Will no-one rid me of these evil moneylenders: Part One

Not only is life tough but you try finding a parking spot in a busy shopping centre. Whenever I do I can usually find some place where they could have fitted an extra parking spot. And pretty obviously if theyd have done so I could park there. Well actually I couldnt. If there was an extra parking space, chances are it would be full too and I’d have to keep searching.

The housing affordability crisis is a bit like that. Of course if we can increase the supply of housing then we can all enjoy better housing. But when its in limited supply it has to be rationed. So if we increase the grants people get to buy houses, theyll all bid against each other and end up back where they started. Well actually theyll end up a bit further back than that because the new arrangements involve churning money through government coffers for no good reason and some level of waste is inevitable.

I’m having to remind myself of my parking rage when I think of the growing community anxiety to stop all this predatory lending thats driving people to the wall. You know the story. A comment by Graham Bell on a post on the sub-prime crisis and its implications for prudential supervision raised the issue.

I’m not accusing Graham of anything so heinous, but I cant help thinking of all those Jews sucking the blood out of Europe before Hitler sorted them out.

This idea that progressively laxer and ultimately predatory lending standards is trapping poor Australians – innocent Australians – into the current ‘mortgage stress’ theyre in flies in the face of all the evidence Ive seen in running a mortgage broker. About a year or two into running Peach, Doris gave us a ring. She was a receptionist. She was earning an OK wage I think around $35,000 a year gross and she was single. If I had been in her position I’d probably have been living in a group house and saving more of my pennies. But I wasnt in her position. She had been working and renting in the previous five years and was paying had paid throughout her tenancy around 50% of her income in rent. She had a deposit and wanted to borrow to buy a house. If you recall at the time rental yields in less posh areas were around seven or eight per cent which meant that she could finance the repayments on the mortgage for substantially less than the rent.

Being an economist, I had a naive faith that even though this wasnt normal, it shouldnt be too hard to persuade a lender to lend to her. Peach’s more prosaic General Manager was not impressed with my impression and convinced me that I was wrong. I guess I shouldnt have been that surprised. I already knew that despite a spotless twenty year credit history and plenty of equity, I couldnt refinance my existing home mortgage. Because you see, having started a new business, I couldnt afford the repayments. That is I couldnt demonstrate current income sufficient to do so. I was happy if the bank took my house if I fell behind on payments, but no such luck. There were no takers despite the obvious stupidity of the situation – my existing bank never did any reviews of my ability to repay the loan.

Now theres an urban myth out there that says that lending has become much more cavalier since then. But its only slightly true. Serviceability formulas of at least some lenders have become a little more permissive and rightly so given reduced economic volatility and even more reduced volatility of interest rates. But only a little. It is true that acceptable loan to valuation ratios (LVRs) have risen (from 95% to 100% and higher if you want to pay much higher interest rates). However thats because of increasing appetite for risk (or more probably a reduced assessment of the actual risks involved) from mortgage insurers. And since lenders are the main risk takers here, they wont lend unless the whole package is serviceable.

And despite what youve heard, even today, lenders against residential mortgages remain an overwhelmingly conservative bunch. They move very slowly and typically no-one is out there innovating with any great gusto. They tend to move pretty much together defining industry practice (the practice to which they might be held accountable if someone defaults on a loan and a consumer lawyer argues that the loan was predatory and so unenforceable.)

Theres an obvious reason lenders are conservative like government regulators, theres much less upside from making a good judgement (just the 2% margin on the interest) than there is downside from getting it wrong (where you can lose 10 or 20% of your capital without too much trouble).

And theres government regulation. The Uniform Consumer Credit Code (UCCC) makes loans that people can’t afford unenforceable unless they are for investment. But if you think that the regulation is the main reason for the conservatism – think again. Lenders are actually more conservative lending for investment (where it’s pretty impossible to get an LVR over 95%) than they are for owner occupation even though the UCCC requirements on serviceability only cover the former.

For all these reasons theres very little risk taking or predatory lending against residential mortgages amongst Australian lenders. Still, Graham Bell says this:

Quite a few of those who become victims of low-doc loans could well be true dropkicks and absolute dills, real born losers, but the rest are both impoverished and very ambitious . a very dangerous combination in our troubled times. Do you imagine that some very nasty groups would neglect to seek out willing recruits from among those who have lost everything?

Sorry but your present discussion, necessary and interesting though it is, seems to me to be like rearranging the deck-chairs on the Titanic when there is a far more urgent and potentially hazardous issue to be tackled.

I wonder if Graham has tried to take out a low-doc loan – that is a loan on which income is not fully documented. Firstly most of them have rates that are only about half a per cent above the discount rates available on fully documented loans. Secondly they are generally difficult to get without substantially more equity than those on full doc loans. Over 80% LVR and your cost of money rises sharply and 90% the market is getting seriously expensive and thin. Thirdly low-docs loans are still subject to the UCCC. The lender certifies their own income and if the amount they certify wont service, the UCCC makes the loan unenforceable if the borrower defaults ie it makes it commercially unviable (the spellchecker thinks ‘unviable’ means ‘enviable’ which gives you some idea of how widespread this moral panic is!). Anyway this kind of lending represents 15% of the market in Australia and about the same in the US where its not called sub-prime but Alt A sounds like a keypad shortcut. (If I press Alt-A in Word the table menu drops down but I digress . . .)

There are also no-doc loans. It beats me as to why theyre more expensive when low-doc lenders can lie about their income and if no-doc lenders come with plenty of equity. But there you go. They are. And theyre expensive at 80% LVRs and virtually impossible to get at LVRs over 85%.

These are sometimes classed with low docs and sometimes with non-conforming loans. Non-conforming loans tend to be Australias equivalent of what the Americans call sub-prime loans. I used to think that banks overdid their abhorrence for those with credit defaults Ive certainly fallen for some sob-stories. Or perhaps they were legit. Stories of people living in group houses and moving out and finding that the people whod moved in had made overseas calls on their telephone accounts etc etc. Quite small defaults. Anyway, a recent study suggests that those with blemished credit records are five times more likely to default again which doesnt seem so surprising.

In any event, non-conforming loans are expensive and account for around 1 per cent of our home loan market as opposed to the market share of sub-prime loans in the States of around 15%!

So when I think of whats happened in the market for housing loans I think back to that empty parking space the one that would be handy if it were there, but which, if it were there would still have a car parked in it.

What has happened is that as money becomes available, people find themselves effectively bidding their own borrowing capacity against that of their neighbours. And so people with similar incomes each compete with others of similar incomes (or of lower incomes and higher risk appetites and/or stronger desires to consume now rather than later).

So those parking spaces are filling up and people are feeling the pinch. There is an interesting case one might make that we could all do ourselves a favour by rationing credit. Ive not read or thought much about it, but the argument would be that competing against each other for houses is like standing up to get a better view at the footy. In the end everyone stands up and everyone is worse off. A decent model would bring out the ways in which that analogy is revealing and ways in which it misleads.

