If you don't think this is a problem then I would very much like to hear your reasons.
Property investors prefer IO loans for IPs so they can reduce their non-deductible debt faster.
By not wasting money paying down tax deductible principal, the investors have more funds to offset non-deductible debt when they buy a home for themselves.
It makes very good financial sense and puts the investor in a stronger position.
Not only is it not a problem, it is actually beneficial.
Property investors prefer IO loans for IPs so they can reduce their non-deductible debt faster.
By not wasting money paying down tax deductible principal, the investors have more funds to offset non-deductible debt when they buy a home for themselves.
It makes very good financial sense and puts the investor in a stronger position.
Not only is it not a problem, it is actually beneficial.
Again you completely miss the point - I'm willing to accept that the strategy you've described works for you personally, but what happens to the market when the number of people employing this strategy increases substantially - will it still work? No of course it won't.
This appears to be your achilles Shadow - you know so much about the micro details that you're completely myopic to the big picture: that economies fail when a big proportion of its agents discover the 'fail-safe' way to make money.
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness. "Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
The spruikers keep beating the drums, that you can never go wrong with property.
But there signs are everywhere.
The housing market is in a mess.
Yet the bear forums have closed down and the bears have all crawled back up their arse caves
Ignore posts by The Whole Truth · View Post · End Ignoring The forum fuckwit goes RRRAAARRRGGHHhhh - But not a fuck was given..................by anyone.
Again you completely miss the point - I'm willing to accept that the strategy you've described works for you personally, but what happens to the market when the number of people employing this strategy increases substantially - will it still work? No of course it won't.
Why not? At what proportion of the population does it fail to work? When do you believe we would hit that level (how many years)?
Quote:
This appears to be your achilles Shadow - you know so much about the micro details that you're completely myopic to the big picture: that economies fail when a big proportion of its agents discover the 'fail-safe' way to make money.
Your problem is you imagine a current trend, extrapolate it to infinity and failure, and then assume this is what must happen.
You're like Steve Keen in 2008 panicking the world because he extrapolated a rise in the Debt/GDP ratio to infinity and assumed disaster ahead.
As it happened, that trend flattened out from 2008 and Debt/GDP has been on a flat to slightly downwards trend since (with no accompanying disaster).
The bottom line is this... house prices have tracked income growth over the past decade and this long term trend can continue indefinitely. It won't be a straight line - the growth will cycle between a few strong growth years (such as right now) which you bears extrapolate to infinity and disaster, followed by correction years (like 2011) that you bears also extrapolate to infinity and disaster. That's the problem with you guys... you don't understand cycles. You look at what's currently happening, and extrapolate that to infinity and disaster. You see house prices rising faster than incomes this year and forget that house prices fell during the previous two years so this is just catch up.
You need to realise that trends change and move in cycles. What is happening now will reverse in the future, and then that reversal will also reverse, and this can keep happening for a long time without any big disastrous property crash. Don't panic if you see house prices rising faster than incomes for a couple of years - it probably means they grew slower than incomes (or even fell) in previous years.
Look at the long term trend. Currently the long term trend over the past decade is that house prices have tracked incomes.
If house prices rise faster than incomes for say the next 2-3 years, then that is likely to be followed by another correction back to the long term trend.
If you see prices rising substantially faster than incomes for a long period of time then expect a major correction (to bring them back to the trend).
Same goes for the other 'scary' trends that you see and panic about, like increased prevalence of IO loans for example.
Don't extrapolate everything to infinity and disaster. You're worrying too much about events that haven't happened yet and probably won't happen.
If you don't think this is a problem then I would very much like to hear your reasons.
Property investors prefer IO loans for IPs so they can reduce their non-deductible debt faster.
By not wasting money paying down tax deductible principal, the investors have more funds to offset non-deductible debt when they buy a home for themselves.
It makes very good financial sense and puts the investor in a stronger position.
Not only is it not a problem, it is actually beneficial.
most property investors pay interest only because :
1. they were lead to believe property doubled every seven years , just like on the gold coast now 50% below 2010 prices and probably 60-70% below prices from years prior to that.
2. thats all they can afford after scaping for the deposit
3. the rent on the property does not even cover the basic costs let alone interest.
4. they think they are getting some sort of tax deduction , buy are simply paying more out of there own pocket every week while jibbering on here.
5. they thought they would be smarter than most and turn that 10% deposit into two 5% deposit and buy two gold coast properties instead of one because two properties doubling every seven years is better than one , oh thats right ,except for when it does not double but drops to half that price in only three years, doh.....
6. they thought they would take out a 105% loan on their own home and use that deposit for and investment property as 5% , which only covers costs like stamp duty building pest inspections and legal costs , and when it doubles in seven years ,well be fine , with the economy thriving and the mining boom and new jobs being creted every day in record numbers and with interest rates now below emergencyy levels of 2008-09.
7. if they dont buy now they will miss out forever, so its not just investors its home buyers too , paying interest only because thats all they could afford, and thats before they had there hours cut or lost there job.
