Perspectives - Personal Finance Blog

Linda says:

How to lose absolutely astronomical amounts of money.

Most of us have at some stage in our lives lent money to a friend or work colleague with a hard luck story. I remember learning the lesson as a student that there were some people, who felt no priority in repaying money they had borrowed. As I noted the borrower to be spending on other items, but making no attempt to repay the debt to me, relations became quite unpleasant. But I learnt one of life’s basic lessons- namely be extremely careful whom you lend money to.

Old fashioned banking where money was lent to persons who had a deposit, and prospects of repaying the loan, appears to have been totally disregarded in the parallel universe called sub prime lending. The old fashioned “deposit” eliminated those who had compulsive spending problems, gambling, overly extravagant lifestyles or simply in sufficient income to service the loan. It was a useful test that even if you had a good income, could you manage your spending?

In the sub prime universe, commonsense appears to have flown out the window as bankers and brokers, paid themselves huge salaries and bonuses for making highly suspect loans, and then on selling these as AAA grade securities. Now, no amount of financial engineering can hide the smell of the rotten original loans. Prestigious firms have basically conned everyone, destroyed billions of capital and are now on their knees, to governments and central banks, to bail them out of an appalling mess.

In old fashioned banking, the first rule was not to lose money. Sure, money was lent to businesses and homebuyers, who eventually, could not keep up their repayments. But, at the time the original loan was made, the belief was that the loan could be serviced. A lot of these sub prime loans were totally rotten from their inception. The money was lent to people. who had no hope of being able to make the payments. It was lent by individuals and organizations, who were looking to shift the risk elsewhere, pocket their money, and did not care what happened down the track.

As the colossal losses that have materialized have shown, some of the involved parties have not been able to escape the real world consequences of their actions. Unfortunately, much of the collateral damage is going to affect ordinary people, who never profited from the financial games played in the parallel universe.

Linda says:

Financial fashions will radically alter in 2008.

My financial forecast for 2008 is a return to the virtues of simplicity.

No more convoluted financial models, which require an advanced degree in mathematics to have any hope of understanding.

No more investing in the blind faith, that name institutions in glossy premises are not going to lose you a truckload of money.

Out of fashion are any styles completely, of dodgy mortgage related securities that have some sort of down gradable rating on them.

Extremely fashionable will be some form of legal action, aimed at sellers of the dodgy mortgage related securities.

That last season’s hot number called private equity buyout will be replaced by the far less glamorous style of actually running a business in a viable, long term manner.

Second hand yachts and Ferraris are likely to be in ready supply and at good prices.

The fashion colour of 2008 is likely to lashings of bright RED, especially in terms of red ink in the balance sheets of some banks and brokerages.

Equally red may be some faces of CEOs, especially entering court.

Owning a condominium, in an empty building in Florida, will definitely not be admitted to by any fashionista.

Buying any asset to “flip”, especially real estate, will be seen as a total style disaster.

Dining “in” is going to be the look of the season, rather than dining “out”.

Throwing the credit cards on the barbecue, is another new fashion trend that is likely to be a hit.

Very well dressed will be the politicians on TV, calling for legislation to do something about whichever financial problem is in the headlines.

Excessive debt levels will equate to excessively high heels- likely to contribute to a wobble and probably a nasty fall.

Unfortunately, the camouflage, military look is also likely to a growing trend in numerous locations across the world, which are not usually known for setting fashion trends.

Gabby says:

Ahhhhhhh, feel that property squeeze.

It’s all over the news here (and probably where you are also), property markets are hotting up. This includes both sales and rentals. You could be excused for thinking that everyone had gone a bit property-mad.

Here in Australia we’re in the middle of a boom, but despite these supposedly prosperous times there are many people who aren’t feeling that well-off at all. They’re feeling stretched and increasingly unhappy in their situations.

Sure, this could be argued to be a general trend in our society - and maybe it is - but had you ever thought that renting could be a cause of anxiety and depression for many people?

No? Well neither had I. I suppose I had never given it much thought.

According to this article as many as “89 per cent of renters reported experiencing negative psychological effects directly related to the rental climate.”

Basically, in the current rental market people are becoming so anxious about having to move and look for a new place that they will stay living in sub-standard conditions. But if the constant horror-stories in the news are anything to go by this anxiety is not completely unjustified. Only last week did I read about one unit in Sydney where over 100 people queued outside waiting to inspect the flat. And only last week did I experience one of these busy inspections for myself…

In my last post I mentioned that I was in the rental market again. Yes, I’m a renter.

I’ve been living at my current address for about 4 years, but they want to renovate and consequently I have to find a new place. The search, so far, has been less than inspiring. You just can’t get the same ‘bang for your buck’ that you used to be able to.

Some people might ask me:

“Well, if it is so bad then why don’t you just go out and BUY a place?”

And whilst I might like to there are a couple of reasons as to why buying a house is not currently an option:

1. The Deposit
   At the grand old age of 23 I’m not quite there yet.

   I’ve got a reasonable chunk of it, but it’s still a far cry from the 20% deposit that I want.

   In Australia the usual minimum deposit on a home is 10%, but in recent years some lenders have started offering no-deposit loans, where they lend you 100% of the total cost. Whilst no-deposit loans seem to be gaining popularity it is not an option that I would choose, just because I would feel uncomfortable having borrowed the entire amount.

   I have some ideas about how I might be able to get this deposit together, and will devote some attention to them, here in the future.

2. The Loan
   I’m primarily self-employed, which by itself precludes me from many standard home loans. Instead of a standard home loan (mortgage) I would typically have to take out a low-documentation (or low-doc) loan.

   With a low-doc loan I would have to self-assess my income and provide whatever documentation I had on hand. The more documentation I could provide, the lower the (extra) interest rates and fees that I would have to pay could be.

   But no matter how much documentation I provided lenders would not be able to run the same sort of checks on me, for example calling up my employer to confirm that I am in fact employed and earning a set amount.

   The result of not being able to perform these checks means that I would pay a higher interest rate, additional fees & charges, and be subject to other conditions not normally placed on those with a ’standard’ loan. The idea behind this is that because I am self-employed I am ‘high risk’, which may suck but c’est la vie, I love my job.

   Low-doc loans are also becoming more expensive in the wake of the Subprime crisis in the US.

   There are some other good financial issues here that I’ll get to in a future post…

3. Situation
   Last, but not least, comes my situation.

   At this point in my life renting suits me.

   Renting sensibly allows me to save money for that larger deposit, and generally suits my lifestyle.

   Whilst owning a home is an eventual (and possible) dream, I don’t know where the next couple of years may take me. I’m not willing to sacrifice any of the exciting opportunities that may present themselves for the sake of getting into the property market as soon as possible.

   Buying a house is a big commitment and in a years time I may want to move elsewhere - without having to worry about what I will need to do with my house.

   There are some other good financial issues on this that I will get to in a future post.

   When it comes down to it I have an entire lifetime to find and enjoy my first home, and whilst I don’t know when I’ll buy it yet there is nothing to stop me from preparing for that day - if nothing else I will have some savings to ease my anxious, renter’s mind.