But a moments thought would show the political impossibility of re-imposing credit rationing, of governments interposing themselves between willing lenders and willing borrowers and effectively robbing people of the ability to become home owners. For while credit rationing would help lots of people who have got a good sized deposit (by keeping down the price of houses), all those without such a deposit would be the ones from which the government confiscates the Australian dream. I dont think so.

Its so much easier to let off a bit of steam against those evil, bloodsucking moneylenders who are driving us all to our doom, and to call for community action regulation to stop this cancerous evil.

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XX
14 years ago

I think you’re being too panglossian about the market here, especially given the actions of some brokers. Just over 3 years ago we had a bbq for the kids, some of their friends and the parents. One had just started a new job working for a broker, and had a few weeks later been promoted to an accounting position after the previous occupant – someone of over 30 years experience – had been fired for being essentially “bolshie”. She had no accounting experience.

She was somewhat worried about this, and after discovering that I worked in the financial industry asked me a few questions and related a few of her concerns – including some thouroughly alarming stories about the quality of the documentation being provided to the banks. Some of it included blatently forged details such as personal circumstances (nbr of kids, zero was better), and credit position (don’t tell ’em about your Visa, the Mastercard will be fine) ….

… up to and including signatures forged by the broker’s staff.

I won’t tell you any more about this, but if this is at all indicative of what’s been happening in that industry – and I’ve no reason to doubt her – we’re in for a very rough ride.

Graham Bell
Graham Bell
14 years ago

Nicholas Gruen:
A thoughtful response to the comment I made on the other thread; much appreciated – though I do disagree with some of what you said.

Shall have to comment on the substance of what you said later, when I have re-read it. Meanwhile, a stake or two in the ground.

Sorry, no evil Jewish — or Indian or Armenian or Chinese — money-lenders in sight anywhere, exciting and entertaining as conspiracy theories may be. Besides, there specific reasons why I myself am unlikely believe in them.

Being a money-lender does not of itself make one evil. As one living in the Other Australia, several times over the years I have had to use the services of pawn-brokers; I found pawn-brokers tough but helpful and honest. They offered a service, charged like wounded bulls for it and I was grateful for their very timely help. There was only one exception [and he became immediately honest as soon as I visited a chamber magistrate :-) There are decent people lending money at the lower end of the economy and they perform a necessary, unnoticed and unrecognized service.

My concern about the harmful effects of low-doc “loans” and predatory lenders comes from personal observation, both socially and – prior to retiring – in my professional work.

And yes, I have had a bit of personal experience of predatory lending. Some years ago, my wife and I had to take out a housing loan at 17% [despite being a war veteran with a clear entitlement to my long-term low-interest War Service Housing Loan!!!] whilst I was at university on a civilian resettlement course. When the government abruptly, arbitrarily and illegally cut my income then lied that it was a temporary administrative adjustment and that I would get a hefty backpay!!, we fell behind in the house loan payments [I had an excellent case for litigation against the government but no lender in the world would wait until a case toddled through our creaky court system; loans have to be serviced and shareholders paid]. In desperation and with no help whatsoever from the bludgers in the RSL, I had little choice but to go seek alternatives — at 29%. The result was inevitable. We lost out house and it took me another seven years to get my degree. Nowadays, I see the same, or worse, things happening to others. Is it any wonder that I am concerned about predatory lending and about the government’s abandonment of its responsibility to protect its citizens against oppression and injustice.

Is that enough to exclude The Protocols Of Zion from the present discussion? :-)

Caroline
14 years ago

Along with lying to the tax department, dodgying up your loan application is standard procedure if you want it to succeed–(apparently). We all need somewhere to live, but people in Australia (and elsewhere, though less so in Europe) are obsessed with ‘owning’ their own home. Keeping up with the Jones’s, and the concomitant greed and vanity have contributed to make this ‘dream’ exactly that for many and for those who do have a toe-hold in the door, it has become a nightmare.

Privately (heh), I think usury sucks, (no personal offense intended Nicholas), but I think it somehow immoral that the archtypal fat, lazy, banker, gets fatter, lazier and richer, by doing nothing other than taking the lion’s share from those leaner than he. An over-simplification true, and it doesn’t look like this shrewd practise is going to go away anytime soon, as the moneyed (or not, as is actually the case) world runs on it. There was some good reason why the good Lordy wasn’t particularly kindly disposed towards the money lender. And while you may think he be a thing of myth and dream, its still a parable with a useful comment on human frailty.

Sermon over. (For now).

Caroline
14 years ago

Nicholas,

I think that feminine modesty is probably wise. (Modesty in both genders is refreshing don’t you think?). I’m not so sure about the strictures, they don’t sound very comfortable. I have no opinion about staged plays and wasn’t aware that the good Lordy had one either. But there you go, learn something every day. (I wonder what the problem is?)

I still think usury sucks and no doubt always will. It would take a great deal to convince me that the rich fleecing the poor was ever in any way a good thing–to put it crudely. I’d hazard a guess and extrapolate from the anecdotes of a diverse assortment of strangers and acquaintences, that dodgying up loan applications is very widespread, though probably less so by people who go to the trouble of using a broker.

My enmity is directed towards the idea of usury, not any one person or group of people, in particular. I don’t by the way, in general, concur, practise or endorse random Biblical parables, only those that match my own experience and prejudices. I’d say I’m actually realistic, albeit that my realism will never be, in this world realised.

Kevin Cox
Kevin Cox
14 years ago

I was surprised a few years ago to learn that banks can lend more money than they have on deposit and they can charge the same interest on this newly created money as they do on money lent from deposits.

There seems to be something fundamentally wrong with the way the system works. Surely wealth backed by tangible assets is different to wealth backed by a promise to pay and should be treated differently.

A system where we can create “equal” money with a stroke of pen means that if we create too much of it we will get inflation which will affect all money equally. That is our money backed by real assets will decrease in value just as much as our money backed by debt assets. It seems that the people who create debt money have a temptation to create too much of it and that seems to be born out by the fact that we are told that we have an inflation target for the country of 2 to 3%. The idea that we need to have inflation indicates to me that the system is fundamentally flawed and will result in a movement of assets from those who create tangible assets to those who create debt assets.

Can someone direct me to an explanation of why this is a good way to run an economy.

Graham Bell
Graham Bell
14 years ago

Caroline:
We need to delineate where honest lending for a just reward ends …. and where oppressive, rapacious, stifling usury begins.

You are right about the importance of lying and deception. The current system works on it so all parties do it. Vendors, lenders, estate agents, solicitors, brokers and borrowers are rewarded, and rewarded again, for lying through their back teeth whereas truthful borrowers are punished by being denied loans and truthful vendors are punished by losing sales.

