Get schooled: lower teh rates eliminates high risk lending

Today l post a pretty short Peachy piece about how the EZFKA banking actually works.  For convenience I use some numbers from EZFKNZ, because they are nice and round.

Now, for the longest time, blokes who don’t understand banking – and certainly don’t understand EZFKA – have been freaking out about high risk lending and irresponsible lending in response to each upward spurt in property prices that is triggered by each “lower teh rates” episode (which they do dearly love).  This is how the logic goes:

Hummm, dherrr…. prices have gone from $500,000 to $600,000, so a buyer has to borrow $100,000 more.

That’s high risk!


shit like this, too:

To describe how it actually works (ie outside the imaginarium), let’s use this headline as a case study:

(https://www.macrobusiness.com.au/2021/03/nz-house-prices-tipped-to-soar-25/)

Let us see what this means for lending:

Today

House price$800,000
Loan$800,000
LVR 100% (aaah! Panic!)

Later this year

House price (+25%)$1,000,000
Loan$800,000
LVR80% (nice responsible number)

This is how it actually works. No matter how much is lent today, or to whom it is lent, there is no real risk of default.

Rather than creating high risk loans, “lower teh rates” makes them disappear! Right across the back book! It’s almost the ultimate prudential stability tool. It makes banks safe as… bro!

Here are the takeaways:

  • high risk lending isn’t about something being risky to the borrower
  • high risk lending is about something being risky to the lender
  • lending isn’t high risk if the collateral rises in value
  • So, as a final flourish: to work out of lending is high risk, we don’t even need to know who the borrower is.

This is how it is. This is how it has always has been. Strangely, some have missed this dynamic.  Perhaps it’s because the price rises have been so gentle and gradual (7% – 10%) as to obscure this process a little. Praise be to Jacinda Arden and RBNZ for creating a situation of 25% annual growth, where the dynamic becomes obvious, immediate and easy to illustrate. 

(Praise be also to Jumping Jack Flash who has been writing with creative flair on this theme for a long time).

Peace!

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stagmal

does anyone ever actually default on their loans in australia or ever have to foreclose on their house? ive NEVER ever seen it ever, never seen a foreclosure sign or sale or whatever, they happen all the time in america but they must be rare as hens teef over here.

bjw678

 they happen all the time in america

I suspect they happen in states where there are no recourse laws for mortgages. i.e. you can just walk away and not pay and the only thing the bank can do is take away the house, not chase you up for any losses they incur.
In Australia you don’t get to do that. They can still chase you up for any loss after they take the house and sell it so there really is no incentive to do a runner and get foreclosed on.

Something many here don’t realise is if their LMI gets claimed on because they default the insurer will be chasing them up to pay that money back.

Last edited 7 months ago by bjw678
Stewie

Yup – although not all states have non-recourse lending. The main reason people lose their homes is through personal disasters, medical catastrophe, death, losing their job. Basically anything that impedes their ability to SERVICE the loan.

The loan doesn’t ever have to be repaid, in fact repaying the loan isn’t the purpose of lending in EZFKA, if you ever get close to doing so, social engineering and the structure of the EZFKeconomies will just find some other debt for you to take on. The repayments are the enslavements and chain, the original debt is just the sunk cost of the enslavement process.

People end up repaying two or three times the original amount they borrow – debt is all about the repayments and skimming from current economic activity, which can be adjusted up or down as interest rates are adjusted up or down. The original loan or principal is just a sunk economic cost that occurred in the past, it is skimming the current interest flows that always matter most in EZFKA.

Last edited 7 months ago by Stewie
Freddy

In EZFKA, if you can’t keep up with repayments the standard practice is to extend and pretend. Essentially it turns into a reverse mortgage and once you reach the point of little or no equity you get booted out before it starts costing the banks money.

