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Real After Tax Term Deposit Returns for Australian Savers are Negative; Savers Punished. Debtors Rewarded. Tax and Inflation Work for Borrowers and Against Savers.
Topic Started: 6 Mar 2012, 11:00 AM (20,814 Views)
Shadow
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Evil Mouzealot Specufestor

Rastus2
23 Mar 2012, 08:46 PM
well it started as you saying 'about 5%', then was 4.7, but now lets call it 4.5%
I actually said close to 5%. I think the exact figure was 4.7%, but you can go with 4.5% if you want, and I'll stick with 'close to 5%'.

Quote:
 
At what % will you start to consider that the upward pressure on prices means they can stop rising
I'll play it by ear.
Edited by Shadow, 24 Mar 2012, 09:19 AM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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Smarter savers thrive in the dash for cash

March 25, 2012

For many people, the global financial crisis wasn't about Wall Street failures or wobbly European state treasuries. It was a wake-up call that created a shift in consumer behaviour and it started a cascade of hardworking people pulling back from personal debt and finding good places to save their cash.

The GFC changed the way we think about managing our wealth, and its effects reverberate today. It gave us a new-found appreciation for ''risk'' - that is, the prospect of losing your hard-earned cash. The Australian savings rate is currently around its highest since the mid-1980s, with about $100 billion of new savings each year flowing into banks and building societies.

This switch from gearing up with mortgages in the late 1990s and early 2000s to focusing on preserving and building wealth has been evident in many ways: business owners reducing debt and looking to better manage their cash-flows; householders paying off credit cards and loans; retirees and near-retirees switching their super from equities to cash and bonds.

To my mind, there has been an evolution in our perception of what is an ''acceptable'' trade-off between the risks we take and the returns we get. Banks, credit unions, and building societies have joined the chase for our cash, creating special "bonus" savings accounts that promise higher returns.

This is a good business for the banks: it's a relatively cheap and stable way for them to accumulate funds they can then lend to home buyers and business owners. And it's also lucrative because, on average, the majors make a 2.4 per cent "margin" or "spread" between what they pay for your deposits and what they earn on that same money when it is lent out.

In this war for savings, key players also use clever marketing to secure their share of your wealth. We are seeing "honeymoon" savings rates, where if you're a new customer you are offered a deposit rate of, say, 5.85 per cent, but this rate drops back to 4.5 per cent after four months. So over any 12-month period, you are actually only earning 4.95 per cent, which is a far cry from the 5.85 per cent.

Read more: http://www.smh.com.au/money/smarter-savers-thrive-in-the-dash-for-cash-20120324-1vqsy.html#ixzz1q4jSijr8
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The direct road to profit

David Potts
March 25, 2012

Leaving money in the bank never made anybody rich, though no doubt it's handy once you get there. Yes, I know term deposits have served a treat; they're government-guaranteed up to $250,000 and the 6 per cent return is better than most shares or properties have been doing.

But they're a foul-weather friend. Great when the going gets tough; a drag in good times, because you could be in something doing better. Your capital can't grow and, in fact, shrinks, since what you don't lose in tax disappears in inflation.

Better to pay off the mortgage or invest. So let's look at where the money is likely to be made in the coming years.

SHARES

The sharemarket is cheap. Did you know Wall Street, the epicentre of the global financial crisis, has surged to within 10 per cent of its all-time high? Our market, however, isn't in a bull's roar of its record. Despite a mining boom, it's done worse in the past six years than even most markets in Europe. How could that be?

. . .

''We're telling clients 2012 will be a very good year,'' Elio D'Amato, chief executive of research group and fund manager Lincoln, says. ''But it will be in two halves. The first half will go sideways but the paradigm will change in the second half when investors will come flooding back.''

PROPERTY

As shares come out of the doldrums, property seems to be going into them. The average price nationally has been gently dropping for about 18 months.

There were 311,447 ''for sale'' signs in February, a jump of 23 per cent on a year ago, RP Data reports. Compared with household incomes or rental yields, property is over-valued. The question is how, and when, they'll get back to normal.