Immediate access to every detail of a borrower’s financial history, of a lender’s clients [and victims?] and of a vendor’s property [and the vendors’ buying-and-selling history too!!] is only a partial answer. The problem is that although any screen-jockey can draw conclusions [accurate, hilarious or disasterous] from a few figures dancing on their computer screen, it takes skill and knowledge to relate that to what is actually happening out there on the ground. The problem has been exacerbated by closure of so many bank branches which then deprived the banks and their subsidiaries of what used to be very reliable local sources of commercial intelligence …. and ringing the local estate agent instead for an impartial information might get you only what is in his own interests to disclose :-)

Imposing savage penalties for telling fibs would make the noose-and-lash brigade happy but do nothing to improve things. What is needed is something simple, just and workable to reward truthfulness and full disclosure and to make deception unprofitable. Sorry, no instant solution here just yet to all the problems caused by lying and deception.

Nicholas Gruen:
[[Haven’t forgotten you. Still mulling your comments :-) ]]

Kevin Cox
Kevin Cox
14 years ago

Nicholas,

As you know our identification system has the central idea of giving individuals the ability to prove who they are and to prove that statements they make are correct. This means that it becomes possible for borrowers to prove that what they are saying is the truth. Truthful borrowers with the existing system get penalised because the lenders have to assume that they may be telling lies and so perversely if they tell the truth they will penalised for the bad things on their record but not rewarded for good things they have done.

We are making progress with “commercialising” the idea. Our approach is now not to go to the final objective of being able to identify new customers but to give a simple way for organisations with existing clients to know they are dealing with the same person by using their voice prints for identification. The immediate payoff for an organisation is to ask existing customers to record their voice prints so that they can be identified quickly and privately when they use your Call Centre or need to contact you again or to sign new documents.

Once a customer has done this for an organisation, the organisation can then give them permission to use their voice to pass on information about their dealings with the organisation to other organisations and vice versa so all will gain.

Graham Bell
Graham Bell
14 years ago

Nicholas Gruen:
Now I see, our differences of opinion probably come from your own work experiences of successful, beneficial lending on one side and, on the other, from my own personal and professional experiences of the disasterous effects of predatory lending and the aggressive marketing of unneeded credit to those manifestly unable or incompetent to handle it. IMHO, when it comes to sheer ruthless bastardry in such lending, some officers of “respectable” banks are no better than the unconvicted cowboys operating outside the normal finance industry; they have blood on their hands. Although lenders [whether as individuals or as shareholders] might end up a bit out of pocket, it is the taxpayers who pay most of the OVERALL cost of the results of predatory lending and aggressive credit marketing.

Please please please do not assume that borrowers have perfect knowledge or that they have unlimited choices available to them, no matter who they are. Although money and knowledge may be borrowers’ most obvious deficits, there may be a lot of others such as time or status. Surely, too, you would have come across borrowers whose previous happy experience of with borrowing, such as for a car or white-goods, made them incredibly less cautious when presented with delightfully attractive low-doc or no-doc housing “loans”?

You are absolutely right about the Australian finance industry being conservative! Can’t help but think of that old saying “Give a Chinaman one pound and he’ll do ten pound’s business; give an Australian ten pound and he’ll do one pound’s business”. How apt when talking about the Australian finance industry’s attitude to low cost and older houses as well as to those in less-fashionable places. It’s not a matter of being risk-averse, it is a matter of being downright business-averse, of having a cargo-cult mentality, of feeling that they deserve to have profits fall from the heavens upon them.

Out in the rough-and-tumble of the real world, profits go to those who get off their backsides and work for them; the purveyors of dodgy housing “loans” know that …. and that’s why they are hopping in for their chop at the lower end of the housing market.

The dodgy operators can flourish in that MARKET because the traditional financial institutions are too big-time, too wilfully ignorant, too timid and too lazy to go in there themselves with appropriate and affordable products and too stupid to design systems to cope profitably and efficiently with the myriad of small transactions that would come from getting into that market.

The crooks, shonks and exploiters can flourish in that market too because government nowadays, regardless of which party is in power, freaks right out whenever somebody mentions the word “regulation” — well, if formulating and enforcing equitable, workable, easily-understood laws and regulations isn’t the business of government then why the hell are we paying them our taxes?

No conspiracy theories here; none needed; just anger at so many lives ruined by the timidity, laziness, ignorance, short-sightedness and panic of those who should know better. Impolite? You bet!

There’s a profitable market there. Why leave it to the crooks? Service it.

Patrick
Patrick
14 years ago

Kevin, some level of inflation is generally considered a good thing. It is because we generally prefer the ‘economy’ to grow, because most of us harbour the secret suspicion that things could still be better.

Absent some inflation, we’d still be living in mud huts.

Incidentally, what you are advocating is called the gold standard – it is a respectable idea (Greenspan was once a fan). As far as I can tell it did nothing to stop (rampant) inflation.

Also, it is hard to see the genius you claim in voice identification. I extremely strongly doubt that the biggest problem in borrowing is identity theft.

Caroline, if you confine your comments to ‘usury’ in its pejorative sense, then fine. Otherwise you are a right dill. Once again, absent usury, we’d be in the mud huts. Not to mention that if you restrict or ban usury, the poor are the first to suffer – and suffer hardest. I had gathered from your tone and a quick perusal of your blog that you consider yourself sympathetic and compassionate. Yet, your views are extreme and apparently devoid of pity for the incredible hardship that their application would entail.

Graham, I don’t know how well you understand our system. I suspect it is about as well as I understand your comment. We have harsh penalties for deceptive lenders – they can’t enforce the loan, and effectively lose all the money lent. They also end up losing their right to lend, which puts them out of a job. Lying borrowers usually face immediate foreclosure if the lender wishes.

All of you, if you care about social justice, there are so many more useful things you could do. In fact, there is little less useful.

Kevin Cox
Kevin Cox
14 years ago

Nicholas why is inflation necessary for an economy to grow? If we need to have inflation for growth then that is because of the way we control our money system. An economy grows when more wealth is generated which comes from higher productivity and output per person. As we all know growth does not come from printing money and we all agree that high inflation is bad. If high inflation is bad then why is less inflation good and when does a little inflation become bad? If the system needs inflation to grow and adjust itself then I would suggest that we should be looking at different ways of organising and issuing money as any inflation or deflation makes its use a measuring tool for trading less effective – and that surely is the main reason we have money. Perhaps the problem arises because we now treat money as wealth itself rather than as a measure of wealth? There seems to be something fundamentally amiss with a system when trades in money are orders of magnitude greater than non money trades. Each day 76 billion Australian dollars are traded on foreign exchange markets yet the total GDP of Australia is less than a billion each day. GDP presumably is related to the size of trades in wealth. Thus we have a system where trades in the measure of wealth are two orders of magnitude greater than the trades in wealth.

I am not claiming voice identification is anything special. It is just a convenient mechanism to enable people to take control of their own information. Giving people control over their own information is special in that it helps us all do a better job at trading and working together. We can only work cooperatively when we can trust each other and we can only trust each other when we know that people will keep their agreements and we can trust the information they supply to us.

