A house of (credit) cards
In 1963 the BBC interviewed the boss of American Express. The interview was focused on a new concept taking root – the evolution of our love of debt – the credit card.
“Well the important thing of course is to make sure that the person who has a card is somebody who is credit-worthy,” said the boss of American Express, whose sole aim it was to introduce the idea that “buy now, pay now” was becoming an outdated mode of transaction.
As the BBC interviewer grapples with this new invention, his next question highlights perfectly how far we’ve evolved:
“Do you have to use this exclusively yourself or could you, if you were unwise enough, give it to your wife?”
Not an altogether silly proposition (aside, of course, from where the question was projected). After all, it was unwise lending that got us into this global dilemma in the first place, and his reply sounds as innocent and safe as a reassurance of “sub-prime” lending practices would have done pre GFC:
“You can certainly get a card for your wife. We’d be very happy to supply her with one,” he quips.
We’ve come a long way since and seen a total transformation in the way banks conduct business. They are no longer the “middle men”, collecting disposable cash and passing it on to big business for the purpose of production and investment. Banks have become “financialised”, with the major part of their profit coming increasingly through financial channels. Like it or not, we’ve been swept along – both willingly and unwillingly – in the process.
Back in the ‘60s when the concept of our modern version of “free credit” started, it felt as if we were moving into a position of personal financial control. However due to “unwise” lending practices and the resulting 2008 fallout, we’re now in a position where – forced onto the investment ladder – we feel anything but in control. To give an example of how upside down the system has become, Sociologist Greta Krippner recently highlighted in a BBC radio 4 interview “Analysis Radical Economics” that large motor companies – such as General Motors, Ford, and Chrysler – all of which have their own financial departments – potentially make more money selling loans to buy the cars than they do from the cars themselves!
In other words, the loan is the new source of profit – and often an unregulated source at that. With all the wheeling and dealing that progressively reached such peaks within in the UK, for example, when household indebtedness exceeded 160% in relation to disposable income pre-GFC, is it any wonder we’re looking at such a monumental mess?
Australia has weathered the after-effects from unwise lending practices relatively well; however, the system we now find ourselves in whittles down to our four major banks holding us to ransom. This week we had to wait almost three days before getting the welcome news (at least for mortgage holders and small business owners) that the big four would pass on the full RBA rate cut. It was spruiked that the decision to drop was down to “people power” largely pushed to the fore by forthright media campaigns. Therefore, on the heel of this came a warning from ANZ that it would no longer bow to the perceived external pressure of “community power”. In effect, they’re now big enough (and powerful enough) to sing their own tune and ignore future RBA decisions altogether.
"We are not going to play this game of having an RBA rate move and then people asking 'who is going to move by what amount" ANZ chairman Philip Chronican told Business Daily.
No doubt the others will follow suit.
Whether the outcome of this increasing split between the RBA and banking system is good for the consumer or the herald of an era during which there is increased interest rate volatility is unknown. But it’s guaranteed to do nothing to increase consumer confidence, which is the one ingredient Australia needs if we’re going to start moving away from the economic doldrums and assist struggling sectors such as retail, small business and home buyers.
Investors make up roughly 30% of our real estate market – they are the buyers who will only step in when confidence – like a pseudo Jiminy Cricket – dictates at least the perception of solid growth. Without this, they’ll simply invest their hard-earned cash elsewhere (these days, usually in the form of a term deposit), which does little to assist business and growth. They – along with first-home buyers who make up roughly 17% of the market, are the reason overall turnover has been at its lowest ebb since 2008. No one wants to purchase into a market they anticipate will drop.
While Wayne Swan is busy assuring us all is OK because now he’s abolished mortgage exit fees we can just play “switch-a-roo” with our lenders and become “powerful” consumers, it’s worth pointing out that back in February, Treasury documents revealed the unintended consequences likely to occur once the fees were scrapped. This included an increase in other fees including interest rates to recoup lost revenue. It also stripped smaller lenders of their competitiveness, and the big banks have quickly found other ways to hit consumer pockets, such as hefty establishment fees. Therefore, at best, Swan’s words only instigated a comforting and temporary placebo effect that at least something was being done.
We can become like the “Occupy” protestors and stage a demonstration against the banking system that has us well and truly over a barrel, however most have little time to spend walking the streets. With unemployment still low, we’re too busy juggling our financial assets to step outside the daily rat race and camp out in Treasury Gardens. Instead we have to develop a new psychology of self-regulation – and wisdom – when it comes to future investments and property purchases. We can’t control external matters, but we can control how we react to them.
Building wealth from debt is an addictive occupation, once the foothold on the ladder is secure, equity enables the pyramid to grow and the ”leveraging tree” begins. However, managing debt and investment involves a degree of self-restraint in order to service the repayments – something our 21st century mentality rebels against.
Indeed – market research shows the only way our younger generation now feel able to purchase is by means of a “gifted” deposit from family or friends (usually borrowing against equity on family assets). It’s widely known that roughly 70% of Australian’s own their own homes, however the larger proportion of this (80%) – are an older generation at the high end of the income stream. Of Gen Ys, ABS statistical data shows 57% rent and 16% are still living at home. Therefore gifting or not, there’s clearly an increasing number falling through the net.
A glance at the fall out across the Atlantic should be warning enough for those who can only see a resolution to this problem in terms of a national housing crash of some 40 to 50% – it’s not a pretty picture. Instead the solution needs to come in terms of education and self-regulation, switching Gen Ys’ mentality towards the growing trend of saving rather than spending. The practice amongst mature households has already stated with research from RateCity revealing an unparalleled increase in deposits (particularly from businesses, which have accounted for an extra $120 billion over the past three years.)
The reason this is so very important is because it’s becoming increasingly clear that we really have no idea what the banks will do to rates next year or what the world will throw at our feet as Europe and the US struggle with increasing debt and mismanagement. Therefore, my one piece of advice for anyone purchasing in 2012 is: “invest within your means. Don’t get carried away taking advantage of lower rates and jumping into various advertised schemes – such as house-and-land packages that are designed to make property look like a Harvey Norman interest-free sale. Housing is a dream we can all achieve if we take a considered long-term approach to saving, investing, and insuring our debt does not exceed our ability to manage the repayments.
House prices are no going to drop; neither are we facing a financial meltdown on a par with the US or Ireland. Due to a continuing shortage of feasibly liveable accommodation close to transport and jobs (another issue that urgently needs to be addressed by state governments), low unemployment, an increasing population and an overall good economic position, not to mention the preference Australian’s have towards home ownership, we’re currently well insulated from disaster.
However, it doesn’t mean the average buyer is well insulated if they make poor choices. It was reported only a couple of months ago that home owners in Victoria alone, had lost over $290 million over the past three years (to July 2011) selling their properties for less than the contract price. Building wealth through property will only work if you invest for the right demographic, in those “blue-chip” areas which have a proven history of consistent solid demand. If you’re unsure of the terrain ahead seek qualified independent advice, but above all, property is not an area where you want to learn from past failures. It’s best to learn from the mistakes of others – and by the sound of it, over the past few years, there have been plenty of examples.
Catherine Cashmore is senior buyer advocate for Elite Buyer Advocates. With extensive experience in all matters regarding real estate, Elite Buyer Advocates purchases and negotiates more than $100 million worth of property each year for its clients.