You probably haven’t heard much about it recently because house prices have been moving fast enough for everyone to retain equity. Also mortgage rates are so low which probably means most of these people can at least keep up with the interest component.

robert2013

Plenty in Perth suburbs that saw big price falls. Banks don’t publish lists of of mortgagee in possession sales because they don’t want to tank the market. They hold a stock of them and release them slowly. E.g. I bid on a mortgagee sale last year. It was $165k for a 3 br house.

Last edited 7 months ago by robert2013
bjw678

Rather than creating high risk loans, “lower teh rates” makes them disappear! Right across the back book! It’s almost the ultimate prudential stability tool. It makes banks safe as… bro!

I’d say it adds them at the same rate that it makes them dissapear, to a near enough approximation anyway, so is neutral in that regard.
At least until there is no more “lower teh rates” or equivalent alternative left that can be done with a straight face by the pollies/rba.

Freddy

At MB we discussed the possibility of negative mortgage rates. For those who didn’t read it. Imagine mortgage rates at -3%. You could buy a house for a trillion dollars and own it outright without paying a single cent of your own money.

I guess if they were giving houses away for free what makes you think you would one of the lucky ones? More likely people who miss out would start burning shit down.

The90kwbeast

Except that you still need to pay it off in 30 years, so there is still debt servicing to be considered. But your sentiments are on the right track.

Maybe there will be 40 year mortgages in the coming decades to keep juicing the housing market some more. If people are living longer, and working longer, they can ‘afford’ to have 40 year mortgages then too!

Freddy

The point is with negative mortgage rates they are paying you interest which can be used to pay down the principle.

I find it quite weird. You get this rapid transition from extreme debt to being gifted a free home.

The90kwbeast

I understand that. Obviously your example is a hyperbole – $1t houses – wouldn’t that make your average property investor cream their pants!

But if mortgage rates ever went negative, house prices probably would be $2m+ average across the country with price to incomes of 20:1+. So whilst, yes, there would be a small negative deduction on the property every month in lieu of your repayment, it would be beyond challenging to ever own it because the debt burden would be so high. So, like I said, you would need 40-50 year+ mortgages for that to work.

So is it a free home if it takes you 40 or 50 years to pay it off..

Freddy

You are making the same mistake MB and co have been making by comparing house prices to income. It is debt repayment to income you should be focused on.

Assuming an EZFKA free-for-all with no deposits and no MPLol. Consider a 30 year mortgage with a $4000/month repayment. According to the Excel PMT function:

  • at 0% you can borrow 1.44 million
  • at -1% you can borrow 14.5 million
  • at -2% you can borrow 288 million
  • at -3% you can borrow 7.7 billion

Negative rates becomes an exponential house price increase.

The90kwbeast

What borrowing assumptions are you using? Care to post a screenshot of your workings?

My calcs say, a $1.05m loan with 2.19% IR over a 30 year term with monthly repayments, is a monthly repayment of $3,981.

Let’s assume that $1.05m is the max you can borrow all other things being equal.

If the interest rate was -1%, the loan value increases to $1.67m all other factors being equal.

At -2%, the loan increases to $1.97m and so on.

Either I’m missing something dramatic or your numbers are way off.

Last edited 7 months ago by The90kwbeast
Freddy

The borrowing assumptions are there. 100% LVR and $4000 monthly repayments over 30 years (360 months).

In Excel it is: PMT(0, 360, 1440000) = 4000

My calcs quite possibly off. I am happy for someone to correct me. ok. Hang 5. I see a problem. I will update.

I forgot to convert rates to monthly…how embarassment. Updated:

  • 0% you can borrow 1.44 million
  • -1% you can borrow 1.68 million
  • -2% you can borrow 1.98 million
  • -3% you can borrow 2.34 million

Site improvement suggestion: Let me edit a post a little longer than the 15 minutes or so it takes for someone to point out that I am an idiot.

Last edited 7 months ago by Freddy
The90kwbeast

All good mate 🙂 Looks like we’re aligned now.

Nonetheless, it’s still a large amount of extra money that can be borrowed.