This comes back to the money problem. Money is information about wealth and if its meaning is corrupted through inflation and misuse in the way it is created through the issuing of doubtful debt then there are few things more important to a well functioning society.

Patrick
Patrick
14 years ago

That should have been addressed to me, Kevin, not Nicholas. I doubt he appreciates the confusion :)

Kevin Cox
Kevin Cox
14 years ago

My apologies Nicholas but thanks very much for the explanations as they confirm what I am reading elsewhere.

I have been trying to “understand” money because as you know our Rewards systems create new currencies with special rules for each currency but with mechanisms to move money from one currency to another.

I can see the reason for having inflation for reasons of adjustments on things which should reduce in value but which are sticky like wages.

I can understand interest being charged on money that represents wealth that I cannot use effectively myself.

The problem is that the rules that we use for money used for different purposes and created in different ways are all “the same” whereas if we had lots of currencies then perhaps the system might be able to cope with the relative change in asset values more efficiently and without so many side effects. Let me give some examples.

If I create some money by giving a loan of money I do not have then this is much more risky than money lent against an asset that already exists yet the cost of the money is the same because it is all the same currency.

This is of practical importance when say a housing loan is given against a house that deflates in value. The lender wants money back not a house back whereas if we had special money that was backed by houses and loaned to me to pay for a house then I could pay back in house money. My guess is that this would help prevent asset bubbles in housing and make housing more affordable because it would enable the deflation of house prices relative to other assets and it would enable lenders to better control risk.

Similarly if I had special money for wages then we could allow inflation in wage money to occur without impacting other assets. The inflation in wage money would occur because the exchange rate between other forms of money would change.

It is an intriguing idea and if we can get a Rewards program up and running then it will be interesting to see what happens. The argument against it is that it is complicated but in practice it is simple to do because it can be done “automatically” when money is spent. Thus if you want to buy a house you must use house money. When you sell a house you receive house money. If you build a house then you are paid in house money which can be converted into real currency as you have created more house assets – but that is the only way house money can be “destroyed”. You can always create more house money by converting some other currency to house money. You can always get rid of your house money by selling it to someone else. If houses overall now deflate in value then it is done by house money only deflating and it does not affect the asset value of other assets.

Similarly we could do the same thing with debt money and we would not get the ripple on effect of the USA subprime lending.

We already do the same thing with national currencies and we let the relative values of the currencies vary to take into account different situations in different countries. Why not do the same but with specific asset classes that are well defined and are subject to “bubbles” like houses or are difficult to control like debt or need to adjust like wages.

Kevin Cox
Kevin Cox
14 years ago

Nicholas I am getting confident that we will get Rewards up and going. After looking and trying to understand what we are creating it turns out that we are setting up a currency for particular asset classes. The reason for the Water Rewards is as a way of breaking the monopoly on the spending of money to save or to increase the supply of water. That is, to make the Water Authorities compete for funds and justify their schemes in the market place (not of water) but of ways of increasing supply. Have a look at my submission to IPART.
http://cscoxk.wordpress.com/2007/09/20/ipart-submission/

We have a new idea on how to get Energy Rewards started and you can see that at http://cscoxk.wordpress.com/2007/09/29/energy-rewards-for-reduced-greenhouse-emissions/
Energy Rewards are to get investment in non polluting energy.

If these get off the ground then we will be able to experiment and see how complicated and difficult and expensive it is.

I believe isolating asset classes is important in both Energy and Water because we get issues in investment in these areas because people can get better returns by using their money elsewhere. However, for some things – like water and greenhouse emissions – we know we have to spend money on those problems but they do not give as high a return as investing in debt (for example) and I would contend that it is better for society to invest efficiently in water infrastructure than consumer debt and that is precisely what we are trying to achieve.

I went to a briefing on emissions trading by the Federal Greenhouse group the other day and they have what appears to me to be an impossible task. They have to invent the rules for emissions permits trading and if you think Rewards are complicated then you should listen to their problems. At the moment they are trying to figure out how not to stop all abatement schemes in their tracks while they introducing emissions trading in 2011 but their record is not good with the price of NSW abatement certificates now dropping to 1/5th the value of European Carbon Credits since the announcement of Emissions Permits Trading. As the intention of Emissions Permits is to direct investment to pollution free energy sources we think Rewards can help. That is, if you made all Permits trading in Rewards then you would get the best of both worlds. A cap and trade but with guaranteed spending on greenhouse abatement through Rewards. It would stop speculation and manipulation of Emissions Permits dead in its tracks.

The housing thing is just a mind experiment at the moment. I have been thinking about the problem of asset inflation and unaffordable housing and trying to think if a special asset class for housing would help.

We are not trying to create a new system but trying to build on the existing money system. Money for trading has been a great way of creating wealth and we should continue to use it. We are only modifying some of the rules associated with money – not building a new system. However, to modify it we have to understand it and that is what we are trying to do. When Keating floated the dollar he was not changing the system he was only changing some of the rules. When countries went off the gold standard they were not changing the system only changing the rules. When we divide the system into currencies for different asset classes for particular reasons we are just changing the rules – not the system.

By the way when an asset class currency can be sold on a par with regular currency then we no longer need it and it can be abolished. That is we create currencies to implement particular policies and we will know when the policies have succeeded when the asset class currency is on a par.

Niall
14 years ago

In 35 years experience lending money to people who ask for it……a sound point which all too many critics of lenders conveniently never mention…..I’ve seen only one major departure from what I’d determine as prudential lending practices, and that came with Lo-doc and No-doc policies. Being an olde fashioned lender, it took me quite a few years to come to terms with the genre, and these days, while I’ll still avoid Lo-doc lending where possible, I recognise that it is a tool to be employed in some very specific circumstances.

As for those poor souls being ripped off by unscrupulous brokers and/or predatory lenders, all I can offer is this. You simply cannot legislate for stupidity.

Bill Posters
Bill Posters
14 years ago

Now theres an urban myth out there that says that lending has become much more cavalier since then.

…and then you immediately go on to document just how it has. Some urban myth.

Graham Bell
Graham Bell
14 years ago

Patrick [on 10]:

“I dont know how well you understand our system. I suspect it is about as well as I understand your comment”.

If you have trouble understanding my comment, please feel free to ask anyone working in Accident&Emergency to explain it for you, or, failing that, ask any Police who have attended too many domestic disturbances and suicides about what precipitated some of those incidents. Then again, better not; “ignorance is bliss’ as the saying goes.

“We have harsh penalties for deceptive lenders – they cant enforce the loan, and effectively lose all the money lent. They also end up losing their right to lend, which puts them out of a job. Lying borrowers usually face immediate foreclosure if the lender wishes”.

Indeed the laws and regulations may say so. And those with near-perfect knowledge may be well aware of all that and be at ease dealing with all the complexities and subtleties of the system …. however, such well-informed people are highly unlikely to be the ones entangled in low-doc or no-doc “loans”; many of the people induced to take out these “loans” just wouldn’t have a bloody clue! They would know something was terribly wrong and that they were in deep trouble but would have only a very vague idea that they could do something that would help resolve their problems and protect their interests. PREDATORY lenders know this; that is why they are so keen to lend to the vulnerable and rather less keen to lend to those who might stick up for themselves …. that is one of the things that distinguishes predatory lenders from hard-nosed lenders.

