Interesting Concept: The Write Direction by John Blackbourn

IF you seek an opinion from an economist, expect a two-handed reply.

On the one hand he thinks this will happen but on the other hand this might happen.

The most common belief in the community today is that interest rates are to blame for most of the world’s ills, but is that a correct concept?

I think not and will tell you why.

When I was a younger person, you could borrow finance from your local bank at or below ten percent.

In those days a 21-year housing loan was operated as if the first seven years of loan repayments paid the interest on the loan.

The next seven years the same repayments covered principal and interest equally, but the third seven-year period saw that same repayment schedule going to completely reduce the capital of the loan to nil.

Simple deal, so it is best not to sell the house until at least the first seven years of repayments are completed, if you want to come out clear with repayments.

At the same time, unsecured borrowings, best understood today as credit card interest rates, were at the level of 20 percent compounding, because unsecured money has a much higher risk profile for the lender.

We all survived at those levels when we managed our affairs correctly, so we ended up in front.

So why is all that noise coming from the community today with banks getting their money at 3.5 percent and relending it to housing borrowers at six to seven percent.

Looks like a good deal to me in comparative terms.

The problem as I see it is that in my day a big loan was under $50K but today everyone borrows at least half a million dollars for their home loan and many borrow a million or more.

Clearly the issue being faced today is the size of the capital being borrowed, not the rate of interest that accompanies that loan.

Of course there are other factors like the cost of living, cost of going out for dinner and drinks, replacing the vehicle, fuel, insurance premiums, educational expenses for the family and so on.

But all those costs were there in past years too.

My argument is that the size of the capital being borrowed is the devil in the deal.

When interest rates got to 17 percent plus for housing finance we saw similar reactions in the community that we are again experiencing today. The way that issue was solved politically at that time was to welcome and allow inflation.

Suddenly having an $80,000 debt on a home valued at $100,000 was quickly engineered in a few years due to rampant inflation by having an $80,000 debt on your home that was now valued at $300,000.

Hey guys, that now doesn’t seem to be too much of an issue as now we are well in front financially.

The government is now off the hook as the bad guy.

Of course no government will ever admit to letting inflation do their heavy lifting because we are all against any inflation, aren’t we ?

The other frustrating concept is that we are being told that private housing is the biggest investment you will ever have.

Investment, did I hear you say?

You pay agents fees, stamp duty, council rates, electricity, gas, water and sewage rates, not to mention repairs and necessary maintenance to keep it in good shape.

Unless this is your second or third home and used to generate rental income, then your place of principal residence is not really an investment.

It looks much more like an expense soaking up all your spare cash. Investments are not supposed to work that way, so forget your home being an investment.

Clearly the cost of housing and the lack of affordable housing is a huge issue.

That similar issue was solved over 30 years ago by letting inflation run, which is why I’m wondering if maybe the present attack on inflation is going to produce a negative result for all young people suffering from mortgage stress.


Leave a Reply