Since it would take a leap in unemployment or interest rates to trigger a crash, it's more likely inflation, a rising population and time will chip away at the overvaluation. In any case, unlike the fallout of property booms in the US and Europe, Australia has a shortage of housing, though perhaps not of listings.

''In the past prices have gone nowhere for an extended period of time,'' the managing director of property investment consultancy Atchison Consultants, Ken Atchison, says. ''That's the way the market's corrected for being fully priced. So I'd expect very flat capital growth for a long time.''

He predicts annual returns from investment properties of 7 per cent to 8 per cent, over half of which will come from rent rises. So like the sharemarket, go for a reliable income and let values look after themselves.

Among the capital cities Sydney, where the shortage is most pronounced, is likely to be the best performer, but only parts of it. Specifically the outer west and south-west where prices are low, producing high rental yields. ''Investors should look at lower socio-economic areas where rents are 7 per cent or more gross,'' the principal of Smart Property Adviser, Kevin Lee, says. Properties in Gosford, north of Sydney, are yielding almost 9 per cent, he says.

Since property prices aren't likely to increase more than 2 per cent a year for the foreseeable future, forget negative gearing with an interest-only loan. Instead make sure the rental yield is more than the interest you're paying.

Read more: http://www.smh.com.au/money/investing/the-direct-road-to-profit-20120324-1vr6y.html#ixzz1qI21OfS3
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Dazibao
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Piper
6 Mar 2012, 11:48 AM
As a purely financial matter, buying a house is a largely ridiculous proposition.
About five years ago a man called Emilio Botin (which means 'Loot') suddenly decided to sell off all the properties owned by his business and promptly offered to rent them back from the buyers.

This was about a year before the rest of the world turned to shit. One very clever man, albeit with better access to information than the rest of us.

You may have heard of him - he's the head of Europe's largest bank - Santander. Lovely surname by the way; very fitting.
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wern
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Shadow, your graph is faulty.

There is no such tax rate as 35% in Australia.

And your statement:
Quote:
 
Meanwhile, sensible homeowners enjoy capital gains, no rent to pay, stability of tenure, negative gearing benefits, and inflation reducing the real value of their home loans, leading to a comfortable rent-free, debt-free, asset-rich retirement.

Is miseleading for the following reasons:

  • Home owners can't enjoy "no rent to pay" as well as "negative gearing benefits". If you live in the home you enjoy "no rent to pay" and "stability of tenure" without "negative gearing benefits" for that investment. If you are renting the property you are enjoying "negative gearing benefits" without "no rent to pay" and without "stability of tenure" for that investment. But you can't enjoy all three for the one investment.
  • Also, as a renter if you can't afford to pay off a mortgage you are in big trouble, whereas it is much much easier to break a rental contract on the basis of financial hardship.
  • And where is your graph to compare the two investment strategies, since you compare them in
  • Inflation does indeed reduce the value of a loan over time which is great news if
    a. your property is increasing in value over time - it has been the case in the past, but the future is extremely unclear due to the unprecendented events taking place - carbon tax, mining tax, GFC 2
    b. you plan to sell your house and make a profit from this increase in value (otherwise you might as well have been renting) - but if you sell the house then you are a renter again. Otherwise if you sell the house and buy another one then you haven't made use of the diminishing value of the loan, as the new house also increased over time.
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Trojan
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wern
30 Mar 2012, 12:32 PM
Home owners can't enjoy "no rent to pay" as well as "negative gearing benefits". If you live in the home you enjoy "no rent to pay" and "stability of tenure" without "negative gearing benefits" for that investment. If you are renting the property you are enjoying "negative gearing benefits" without "no rent to pay" and without "stability of tenure" for that investment. But you can't enjoy all three for the one investment.
Actually it is possible to have all 3. Renting out part of the property comes to mind.
Though I can't read Shadow's mind so not sure if this is what he had in mind when he wrote the post.