Kevin Cox [on 14]:
Just on special money, etc. Nice idea …. might even be practicable too, though I really don’t know how. Having lived in two countries that each had parallel currencies and the like, I feel it may well cause a flourishing black market to arise.

Niall [on 17]:

“You simply cannot legislate for stupidity”.

True enough …. and there is glut of people who are as thick as a brick …. but you can legislate to prevent the stupid and the uninformed being deceived, plundered and abused by ruthless predators, and you can make sure there are sufficient means to ensure the law is being kept.

Everyone:
Earlier, I suggested the mainstram finance industry make available “appropriate and affordable products” for those at the bottom end of the housing market who are currently being “serviced” by predatory lenders.

Why has there been no answer to that challenge?

Brendan Halfweeg
14 years ago

Australia did not suffer from rampant inflation when we had both commodity standard back currency and before we had a central bank. When the US decoupled the dollar from the Bretton Woods pseudo-gold standard in 1971, inflation (and commodity prices) went absolutely haywire. To claim we need inflation to grow the economy is rubbish. To grow the economy you need stable currency and (non-discriminatory) rule of law.

As for inflation being useful in lowering wages, that is rubbish. Capital accumulation increases real wages, and inflation is capital accumulation’s worst enemy. Sneaky real wage decreases is not worth the harm that inflation wreaks on capital.

Fractional reserve lending is fine, so long as both lender (depositor) and borrower (bank) are aware of the risk. Even if they are not, there are price signals that indicate this risk, even if they are subtle. The depositor gains by getting cheap banking and interest payments on their deposits. Legislate against fractional reserve, and you’ll have to pay the banks money to store your money for you. Not only this, but getting a mortgage would be much more expensive, since each borrower (home buyer) would need to be linked to lenders who have no need to access their money for the length of the mortgage and only be organised by brokers. Full reserve banking has never been tried, even in Islamic countries where interest is supposed to be expressly forbidden.

Graham Bell
Graham Bell
14 years ago

Nicholas Gruen [on 21]:

Thanks for that; some of it I did realize or know; some of it was a new [for me, anyway] perspective.

Alright. I’ll try restating the challenge. How do we get those at the bottom end of the housing market into long-term suitable housing; modest housing in which they can have some commitment to maintaining and improving, perhaps even as a store of their wealth [or whatever] and which they can call their own.

The very long term, low cost tenency arrangements of the state Housing Commissions worked very well for native-born and migrants alike but it is highly unlikely that the Good Old Days, when such a system flourished, will ever happen again. Nor can we ever hope to resurrect the railway houses or the mine houses of bygone years. So where do we go from here?

Having tightened up building codes to the extent that it is damed difficult to build anything less than a mcmansion these days, how do we go about relaxing regulations so that we can build cheap, durable, attractive [to the occupier, not to the professional] basic houses and flats that do not become instant slums.

How do we break the irrational, anti-conmmercial ingrained prejudice of those in the finance industry against unfashionable locations so that some can start a new life in dying country towns and in rust-belt suburbs?

What can be done to break down the set-in-concrete mindset of Centrelink that punishes anyone among the long-term unemployed who tries to start a new life for themselves by moving to areas that are deemed, willy-nilly and on very little evidence, to have “lower employment prospects” but which have incredibly cheap modest houses in abundance?

Allowing predatory lenders, real estate cowboys and similar scoundrels to continue creating havor among the most vulnerable in our society will come back to create havoc for the rest of us — in spades! They get rich; we get grief. IMHO, this is an incipient security problem as well.

Brendan Halfweeg
14 years ago

Graham,

Notwithstanding your bile against the banking industry, you have already hinted at the solution yourself – deregulation! Deregulate building codes, deregulate zoning, deregulate land releases.

People want to live in cities and in urban areas. Why are you opposed to this? Why would do you want people to live in country towns where employment prospects are lower and services are worse? What is the nostalgia for rural living?

Kevin Cox
Kevin Cox
14 years ago

Now we are getting somewhere. The problem is not with the lenders but it is with the cost of houses. You get a reduction in prices when you get more dwellings built and where you have incentives for governments to reduce their dependence on housing taxes and land transfer taxes.

The ACT is a classic case. The price of the land component in the ACT has sky-rocketed yet all land release is controlled by the government. When the ACT achieved self government they needed to raise revenue and as land was one of the few things they could easily “tax” through increasing prices they have proceeded to do so. They have discovered by limiting the release of land, by reducing and delaying services in new suburbs, by concentrating development in the Centre they could increase their “profit” to the detriment of the new home residents. Once new land prices are high then you have a real political problem because if you reduce them then all existing houses will drop in value and that is political suicide. When you start to change the environment of the “older” areas through changing the use of land – turn schools into high density living areas – build apartments in leafy inner suburbs etc – and if as a government you take the extra value created and do not share it with the existing residents then it too becomes a political problem.

Perhaps we could remove housing as a special means of taxation? Perhaps we simply put a GST on house sales and remove all other taxes and land transfer charges except for genuine costs.

Perhaps set up a system where the cost of new land is noted but not paid immediately. Let it be paid when the house is sold and where the owner of the house shares in the capital gain.

Perhaps allow developers to build and run public transport systems to increase the value of their developments and enable high density living – which many people prefer – to move to cheaper land.

Require that money raised from the sale of new land be spent to the benefit of the people who purchase the new land and not used as a general revenue raiser.

Affordable housing will only come by addressing the supply problem. Making it easier for people to get loans will make the problem worse. Make housing cheaper by increasing the supply and reducing the cost will work more effectively.

derrida derider
derrida derider
14 years ago

Caroline’s should read this erudite, fascinating and funny little essay by a prominent blogger. In fact, Nic and Graham ought also to read it.

And Kevin’s right – the big problems in Australian housing are on the supply, not demand, side.

Bannerman
14 years ago

Why has there been no answer to that challenge?

Graham, if you have any shareholdings in the major banking institutions, you should already know why. Banking, and finance in general, is a business controlled by the desires of shareholders for profit. Even the likes of Bendigo Bank eventually turn, because they need to in order to survive and compete.

“Appropriate and affordable products” require a re-assessment of risk in line with profits generated. There are some very appropriate loan products in the domestic marketplace, priced very competitively in comparison to the majors, however the general consensus among borrowers is that ‘Mum & Dad banked with (insert major of your choice here), so I guess I will too’.

I urge all of my clients to examine the products and services offered by Illawarra Mutual and AMP Banking. Highly competitive, fully serviced loan and banking products supported by fully-fledged banking institutions in every sense of the word, and yet, who knows about them? Are they any less valid because they don’t market themselves broadly like the majors do? Or is it that they’re simply not choosing to make themselves available to the higher risk applicant?

