here.

If this continues then we become Argentina, with a complete destruction of the middle class. Quite possible I suppose.

Edited to add: The recession we had to have

http://www.theage.com.au/news/business/the-real-reasons-why-it-was-the-1990s-recession-we-had-to-have/2006/12/01/1164777791623.html

Edited May 30, 2010 by D'oh

[Tiger Woods?]

Determination of Australian Interest rates

[aussieboy]

Not sure why you've posted a link about the RBA cash rate?

I was asking about the funding from the wholesale markets and where the debt is sited.

Are the assets all on balance sheet or are they securitizing mortgages - SIV etc etc?

Link describes how mortgage rates are set - this was the other part of your q.

[aussieboy]

Determination of Australian Interest rates

So... Australia is a small open economy. Reading this:

- comparing different eras is misleading due to different degrees of independence, free float of dollar, etc

- high interest rates coincide with hi gh inflation... Hence to inflationary pressures, hence higher levels of debt require lower interest rates to reduce this pressure etc

[Alan B'Stard MP]

Link describes how mortgage rates are set - this was the other part of your q.

It's shows the correlation between the mortgage rate and cash rate but not a causal relationship.

If money is sourced on international money markets - what has the cash rate got to do with it?

As far as I can see the rates are set by foreign central banks?

Edited May 30, 2010 by Alan B'Stard MP