Edited by Trojan, 30 Mar 2012, 12:53 PM.
I put trolls and time wasters on my ignore list so if I don't respond to you, you are probably on it ....
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wern
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If you rent out part of your property (which very few people do) then you are unlikely to have negative gearing as you can only claim a portion of your expenses (such as the mortgage interest) in proportion to the area of the rented portion of the property - this usually results in a book profit. Negative gearing means that you are making a loss which is then offset against your other income (such as wages). It is theoretically possible to make a loss for argument's sake but then that can also apply to term deposits - ie shadow used averages, but theoretically someone could have always picked the bank with the highest interest rate while having no other income which means they are unlikely to pay any tax on their interest income (and if they do pay tax it will be far lower than 35%), which blows his whole graph to hell.
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wern
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wern
30 Mar 2012, 01:24 PM
If you rent out part of your property (which very few people do) then you are unlikely to have negative gearing as you can only claim a portion of your expenses (such as the mortgage interest) in proportion to the area of the rented portion of the property - this usually results in a book profit. Negative gearing means that you are making a loss which is then offset against your other income (such as wages). It is theoretically possible to make a loss for argument's sake but then that can also apply to term deposits - ie shadow used averages, but theoretically someone could have always picked the bank with the highest interest rate while having no other income which means they are unlikely to pay any tax on their interest income (and if they do pay tax it will be far lower than 35%), which blows his whole graph to hell.
Correction:
If you rent out part of your property while you are living in it (which very few people do) then you are unlikely to have negative gearing as you can only claim a portion of your expenses (such as the mortgage interest) in proportion to the area of the rented portion of the property - this usually results in a book profit. Negative gearing means that you are making a loss which is then offset against your other income (such as wages). It is theoretically possible to make a loss for argument's sake but then that can also apply to term deposits - ie shadow used averages, but theoretically someone could have always picked the bank with the highest interest rate while having no other income which means they are unlikely to pay any tax on their interest income (and if they do pay tax it will be far lower than 35%), which blows his whole graph to hell.
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Trojan
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wern
30 Mar 2012, 01:25 PM
Correction:
If you rent out part of your property while you are living in it (which very few people do) then you are unlikely to have negative gearing as you can only claim a portion of your expenses (such as the mortgage interest) in proportion to the area of the rented portion of the property - this usually results in a book profit. Negative gearing means that you are making a loss which is then offset against your other income (such as wages). It is theoretically possible to make a loss for argument's sake but then that can also apply to term deposits - ie shadow used averages, but theoretically someone could have always picked the bank with the highest interest rate while having no other income which means they are unlikely to pay any tax on their interest income (and if they do pay tax it will be far lower than 35%), which blows his whole graph to hell.
I agree very people do it (We don't rent out any part of our home)
But why would it result in a book profit?

If I rented out my whole home and it was negatively geared, why would renting out half of it while living there not result in it being negatively geared?
Rent would be approx halved and expenses would also be halved ....
I put trolls and time wasters on my ignore list so if I don't respond to you, you are probably on it ....
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kennyjaiz
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wern
30 Mar 2012, 01:25 PM
Correction:
If you rent out part of your property while you are living in it (which very few people do) then you are unlikely to have negative gearing as you can only claim a portion of your expenses (such as the mortgage interest) in proportion to the area of the rented portion of the property - this usually results in a book profit. Negative gearing means that you are making a loss which is then offset against your other income (such as wages). It is theoretically possible to make a loss for argument's sake but then that can also apply to term deposits - ie shadow used averages, but theoretically someone could have always picked the bank with the highest interest rate while having no other income which means they are unlikely to pay any tax on their interest income (and if they do pay tax it will be far lower than 35%), which blows his whole graph to hell.
A negative gearing property would yield a negative gearing result regardless if you rent out the entire investment property or rent out a portion while living in it. The taxpayer is required to apportion the expenses and rental income accordingly, but a property does not become less likely to have negative gearing, just because you are apportioning it.

E.g.
Investment property:
Income generating portion: 100%
Total Rental income $9000 p.a.
Total expenses $9900 p.a.
Investment loss $900 (9900-9000)
This 900 bucks is used to deduct against other income sources.
i.e. Negative Gearing.

Rent out a portion while living in it:
Income generating portion: 1/3
Total rental income $3000 p.a.
Investment loss $3300 p.a.
Investment loss $300
This 300 bucks is used to deduct against other income sources.
i.e. Negative Gearing

Edited by kennyjaiz, 30 Mar 2012, 02:02 PM.
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