Excuse me if I make an incorrect assumption here, Graham, but are you claiming that prudentiality has to give way to risk because the idiot borrowers deserve more lenience than the fiscally astute? Will blanket legislation governing the finance industry, lenders and referrers solve the problems that the current crop of legislation has failed to? Five will get you ten the answer is a definite NO.

Graham Bell
Graham Bell
14 years ago

Derrida Derider [ ]:
I avoid Pound and his ilk like the plague. As science fiction author Heinlein said ” Beware of those who recite their own poetry in public places – they may have oher nasty habits” :-) Thanks anyway.

Is the problem defining “Usury”?

“Usury”, as opposed to making a healthy and well-deserved return on money prudently and beneficially invested, does stifle commerce and innovation; it does create misery; so in that, “Usury” is as bad as was Feudalism and Communism.

Now to the Claims on your link to the D-Squared Digest article — [1] You cannot speak of Usury and the original Building Societies in the same breath – the first was malevolent and repressive, the second was beneficial and productive. [2] Communism and other oppressive regimes did produce some great works of art as well as a lot of wasted firewood! [Do like the malt whisky curve though, even I can understand that :-) ] [3] Usury creates misery. ” “….although loan sharks provide a valuable service to the poor, they often do so in an extremely destructive way, and they should be regulated as tightly as possible; also, the bankruptcy law for individuals should be easy and free of stigma. Score a big one for Pound here. ….” ” My bloody oath! And it is we taxpayers who are forced to pick up the bill for their predations. [4] Social Credit is not totally bad; like Communism or Nazism, there are parts of it which can be adapted beneficially to our own needs.

Patrick
Patrick
14 years ago

like Communism or Nazism, there are parts of it which can be adapted beneficially to our own needs.

Off the top of my head, I’m struggling to think of them.

Graham Bell
Graham Bell
14 years ago

Bannerman [27]

Perhaps I should have stated the problem more broadly as something like …. ” How do we get the more vulnerable members of society [yes, even including the utter dropkicks, failed petty crims, druggies, serial bludgers, etc.] into long-term, stable, durable, affordable housing WITHOUT creating slums AND WITHOUT assisting, subsidizing and otherwise rewarding predatory lenders and other assorted hit-and-run scoundrels for creating serious problem for all the rest of us? ” Housing ownership is one of the better ways of doing it but what are other secure and stable ways of getting similar results?

Thanks for the info on these particular lenders. The view from here is of the major banks, finance companies and fairly local building societies [[disclosure: I am not and never have been a member of a finance organization]].

Well, yes. Actually, I am asking for the finance industry to come into the 21st Century. Surely there has been enough research done, in several different fields over the past century or so, on risk management to take apparently greater [and, I feel, necessary] risks with greater confidence and with lower actual risk. The prevalent old-fashioned attitudes to “risky” borrowers look to me a bit like searching for virgins in a brothel. Nicholas Gruen [in post 21] mentioned the time-wasting dealing with the bottom end of the market – and I can empathize with him – but surely, with all the research that has been done, there could be very simple, time saving systems to handle such borrowers efficiently, effectively and far more profitably. The predatory lenders recognize the value of that [niche] market and are getting rich being there …. then the respectable part of the finance industry can do their shareholders and their potential customers a service by getting into that market too and displacing the shonks. All that is needed is for a change in mind-set and a willingness be innovative and to have a go.

[Brendon Halfweg: Shall answer as soon as I get a spare moment]

Niall
14 years ago

Nicholas re:28

I tend to recommend IMB and AMP because of their fee structures, as well as their rate structures. IMB in particular, given the right product choice, would most likely beat any other bank hands down. There’s more to being competitive than simple rate structures, I’m sure you’d agree.

Graham re:31

Graham, as I see it, the current regime of referrers sending good deals to credit analysts in banks and non-bank lending institutions will never see the vulnerable shielded from the predatory brokers and lenders. Reason being that risk is not well understood by the kids in credit areas these days, any better than they understand their employers credit policies. Lending is all about risk, not whether a particular deal conforms to policy. Black is not black and white is almost always gray. I know. I have two such deals on my desk at the moment which I’d happily sign off on immediately because I know the circumstances behind them. Lenders do not trust brokers. It’s that simple. It’s a lot easier to say NO than it is to say YES, when you know that saying NO holds no risk for you, the authority holder.
The solution? First person approval authorities. That is to say, REAL accreditation between lenders and brokers with REAL penalties for transgression or poor lending decisions. Lending money isn’t hard, but it can’t be taught by rote. It comes with experience.

Graham Bell
Graham Bell
14 years ago

Brendan Halfweeg, you asked [post 24]

“What is the nostalgia for rural living?”

Absolutely no nostalgia whatsoever; just sheer practicality, that’s all.

There’s an oversupply of very cheap houses and very low rents in many small country towns. [That’s why I’m living here in the Other Australia; if the situation was reversed, I would be living in Pitt street, Sydney. It’s called “market forces”. isn’t it? :D ]

There are a lot of people, especially long-term unemployed and “unqualified”?? younger people, in cities who are really struggling to pay the rent or loan repayments. Their employment chances are severely limited, even with our glorious WorkChoices.

If you apply CentreLink’s narrow view of employment prospects, they are indeed limited in country areas. However, once someone is known locally to be keen on finding work, work will find them; it may not be work that conforms exactly to this or that bureaucratic criteria but it is still an exchange of labour-for-money.

So what is so wrong about putting two needs together? The need for affordable housing with the need for people in the bush. Besides, if such people are on government benefits, that’s money going into the local economy, for a while at least, with all sorts of beneficial effects …. and a far better chance of these people eventually coming off benefits than if they stayed in a worsening urban poverty trap.

No nostalgia there, is there?

“Deregulation”? Sorry, I’m not really into millinarian religion nor into cargo cults. Building codes? Why then is there open slather for building overpriced, poorly designed “chipboard palaces” and yet owner-builders are overburdened with unnecessary restrictions that have nothing whatsoever to do with protecting future buyers from jerry-built dumps? Wiping several regulations from one page in a code and then writing up several more on another isn’t “deregulation”, it’s bureaucracy-gone-mad; it stops affordable and appropriate housing being built and it prevents an outbreak of real competition in the housing industry.

b.t.w., Your comment on what I said earlier: Is it “timely criticism” if you agree with something and “bile” if you do not? :D

Kevin Cox [25]:
Stick around. Once the next federal election is over, whichever party is in government will whack capital gains tax on the sale of the family house.

Surely you didn’t expect a rational policy, one that made sound economic sense, did you?

Graham Bell
Graham Bell
14 years ago

Niall [32]:
Wisdom at last. Don’t worry; your secret is safe with me ….

You have hit one of the nails right on the head.

“The solution? First person approval authorities. That is to say, REAL accreditation between lenders and brokers with REAL penalties for transgression or poor lending decisions”

That would have prevented all the shenanegans of the White Shoe Brigade and similar scallywags too.