Note that in your case with a 100% deposit, house prices and borrowing capacity (debt repayment as you call it) are the same thing.

All in all, lower teh rates, including below negative, always fix thing!

bjw678

The transition won’t be rapid. you will see tiny changes to rates as they go negative.
It also never quite pays itself off, as you owe less it also pays back less.
Owe $10,000 at -3% you get $300 off in interest, owe $1 you get $0.03

emusplatt

inflate away the debt??? stagger me!

The90kwbeast

Meanwhile on MB humble pie is being eaten today by LVO. His comment actually made me laugh, the poor bloke.

How is it a crapshoot when most others were getting it right… that isn’t a crapshoot, that’s you being super wrong for a decade dude.

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Last edited 7 months ago by The90kwbeast
bjw678

It’s hard to admit you have no idea what you are talking about when your entire career is based on selling your opinion…

The90kwbeast

Ouch! Harsh but true.

stagmal

i imagine the ‘deflation imaginarium’ is like the dome around the set of the truman show

leith is truman trying to get out

Stewie

If only they apply the EZFKA lens and realise that in the economic zone NOTHING is allowed to fail… well outside of the individual consumer units.

Maybe I should rephrase it to ‘The system will always be saved’.

Last edited 7 months ago by Stewie
stagmal

yeah just the sheer number of whingers on tv now talking about their businesses going belly up and wanting more jobkeeper etc, it really drove this point home. in australia nothing is allowed to fail, the only people who have to suffer are the people who had nothing in the first place. bail-outs and hand-outs excelsior for everybody else.

Stewie

Basically “Save Us!” = “Enslave Us!”

stagmal

6 m o n t h s

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The90kwbeast

bcnich, predicating 1,000 of the last 0 global resets

Agent 47

This.

This bloke is drunk off of copium. He’ll be back in 6 months time telling us it’s another 6 months away and once again misreads the globalists ability to extend the whole charade forever.

Coming

Forgot about the David Collyer moron

him, lvo and DLS should be sued into oblivion class action by mb subscribers

imagine being completely fucking wrong about everything for 10 years and you just double down every time

seems like they are now realising and back tracking though of course with the whocoodanode cry

it was the classic MB middle intellect trap

ThePensum

although I don’t know about that David Collyer guy. seems to have disappeared a few years ago. he was spouting the “don’t buy now” mantra in 2012 or so if I remember.

Coming

he posts every fucking day mate

nz links that no one gives a shit about or responds to

he’s as much of a nut case as bcnich

it’s really a clown show over there

ThePensum

hang on isn’t that that Hugh Pavelitch guy — the one with the NZ-related links?

edit: maybe it’s just in the subscriber-only posts; or I just gloss over them.

Last edited 7 months ago by ThePensum
stagmal

yeah i thought he was referring to hugh as well, he’s still around all the time

Chinese Astroturfer

Yeah I’ve never clicked one of his damn links.

Freddy

Collyer was gloating back in June when DLS dedicated a title to him.

Don’t buy Aussie property now! – MacroBusiness

Freddy

To be fair to Collyer it looks like he bought the stock market dip in a big way. Good luck to him.

I am currently not an MB subscriber as every dollar I can scrape together is in the sharemarket, geared up to the wazoo. Banks, REITs, retail, airlines, tourism are all ruined, but select sectors have genuine pricing power: I like Cu, Ni, agriculture and insurances.

Freddy

Not sure what to make of that. Collyer can afford a roof over his head but has chosen to roll the dice and with leverage on the stock market.

I know it is common for wealthy people to do that but he doesn’t sound wealthy enough to be able to lose 50% and still enjoy the high life in retirement.

Last edited 7 months ago by Freddy
ThePensum

good luck to him, sure, but he spouted advice to others, that other might have taken, that was totally wrong.

The90kwbeast

I just had a read through that article by DLS – that may well turn out to be his magnum opus on contrarian property investment advice!

