Please list the global financial shocks over the last 10 years that have been positive for the finance industry... if you can.
The fall of interest rates from over 20% in 1987 to under 4% now, The oil glut that caused a barrel of oil to fall from $150USD to close to $20USD, oh there have been plenty really. More positive shocks that negative ones judging by the constant rise of the S&P 500, it's just that people don't pay as much attention to a positive shock.
Take risks - if you win you will become wealthy, if you lose you will become wise
So while it is true housing is the majority of assets, households still hold SIGNIFICANT assets over and above housing - 40% of household assets are financial / non-housing assets.
So future households have future liabilities 650% of disposable income.
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There is no way household net assets would be negative if "marked to book value" (whatever the hell this means! ).You can see that even if housing values were set at zero, net wealth / assets would still be double liabilities. And this is a ridiculous scenario / assertion anyway.
Sometimes the only way to model a continuous process is to discretise it. So lets see if I can do that so you understand.
For simplicity, let's assume you can borrow 100% of the purchase price.
Say you have 100 owners that own 100 houses (1 each), which they purchased for $100. At the time they borrowed $100.
Liabilities = $10,000 and assets = $10,000
20 years later they have all paid off their loans and the market value of each house is now $300. All 100 owners sell their house to 100 new owners for $300, which the new owners take out loans for $300 each.
Liabilities = $30,000 and assets = $30,000
So, in the intervening 20 years before the first owners sell their houses to the new owners, every increase in the market value of a house increases the FUTURE liability for the FUTURE owner.
There is nothing ridiculous about it. It is an accounting certainty.
This can only work if the discount rate of money (e.g. risk free plus inflation) is the same as the increase in house prices. i.e. 1/(1+r)^20 * 300 = 100
Otherwise prices will climb faster than incomes and in 20 years time the future owners will not be able to afford to take out a $300 loan to buy the houses.
This can only work if the discount rate of money (e.g. risk free plus inflation) is the same as the increase in house prices. i.e. 1/(1+r)^20 * 300 = 100
Otherwise prices will climb faster than incomes and in 20 years time the future owners will not be able to afford to take out a $300 loan to buy the houses.
Does it make any diff if interest rates are only one third wot they were 20 yrs ago?
A Professional Demographer to an amateur demographer:"negative natural increase will never outweigh the positive net migration"
Does it make any diff if interest rates are only one third wot they were 20 yrs ago?
Yes. It makes it worse.
Remember, the discount rate for affordability for most households is the rate they earn on deposits plus wage inflation. The deposit rate (net of tax) is roughly 2.1% and wage inflation is 1.9%, which gives a discount rate of 4%, but prices doubling every 10 years is a CAGR of 7.1%
Which means that every 10 years real income will increase by 48% while prices increase by 100%. Lower interest rates will get you part of the way there, as will longer loan terms, but ultimately prices will outrun real income faster than interest rates can decrease or loan terms can be extended.
Speak when you are angry and you will make the best speech you will ever regret. Ambrose Bierce
Remember, the discount rate for affordability for most households is the rate they earn on deposits plus wage inflation. The deposit rate (net of tax) is roughly 2.1% and wage inflation is 1.9%, which gives a discount rate of 4%, but prices doubling every 10 years is a CAGR of 7.1%
Which means that every 10 years real income will increase by 48% while prices increase by 100%. Lower interest rates will get you part of the way there, as will longer loan terms, but ultimately prices will outrun real income faster than interest rates can decrease or loan terms can be extended.
Yeah, I woz gunna mention that extending loan term things next - So's thanks for doing it on me behalf. (Yunno, wot wif tha punters just generally bein' edumacated ta be more 'comfortable' wif debt these days than 'I woz as a boy' I strongly suspect.)
But anyways "ultimately" still sounds like a potentially VERY long ('n even unknown?) time ta me ...
A Professional Demographer to an amateur demographer:"negative natural increase will never outweigh the positive net migration"
Yeah, I woz gunna mention that extending loan term things next - So's thanks for doing it on me behalf. (Yunno, wot wif tha punters just generally bein' edumacated ta be more 'comfortable' wif debt these days than 'I woz as a boy' I strongly suspect.)
There is not much flexibility in loan terms in Australia. We are a developing country, we have little to no manufacturing capability, almost no high-tech industry, the population is (by developed world standards) poorly educated in maths and sciences, socially backwards and politically naive. It's only in the last couple of years that there has been a government bond with a term longer than 10 years issued. Managing Rho on a 60 year time horizon is very risky and expensive under those circumstances.
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But anyways "ultimately" still sounds like a potentially VERY long ('n even unknown?) time ta me ...
Ultimately is a time frame that is longer than bears expected but sooner than bulls were prepared for. And when it arrives, it pretty much happens all at once.
Speak when you are angry and you will make the best speech you will ever regret. Ambrose Bierce
The fall of interest rates from over 20% in 1987 to under 4% now, The oil glut that caused a barrel of oil to fall from $150USD to close to $20USD, oh there have been plenty really. More positive shocks that negative ones judging by the constant rise of the S&P 500, it's just that people don't pay as much attention to a positive shock.
I never said positive things did not happen without warning... I simply said that the media does not usually call them "economic shocks"... that term is more often used for negative financial events than positive ones..
IR falling most recently had quite a bit to do with the negative economic shock called the GFC
The Oil glut is rarely termed 'financial shock' except for the middle eastern countries, and then, not in a good way.
There is a reasonable explanation why this might be so... when things go well (unexpectedly), there is always someone around to claim ownership... when things to badly, the fallout is an orphan, and despite the possibility that people saw it coming, and, quite likely, caused it... they lay low... thus, it gets branded a 'shock'.
Will the "Corresponding Asset Remain Four times" the additional Debt over the Next 25 years......
Well the RBA chart posted shows that the ratio has remained at that sort level while interest rates were high / rising (up to 17% in 1990), low/falling, rising/high again (10% mortgage rates as recently as 2007), through the GFC, recession, dot com bust, asian financial crisis, mining boom / mining bust and so on. So why would a small rise in interest rates now make any real difference?
Jon Snow
25 Nov 2016, 08:32 PM
Say you have 100 owners that own 100 houses (1 each), which they purchased for $100. At the time they borrowed $100.
Liabilities = $10,000 and assets = $10,000
20 years later they have all paid off their loans and the market value of each house is now $300. All 100 owners sell their house to 100 new owners for $300, which the new owners take out loans for $300 each.
Liabilities = $30,000 and assets = $30,000
In household aggregate balance sheet terms, at the end you will have $30k in total liabilities, and $60k in total assets - remember the $30k borrowed to buy the 100 houses was given as cash to the previous owners - so that's a financial asset for them. In addition $10k + interest in loans have been paid off - that money has also ended up somewhere - possibly also on the aggregate household balance sheet. So there may even be $70k in assets - $30k dwellings and $40k financial.
Likewise at the start the original $10k borrowed to buy the houses must have gone to someone / something as well, so that may also have appeared in the household aggregates (unless you assume the houses were build and sold by the government or something). Meaning at the start you would have seen $10k liabilities and $20k assets in the household balance sheet.
So in fact in your scenario both liabilities and assets triple, and the ratio of assets to liabilities remains the same at 2 times, or perhaps has even increased.
So I'm not sure what point you are trying to make?
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