Alright, what sort of battering-rams and siege-towers and trebuchets are needed to get such a system up, running, making money, keeping viable small businesses flourishing, putting people into affordable housing and generally stimulating the economy?

Brendan Halfweeg
14 years ago

Graham,

If it is so practical to live in the bush, why are so many young rural people upping stakes and moving to the cities? Why aren’t the hoards of Sydney strugglers moving to Bennelong or Burke? What has centrelink got to do with it? And what do you mean by “work will find them”? Haven’t we already tried keeping a certain group of people on welfare indefinitely in the bush?

If we had regional minimum wages (or better yet NO minimum wage), then perhaps more work would be created in rural areas where cost of living is cheaper. If you want work to be created in the bush, then you can’t expect labour to worth the same as the city, especially if it is low skilled labour.

What part of deregulation of building codes don’t you understand? Where did I advocate deregulation followed by re-regulation? When I say deregulation, I mean just that. I advocate people being able to build whatever they want on their land. Mortgage providers and insurance companies would require certain standards to be met in order for home owners to access their financial products, but they’d be in a much better position to be flexible than some council building inspector because they would be able to make decisions based on risk assessment rather than one rule for all.

Getting into debt that you have deceived the lender into giving you is fraud. These people are adults, they are only fooling themselves and defrauding the bank by lying about their income and financial position. And you blame the bank being defrauded for the fraud? Sure, they might pay a bit more attention to their borrowers to protect themselves, but that still doesn’t make lying to them right, does it?

Graham Bell
Graham Bell
14 years ago

Nicholas Gruen:
It is an age-old problem to get the most vulnerable people into some sort of housing and out of the clutches of those who exploit their weaknesses and follies. It is a problem that we need to address but it is not an urgent problem.

What is an urgent problem in these very troubled times is what do we do about all those decent, hard-working, ambitious, intelligent people who are now at the lowest end of our economy through no fault of their own but who, in normal times, would not be there …. and are very well aware of that?

For example: the “downsized” middle-aged professional or experienced worker; the young couple who had been given tens of thousands of dollars by their parents to help them buy a house but now find they are excluded from the respectable parts of the housing market; or, further afield, the efficient far-sighted farmer who lost almost everything through bad luck or Canberra’s latest whimsical policy …. the list goes on and on. People like these swell the ranks of the New Poor as each day goes by.

These are the people who make very desirable recruits for nasty extremist organizations.

Such groups do not want the dregs of society except as cannon-fodder – to be sacrificed in clashes with the authorities or with rival groups; when they die they become marketable heroes, martyrs to the cause who must be emulated. When such groups achieve their purpose, they in turn will repress their formerly useful cannon-fodder; it has always been the way of the world.

Successful extremist groups, whether they be fascist, falangist, nazi, communist, radical nationalist, theocratic or whatever, have always relied for their success on an educated, intelligent and hard-working but disillusioned and betrayed middle-class. [[pace, any counter-terrorism specialists lurking here, this is a weblog, not a conference, so my oversimplification is quite in order]].

Poverty alone rarely causes social upheaval, revolution or terrorism …. they generally arise from smashed hopes and from frustrated ambitions. Do you think those who have had their hopes of a better life than their parents wrecked are going to have your continued well-being at heart? Do you think those who have, though no fault of their own, been excluded from all the good things of life – such as having a home of their own – are going to support and protect the present system. No way!

One of the cotter-pins that stop the wheels falling off Australian society is affordable home ownership. That so many people who would formerly have been in the regular property market are now either excluded altoghther or have little choice but to deal with shonks and predators [with a very high risk of disasterous results, thereby exacerbating the situation] is cause for alarm; this isn’t just the usual ups and downs of the market – this is something new and it is dangerous.

It is easy to spot the origins of complacency towards this hazard: Communism in Australia was easily contained because of the vigilance of the Labor Party and the churches [they didn’t want any competition] but nowadays there is nothing to hinder extremist groups from recruiting badly hurt and disaffected middle-class Australians to their cause.

Niall
14 years ago

Graham:(34)

Alright, what sort of battering-rams and siege-towers and trebuchets are needed to get such a system up, running, making money, keeping viable small businesses flourishing, putting people into affordable housing and generally stimulating the economy?

An acceptance by the major lending institutions that the ability to lend comes from the gut and mind of the lender, and not from a policy manual. An acceptance that sales targets and market share do not prudentiality make. An acceptance that real lenders deal with real people and not figures on taxation returns. Esoteric stuff in the main, but having done this gig for a long, long time now, it’s the esoterics which just aren’t taken into account when people lend money to other people.

In my mind, the paradigm shift required in finance these days revolves around sales. Sales and credit simply DO NOT mix, and yet, all lenders have allowed sales to hold sway over credit. Until credit regains the upper hand, or at least comes to a compromise position with sales, the vulnerable in society will remain at risk.

Andrew Reynolds
14 years ago

Niall,
Sorry to disagree, but sales and credit do mix – without one the other is useless. I could be the best salesperson possible, but without credit to sell my commission will be nil. The reverse is also true. This you tacitly, and partially, acknowledge when you say that a compromise position is possible.
Judging by the actual loss history of most banks (a quick look here may help) credit losses are currently tiny, and have been so for many years. This means that predatory lending, at least by the majors banks, in not a problem as if it were you could expect credit losses to show through. To me, this data supports Nicholas’ piece at the head.

Andrew Reynolds
14 years ago

Graham Bell,
I would encourage you to read a recent talk by the deputy head of the RBA, Ric Battellino, on the subject of debt affordability in Australia. He puts the whole question into a real context, not the limited look you get through the media.
There is some real stress out there, but it is limited in scope and in exceptional cases. Strangely, people can be trusted to make their own decisions in life and lending. Further regulation (IMHO) will only restrict credit supply for no real benefit – in fact there is good evidence that things are too strict at the moment and the regulations are just hurting. A recent South African study deserves a good look. “Usurious” lending, done with care, has a good chance of actually helping the borrower.

Brendan Halfweeg
14 years ago

Graham,

Your last post makes Australia sound like some kind of Weimar Republic, rather than a nation enjoying almost full employment and some of the best living conditions on earth. You, friend, are a doomsayer, and it is not surprising you say doom. A pox on your soothsaying!

Niall
14 years ago

Brendan, I fear you’re over-simplifying, or rather glossing over the known deficiencies in our monetary/credit system. Nicholas says a lot….in fact he didn’t need to say quite as much, but never the less….in his piece. There are problems, indeed, and there are predatory lenders and brokers. Given that thorough-going blanket legislation governing the finance industry can be brought into place in the very near term, those predatory types can be and will be weeded out.
What Graham identifies in a somewhat over-glorified claim, is real. There is a new class of working poor and they are growing. Growing in number and growing in discontent. It’s discontent that this nation needs to be aware of, meaning the government of the day, by not adhering to ideologically driven class dividing statutes like Workchoices. We may not be a mirror of 1920’s Germany, but the fact that mid-20th century strife arose in Europe at all, provides proof positive that discontent is the feed-stuff of civil unrest.
I believe Australia’s most pressing challenge in the coming decade will be the restriction of wages pressures in the lower paid sectors while ensuring that those same sectors are brought into some median parity with sectors which are benefiting from, and will no doubt expand with, the resources boom. Uncontrolled wages pressures remain our greatest enemy, and all nasty manner of economic events flow from it.
By the way…..’almost full employment’? Methinks there are cuckoos and clouds where you live.

