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Timak

Why Are People So Casual About Debt

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I'd like a bigger house for my family to live in.

When I've been discussing with friends, families, colleagues etc they are all constantly saying the best thing to do is get a big mortgage now because rates will never be better. I can't comprehend that level of financial stupidity, when rates are the lowest they can be then surely it is the worst time to be taking on a big debt.

The era of rising wages inflating away debt is gone, you have to consider that this debt will be with you forever and you have to pay rising bills as well.

Yet these are well educated people in the professional world, and also the type of people outbidding me on houses.

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I'd like a bigger house for my family to live in.

When I've been discussing with friends, families, colleagues etc they are all constantly saying the best thing to do is get a big mortgage now because rates will never be better. I can't comprehend that level of financial stupidity, when rates are the lowest they can be then surely it is the worst time to be taking on a big debt.

The era of rising wages inflating away debt is gone, you have to consider that this debt will be with you forever and you have to pay rising bills as well.

Yet these are well educated people in the professional world, and also the type of people outbidding me on houses.

:rolleyes: Just let them commit financial suicide... :rolleyes:

Sit back & watch the children play... :P

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I'd like a bigger house for my family to live in.

When I've been discussing with friends, families, colleagues etc they are all constantly saying the best thing to do is get a big mortgage now because rates will never be better. I can't comprehend that level of financial stupidity, when rates are the lowest they can be then surely it is the worst time to be taking on a big debt.

The era of rising wages inflating away debt is gone, you have to consider that this debt will be with you forever and you have to pay rising bills as well.

Yet these are well educated people in the professional world, and also the type of people outbidding me on houses.

If this annoys you, wait until rates go up again and they're moaning because their mortgage is crippling them. I mean, who could have forseen that?

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Because with a few rare exceptions, it is a strategy that has worked spectacularly well over most people's lifetimes. Leverage up to by an appreciating asset, ka-ching. All helped by very low rates.

The problem is one of timing. Anyone with half a clue knows the party has to end at some stage, but very powerful forces are keeping the music playing. Take an example: I bought in 2008 - every sense I had said it was financial suicide, but we needed to do it. 5 years later, the house appears to be earning more than I do by going to work. If I had been clever, I would have mortgaged to the hilt and bought two.

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I'd like a bigger house for my family to live in.

When I've been discussing with friends, families, colleagues etc they are all constantly saying the best thing to do is get a big mortgage now because rates will never be better. I can't comprehend that level of financial stupidity, when rates are the lowest they can be then surely it is the worst time to be taking on a big debt.

The era of rising wages inflating away debt is gone, you have to consider that this debt will be with you forever and you have to pay rising bills as well.

Yet these are well educated people in the professional world, and also the type of people outbidding me on houses.

Yeah but, no but yeah but..... When (If) wage start to rise interest rates will rise to combat the rising wages - that's how it works. The people that you are talking will only have experience of living in an environment of falling interest rates, so from their personal experience tells them that gearing up an investment against rising house prices and falling interest rates is the thing to do.

Gearing (borrowing lots) woks great when house prices are rising due to interest rates falling:

Start with 20k deposit, borrow 200k - wait 10 years house doubles and you end up with a property worth £440k - well done

But then if interest rates start to rise:

Start with 20k deposit (and 20k help to buy), borrow 420k in total - wait 10 years house prices halves (like Ireland or Japan) and you end up with a property worth £220k, you lost your 20k deposit and owe the government 20k and the bank 180k negative equity.

Want to see some examples of the people who lost the gamble big time? Mortgage arrears, personal debt & negative equity - questions and case studies

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People are stupid

BUT, given that people are stupid, and given that the financial system is run by and for people, if everyone is stupid is stupid the thing to be?

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People are casual about debt because they have learnt quickly to follow those who have led by example 'easy come easy go'......they see that people are no longer accountable for their actions, they see that there are no longer debtor prisons, they see that bankruptcy laws were not that long ago relaxed to encourage the take up of more debt, they see that taking on high risk debt is no longer high risk when it is someone else's money they are risking not their own, they see that saving anything gives no return, savings mean losing money that has been worked for only to be stolen/eroded by inflation.......money has been devalued and is no longer respected enough to be held.........people only act in the way the system encourages them to act, they behave how the system want them to behave ie clock up debt if you can't pay it don't worry about it, it will be sold on.... all is well because debt is good for GDP that must mean it is something good to accumulate....debt=wealth. ;)

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People are stupid

BUT, given that people are stupid, and given that the financial system is run by and for people, if everyone is stupid is stupid the thing to be?