Just 9 months on, and almost all of it is completely wrong. Absolutely unbelievable.

Worth a read for anyone looking to truly pinpoint where MB went peak bear contrarian. Summed up by this doozy:

“Seventh, policy is exhausted. The RBA is out of rate cuts and moving incredibly slowing to unconventional measures. Banks have reduced mortgage rates after the last cuts, certainly, but nothing like enough to offset the above headwinds. A few basis points versus 4.5% during the GFC. Australians now know that the RBA put is dead for housing.”

On Leith’s charts he shared, can’t find the post, but you can almost pinpoint this (June 2020) as being the absolute low point prior to property once again taking off. It’s just cringe worthy now.

Last edited 7 months ago by The90kwbeast
Freddy

I lol’d at the post calling you a potty-mouthed Trans.

bjw678

A few basis points versus 4.5% during the GFC. Australians now know that the RBA put is dead for housing.

The fact he doesn’t even appear to grasp the concept that the relative rather than absolute change in rates is what actually matters is telling of his understanding of the topic.

But since it seems to be shit all over DLS predictions day:

If this is what Cabcharge is planning for then it’s already dead. It will be wiped out by Uber and other private operators in about a week when driverless rideshares takeoff. The economics of driverless cars are unbelievably cheap compared with manned cabs and the latter will simply cease to exist overnight.

from:
https://www.macrobusiness.com.au/2017/11/driverless-cabs-2026-try-three-years/
which predicted driverless cabs by sometime last year.

Last edited 7 months ago by bjw678
The90kwbeast

Yep. If you cut interest rates from 1% to 0.5%,that’s a 50% reduction. If you cut from 5% to 2.5%, still just a 50% reduction. Doesn’t drastically reduce the interest impact going from 1% to 0.5%, but by gee it levers up the borrowing capacity!

And why not make it shit over DLS predictions day haha

If you’re going to charge $199 every year to read a bunch of predictions that are 3/4 of the time wrong, you ask for mud to be thrown in your face as a result.

Obviously I won’t be renewing my sub.

Last edited 7 months ago by The90kwbeast
bjw678

Doesn’t drastically reduce the interest impact going from 1% to 0.5%

Halving interest payments is what I’d call drastic. whether from 8-4% or 1.5-0.75%

Chinese Astroturfer

You would be better off tossing a coin to make the decision to buy or sell for you than listening to DLS.

It’s at the point where a lot of his financial advice is simply shonky.

The90kwbeast

Yep. A coin gives you a 50% chance of guessing it right! Better than about the 20% you get from the MB boys.

Last edited 7 months ago by The90kwbeast
ThePensum

ahhh hah! incorrect, if the MB boys are wrong 80% of the time (which I would agree with), they are an excellent reverse indicator; and a better signal than the toss of a coin!

robert2013

They were not wrong about Perth property. I bought a house at the end of 2020 and I think I pretty much got the bottom. Also, their medium range AUDUSD forecasts have been pretty good and have made me some good %.

Stewie

Yeah – I’m in the camp that they’ve done okay. I’m fairly sanguine about them under performing since the bottom. I’d rather have an adviser tell me when to step away and that its time to go fishing, then be so pre-occupied with beating the index that they walk off the cliff with everyone else. Fund performance is best measured over more than one year, I’ll reserve judgement for the moment.

Last edited 7 months ago by Stewie
stagmal

just wanna take this moment to comment that britney spears was so fkn hot in that video

bjw678

And too young for me even then, let alone now…

Djenka

indeed, makeup can do miracles.

OTOH, this one does not need makeup:

jennifer_hawkins_nov-2-gthumb-gwdata1200-ghdata1200-gfitdatamax[1].jpg
Djenka

Is there an option for links to images so local space is not used? I looked but it offers only upload.

Djenka

Fair point.
Thumbnails limitation and say 5 images can clip the wings of Gunnamatta-wannabe image gallorains

bjw678

Better than political party staffers?

Too soon?