Niall
14 years ago

Andrew, you make a sound point regarding sales and credit, however it is my understanding that currently an imbalance exists in many major lending institutions, whereby sales’ desires over-ride credit’s concerns. This is dangerous, and leads to a rapid collapse in prudentiality.

Personally, being a credit person, I loathe sales, primarily for the disingenuity it invariably fosters. Where sales seek out the assistance and guidance of credit, both can work together in harmony, however, this is sadly in the minority. Sales are almost always seen as profit centres, whereas credit is always seen as a cost centre. At least where I’ve worked in the past.

Andrew Reynolds
14 years ago

Niall,
If such a situation existed I would expect to see realised losses being much, much higher than they are. The simple fact is that credit losses are only just coming off some seriously low levels – comparable with the levels in the over-regulated 1960s. To me, this does not indicate that there is a problem with an over-stimulated sales force. If anything, the reverse looks true.
Granted, we have been going through a really good time in credit terms, with high growth, low unemployment and stable inflation. This may turn around in the not so distant future. Even if it does, though, the stuff in Battellino’s speech that I link to earlier shows that it should not be too serious a problem.
.
On your comment to Brendan – if you know any of the working poor, please advise them to come to WA. We are desperately short of working people. Housing is the only real problem but employers are generally happy to help out anyone with a trade certificate and / or a good work history.

Caroline
14 years ago

Thanks derrider derrider for the link.

Nicholas –

perhaps many people, indeed I expect most people – at the bottom end arent lovely people and more to the point, people who can be trusted

I am a lovely person. And you could trust me with your life. I just happen to be at the bottom end.

Brendan Halfweeg
14 years ago

The only civil strife Australia is likely to suffer in the near term is the after Christmas sales where your working poor fight each other over plasma TVs and white goods. Niall, you and Graham are talking bollocks if you think the social changes in Europe in the 20s and 30s due to The Great Depression are at all compatible to people not being able to afford McMansions and having to delay homeownership.

The housing shortage in Australian capital cities is entirely government created. The first homeonwers grant has increased prices (more money chasing a slowly increasing stock of houses) and the failure for the state governments to release land rapidly enough, the zoning restrictions that they put on the land that they do release and building code regulations has restricted the rate of increase in the growth of housing supply.

Graham wants to solve this by encouraging people on welfare to rural areas without jobs and you seem to think that the way to solve the housing shortage is to make lending harder and more expensive through regulation. Bloody hell, can’t you see that the problem is in the supply of housing, not what people are willing to pay for it and how they finance it?

If cities like Austin and Houston can achieve affordable housing, then so can Australian cities.

Kevin Cox
Kevin Cox
14 years ago

Why do most people think owning their own house is a sensible thing to do? People buy houses because it offers them security (a nest) and it offers some protection against inflation. They believe that in the long term the house price should increase at about the same rate as inflation. All this works while the “real” value of house remains about the same as the price charged for a house. If the underlying value of houses – which is reflected in the rent that people are willing or are able or have to pay – gets out of whack with the prices then sooner or later something has to break. People also believe that house owners are not going to loose out too badly because there are more of them and that somehow they will be protected.

So people are willing to pay a higher price for a house than one would reasonably expect by looking at rents. To get the funds to purchase a house then the only asset most people have is their labour and so they sell their future labour and purchase some debt. The sellers of debt are on a winner. They can sell debt and even if the wages of people are not sufficient to cover the debt then they get the underlying asset and if the underlying asset drops in value then they get the wages of people.

Maybe the underlying systematic problem is to do with debt being created against a lien on wages rather than debt being backed by the asset for which the money was loaned. Perhaps if lenders could only get back the house when things went pear shaped then we would get more responsible lending.

The problem compounds when we get the securitisation of loans and the lender of money becomes even more remote from the underlying asset.

So how about this for a way to stop housing asset bubbles in their tracks.

When a house loan is given it is only backed by the house itself and only backed by the proportion of the house “owned” by the lender. Thus if a house has a value of $100,000, the lender lends $70,000 then they are entitled to 70% of the sale of the house.

Isn’t this the idea behind limited liability companies? You put in some money but you are only responsible for the amount of money you put in and equally you only get back what you put in.

One result would be that we would get very responsible lending.

Can this be done in any practical sense? Well yes it can if we think of a house like we think of a company. Lenders purchase “shares” in the house – not shares in wages.

The system could be introduced “slowly” by designating that new developments can only happen with the new loans. My guess is that there would be new houses built with the new loans but the value of the land would drop and new houses would become truly affordable because lenders would know they would have to reflect the underlying rental value of the properties.

Kevin Cox
Kevin Cox
14 years ago

If people like the previous argument now how about the following as a logical extension so that we can extend the concept to all existing houses/dwellings without destroying the system we are trying to save.

Let us create a special money whose purpose is to conduct transactions in the asset class of houses. When you purchase a house or dwelling then you buy the special currency with regular money and you pay for the house with the new money. The receiver of the money however, can sell it, or they can use it to buy another dwelling. That is they cannot use the money for anything other than a dwelling. They can also use it build another dwelling by purchasing new land, building materials etc. The people who supplied the new land, the building materials etc can convert the new money back to regular currency.

What would happen would be that the new currency value would fall in relation to the regular currency and to get the best value for selling your house you would have to build a new dwelling. My guess is that the system would soon “settle down” so that the two currencies approached par when we had sufficient housing to meet demand.

The new currency is really an extension of the idea of shares in a single house. It just gives a way of trading house shares (or bits of this asset class).

Is it practical and could it be done? Because house and dwelling sales have such good record keeping associated with them then it is simple to implement. Because it is easy to identify suppliers of the bits and pieces needed to build houses/dwellings it is easy to police the people who can convert house money into real money. Would it be politically saleable – well it is a “brave” policy but it could be started slowly and with new houses. I think it would be welcomed by the responsible lenders (the banks) because they must know that the current asset boom is not good for them in the long term.

Patrick
Patrick
14 years ago

When a house loan is given it is only backed by the house itself and only backed by the proportion of the house owned by the lender. Thus if a house has a value of $100,000, the lender lends $70,000 then they are entitled to 70% of the sale of the house.

I was under the impression that this was how most mortgages had worked since the early part of this century, allowing of course for interest.

Kevin Cox
Kevin Cox
14 years ago

Patrick if this was the case how can people get negative equity?