Very good point.

Reminds me of Catch-22.

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People are stupid

BUT, given that people are stupid, and given that the financial system is run by and for people, if everyone is stupid is stupid the thing to be?

You're assuming that stupid people will be able to formulate and implement policies which benefit stupid people. There is a good chance they are too stupid to figure out how to do that.

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Hmm, everytime I turn on the TV, radio, open a paper there are politicians, 'economists', financial planners, assorted media whores telling them its the right thing to do. That could have something to do with it. Constant, unyielding propaganda. Heck, even good people voted for the Nazis...I sure some would even vote labour if the BBC told them to.

On one level, maybe a certain level of debt is unfortunately good (only because its mispriced and misallocated by statist forces, I will add) as if everyone else is expanding that way, you must too, HOWEVER, always make sure you have a reasonably large pile of cash to see you through the inevitable crashes. Most do not, and go bankrupt. With the deflationary environment this is likely to cause, financing costs should once again fall, so as long as you have enough cash to see you through the prior phase (ie what we had from 2007-2009) of elevated interest costs.

Its amazing to see these stories of bankrupts who throw everything at expansion and have literally zero cash buffer or liquidity. Utter idiocy. Only way to get that to work for you is to be a Trump of one of the Candy brothers. No one cares if you're actually any good then, you're too big to fail.

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You're assuming that stupid people will be able to formulate and implement policies which benefit stupid people. There is a good chance they are too stupid to figure out how to do that.

Running out of money, print some more! People aren't borrowing enough to 'keep the economy going', lower interest rates! Oh we're stuck with low rates, erm, commit to keeping them low forever!

Those policies help stupid people. They are stupid policies. It is arguable that the collection of people that formulate such policies themselves are stupid, but nevertheless the world reacts to your actions and not your thoughts and if your actions result in a stupid policy the result is the same.

The actions of the government, banks, regulators, borrowers could be described as stupid. Whether the individuals themselves are inherently dumb doesnt really matter when their actions are the same as they would be if they are dumb.

So as an individual is it smarter to act dumb? Who has benefitted from economic policy over the last 10+ years? The stupid acting people or the smart acting people? You don't actually have to BE stupid, just act stupid, and you'll be catered for since you'll be in the majority.

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People are casual about debt because they have learnt quickly to follow those who have led by example 'easy come easy go'......they see that people are no longer accountable for their actions, they see that there are no longer debtor prisons, they see that bankruptcy laws were not that long ago relaxed to encourage the take up of more debt, they see that taking on high risk debt is no longer high risk when it is someone else's money they are risking not their own, they see that saving anything gives no return, savings mean losing money that has been worked for only to be stolen/eroded by inflation.......money has been devalued and is no longer respected enough to be held.........people only act in the way the system encourages them to act, they behave how the system want them to behave ie clock up debt you can't pay it don't worry about it, it will be sold on.... all is well because debt is good for GDP that must mean it is something good to accumulate....debt=wealth. ;)

All of which can be summarised in two words: moral hazard.

Add to Winkie's list the scheme whereby the government pays your mortgage interest if you lose your job, and there is now virtually no significant risk involved in buying a house with a mortgage, even at an unsustainably inflated price. It's yet another example (in fact, one of the most widespread examples) of the 'privatise the reward / nationalise the risk' strategy of the 1997-2010 government that the present one has retained.

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So as an individual is it smarter to act dumb? Who has benefitted from economic policy over the last 10+ years? The stupid acting people or the smart acting people? You don't actually have to BE stupid, just act stupid, and you'll be catered for since you'll be in the majority.

The overwhelming theme from those not being or acting dumb, is to treat the over-extended big debtors as victims. Giving excuses for them, such as misled by the media, sucked in by the banks, couldn't have expected a crash, just wanted a home, and so on.

It's been difficult for them to lose out, given the authorities want to allow the dumb to win to keep house prices high. And especially when non-owning HPCers who've waited years for correction are massive big softies, more worried about other people than focusing on their own needs, leading the excuses for the stupid. The actual thing HPCers find hard to understand is, such buyers wanting massive debt tend not to give any thought to anyone else.

Just the other day had to hear of one of the oldest non-owning HPC forum member saying how one of his relatives was drooling at getting into BTL, and him passing it off as stupidity. The majority make their decisions with only themselves in mind, not some let's do best for society and make life fair and nice for everyone kind of HPC thing.

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The majority make their decisions with only themselves in mind, not some let's do best for society and make life fair and nice for everyone kind of HPC thing.