8. after all other costs increasing like power and fuel for a start, even though we are supposedly in a decling eceonomy, we still need to make our banks the most profitable in the world and keep gail kellys pay packet at around 15 million per year and keep doubling the politicians wages for all the great decisions they make not to mention the improvememnts to the economy they make , again they cant afford much more than interest rates after being robbed for evrything else.
9. its the done thing , all great investors know that, its how you do it these days, thats why is was creating by geniarses who make millions per year reduce there tax , not for the average dummy, works greta until it doesnt anymore. what was a tax haven for the filthy rich turned into a ponzi scheme for dummies, works great for a while then doh. all good ponzies come to an end ,unfortunatly...
If I was in Tony/Joe's shoes now I would be seriously considering how much inflation we could get away with in the next few years without losing our financial reputation.
Not that this would help with my plans to save another year or two for a deposit
depending on where you buy it might be a good idea to buy sooner than later - years ago we got shafted trying to save in an environment where prices were rising much faster than what we were able to save. I honestly do hope it works out for you though
Shadow
17 Sep 2013, 04:16 PM
The bottom line is this... house prices have tracked income growth over the past decade and this long term trend can continue indefinitely. It won't be a straight line - the growth will cycle between a few strong growth years (such as right now) which you bears extrapolate to infinity and disaster, followed by correction years (like 2011) that you bears also extrapolate to infinity and disaster. That's the problem with you guys... you don't understand cycles. You look at what's currently happening, and extrapolate that to infinity and disaster. You see house prices rising faster than incomes this year and forget that house prices fell during the previous two years so this is just catch up.
You need to realise that trends change and move in cycles. What is happening now will reverse in the future, and then that reversal will also reverse, and this can keep happening for a long time without any big disastrous property crash. Don't panic if you see house prices rising faster than incomes for a couple of years - it probably means they grew slower than incomes (or even fell) in previous years.
great post Shadow - for the sake of illustration you could ask if ANYONE here believes prices in the US won't reach all time nominal highs within 15 years
Why not? At what proportion of the population does it fail to work? When do you believe we would hit that level (how many years)?
In 2006-2007 while working in the UK I began noticing aggressive promotion of IP loans through posters and commercials popping up on the London Underground. Don't know the figures, but Bradford & Bingley (who were eventually nationalised when the wholesale money market froze) at the height of the boom were offering instant approvals online for IP loans for PPOR mortgage holders
When I went in to HSBC for a chat I was offered an IO loan as a way of getting into this lucrative business. I declined, as did house prices a year later.
I believe we're now entering this IO IP phase now, so a major correction could be about a year and a bit away. Otherwise more will need to be done to prop up the market and encourage transfer of wealth to the property owning classes.
Quote:
Your problem is you imagine a current trend, extrapolate it to infinity and failure, and then assume this is what must happen.
You're like Steve Keen in 2008 panicking the world because he extrapolated a rise in the Debt/GDP ratio to infinity and assumed disaster ahead.
As it happened, that trend flattened out from 2008 and Debt/GDP has been on a flat to slightly downwards trend since (with no accompanying disaster).
It's called 'kicking the can down the road'. Private debt is still at unprecedented high levels. The downward trend is negligible.
Quote:
The bottom line is this... house prices have tracked income growth over the past decade and this long term trend can continue indefinitely. It won't be a straight line - the growth will cycle between a few strong growth years (such as right now) which you bears extrapolate to infinity and disaster, followed by correction years (like 2011) that you bears also extrapolate to infinity and disaster. That's the problem with you guys... you don't understand cycles. You look at what's currently happening, and extrapolate that to infinity and disaster. You see house prices rising faster than incomes this year and forget that house prices fell during the previous two years so this is just catch up.
Please explain, if this is just catch up, why FHBs are still a small segment of market, NZ is implementing Macro-Pru controls and the RBA is expressing concern about the effect of low IR on property prices (even though it's not strictly their domain)
Quote:
You need to realise that trends change and move in cycles.
Please explain how the GFC/Subprime fits into your theory of cycles. Please don't say super-cycle or I'll really know you don't know what you're talking about
Quote:
What is happening now will reverse in the future, and then that reversal will also reverse, and this can keep happening for a long time without any big disastrous property crash. Don't panic if you see house prices rising faster than incomes for a couple of years - it probably means they grew slower than incomes (or even fell) in previous years.
again, if everything moved in cycles there would be no need to manage risk.
Quote:
Look at the long term trend. Currently the long term trend over the past decade is that house prices have tracked incomes.
Off the back of large stimulus programs and decreasing Income Tax receipts through NG claims from amateur property investors.
Quote:
If house prices rise faster than incomes for say the next 2-3 years, then that is likely to be followed by another correction back to the long term trend. If you see prices rising substantially faster than incomes for a long period of time then expect a major correction (to bring them back to the trend).
Again, please explain how the GFC/subprime represents some reversion to trend, if it does then why are we pumping the system full of stimulus
Quote:
Same goes for the other 'scary' trends that you see and panic about, like increased prevalence of IO loans for example.
You mean like the GFC/Subprime?
Quote:
Don't extrapolate everything to infinity and disaster. You're worrying too much about events that haven't happened yet and probably won't happen.
You mean like the GFC/Subprime?
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness. "Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
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