Which, if you're right, makes the moral hazard risk even more of a serious one, because the obvious deduction to draw from that is that the risk of something nasty happening to you is the only meaningful regulator of venal behaviour. Take that risk away altogether (and in relation to buying houses on a mortgage, it effectively has been), and you get the situation we're in now.

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I'd like a bigger house for my family to live in.

When I've been discussing with friends, families, colleagues etc they are all constantly saying the best thing to do is get a big mortgage now because rates will never be better. I can't comprehend that level of financial stupidity, when rates are the lowest they can be then surely it is the worst time to be taking on a big debt.

The era of rising wages inflating away debt is gone, you have to consider that this debt will be with you forever and you have to pay rising bills as well.

Yet these are well educated people in the professional world, and also the type of people outbidding me on houses.

...what is 'well' educated ...they certainly have not been educated for today's world ...and they show no common sense..they all suffer from a sense of entitlement which is a state of mind and think they can walk on water with their 'education' ...their inability to assess, think and act is frightening..they were brought up in a TV world of 'Friends' and all the 'Soap' nonsense ..which they think is real life ...frightening .... :rolleyes:

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...what is 'well' educated ...they certainly have not been educated for today's world

And that is the problem, education.

If someone has never been taught how to operate a bank account, how to balance accounts or budget for their monthly salary we cannot blame them for their poor financial decisions.

The fault lies with the secondary education system.

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The fault lies with the secondary education system.

They are taught how to add and subtract, if they don't apply that to money what more can you do? Employ an advisor to walk around with them 24 hours a day telling them what they can and cannot afford?

They need to feel consequences for their actions. If they have the house they cannot afford taken off them they will learn.

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They are taught how to add and subtract, if they don't apply that to money what more can you do? Employ an advisor to walk around with them 24 hours a day telling them what they can and cannot afford?

They need to feel consequences for their actions. If they have the house they cannot afford taken off them they will learn.

I would contest the idea that children are taught correct mathematics at secondary school but even if they were, are they taught about interest rates and bankruptcy? How to invest their spare income to beat inflation? A mortgage term on average is 25 years, with inflation and interest rates it is not enough just to live within a budget.

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Just the other day had to hear of one of the oldest non-owning HPC forum member saying how one of his relatives was drooling at getting into BTL, and him passing it off as stupidity. The majority make their decisions with only themselves in mind, not some let's do best for society and make life fair and nice for everyone kind of HPC thing.

Would be interesting to discuss cognitive bias when it comes to financial planning based on debt.

From a review of Kahnemann's Thinking Fast and Slow:

The same goes for all of us, almost all the time. We think we're smart; we're confident we won't be unconsciously swayed by the high list price of a house. We're wrong. (Kahneman admits his own inability to counter some of these effects.) We're also hopelessly subject to the "focusing illusion", which can be conveyed in one sentence: "Nothing in life is as important as you think it is when you're thinking about it." Whatever we focus on, it bulges in the heat of our attention until we assume its role in our life as a whole is greater than it is. Another systematic error involves "duration neglect" and the "peak-end rule". Looking back on our experience of pain, we prefer a larger, longer amount to a shorter, smaller amount, just so long as the closing stages of the greater pain were easier to bear than the closing stages of the lesser one.

http://www.theguardian.com/books/2011/dec/13/thinking-fast-slow-daniel-kahneman

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I would contest the idea that children are taught correct mathematics at secondary school but even if they were, are they taught about interest rates and bankruptcy? How to invest their spare income to beat inflation? A mortgage term on average is 25 years, with inflation and interest rates it is not enough just to live within a budget.

I think that a general ignorance of how the system works is an essential component of the system. For example, if people actually understood on a widespread basis that the 'money' they borrow to purchase their cars and houses is created from nothing by the banks who profit from this arrangement at their considerable expense, the legitimacy of the debt based system of money would soon fall into serious disrepute.

People's willingness to tolerate the banksters is in part based on their incorrect assumption that the bankers gave them something of value-credit- which they are therefore morally obliged to pay back- with interest.

Should they discover en masse that the 'credit' they pay so much to obtain was in fact brought into being by themselves when they signed the agreement that created it- they might take a dim view of the bloodsucking leeches in the banking system who live very well on the proceeds of what is essentially a confidence trick.

So the 'failure' of the educational system to inform the cattle that they are being milked is not really a failure at all- it's an entirely desired outcome of that system- and I suspect that any teacher who undertook to educate his students as to the real nature of how the banksters profit from the current arrangement would soon find themselves in deep trouble.

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