Portfolio diversification: Starcraft analogy

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My 11 year old is a big fan of Starcraft II, a strategy computer game. If you know the game, you will be aware there are two resources in the game, Vespene Gas and Minerals.  Units in the game can collect these resources and use them as commodities to build new items, or as currency to finance acquisitions, for example fighting or healing units in one of the three armies, Zerg (Alien insects), Protoss (A highly advanced alien race) or Terrans (Humans).  The resources Vespene Gas and Minerals are valuable and necessary for any successful Starcraft II army.  Especially if you want to have success in the game or annihilate your enemy’s bases.  Successful armies require Vespene Gas and Minerals so there is always a market for these resources.

If I was an investor in the Starcraft universe, I would have two possible resources to invest in, Vespene Gas or Minerals.  If I bought only Vespene Gas, my investment portfolio would contain one thing: Vespene Gas.  Say I invested only in a Zerg Vespene Gas field I would have only the risk attached to owning a Zerg Vespene Gas field.

If one day the Protoss came along and blew it up, and blew up all my harvesting units, I would loose all of my investment.  I would have nothing and be all of a sudden very poor.  If I  had instead put only half my assets into the Zerg Vespene Gas field and the other half into a Terran Minerals deposit I would have reduced my risk.  My portfolio would be half Minerals and half Vespene Gas. I would still have my investment in the Minerals even if the gas field was destroyed. I would only loose half of my investment.

By investing in both resources I am spreading my risk and hopefully by doing so reducing my total investment risk. This is why it is so important to build a diverse portfolio and why people say “not to put all your eggs in one basket”.  That is why it is unwise to only invest in Vespene Gas.

 

*Note: This is a very simple example of portfolio diversification for demonstration purposes only. It should not be taken as investment advice. At the time of writing I do not and have not previously held stocks in Blizzard Activision (or Vespene Gas for that matter!)

How to save money when you’re a fashionista: My guide to not overspending on clothing and accessories.

When you love fashion it is very easy to get swept up in trends and spend a lot of money on clothes that you will no doubt wear only a few times, perhaps only once, after which the dresses and outfits you shelled out big bucks for sit in your wardrobe unworn because they don’t fit into the next season or they were not “wearable” clothing. By not wearable clothing I mean garments that look great but might be uncomfortable to wear for long periods, occasional wear that you can’t wear again easily, or clothes that just don’t go with your other clothes. I’ve fallen into this trap many times in the past, paid a lot of money for a dress only to wear it once and afterwards have it hang in my wardrobe unused. A classic example of this was the Romance was Born Link dress that I purchased, it looked good, had a great colour and movement, a great dress to dance in, but ultimately I only had one occasion I was able to wear it to, a friends wedding reception. I bought it on sale and it was a size 6, and I am probably closer to an 8 so it was really too tight for me to wear comfortably. I have quite a few size 6 dressed I wish were size 8…Sure you could try selling your unwanted clothes on eBay, but what if they don’t sell? Or what if they only sell at such a great loss you wonder if they were worth the money you paid for them?

I’m going to give my advice now on how to build a wardrobe that transcends seasons and years, so you will be able to look fashionable despite whatever the trend might be. The key, and you may have heard this before is building a great basic wardrobe from which you can accessorise and mix and match to get different looks. I have a variation on this basic wardrobe that works for me, and you will no doubt make your own adjustments based on your needs. Make sure the clothes you buy have a great fit, don’t fall into the trap that I and many others have fallen into of buying the size down because it was the “last one and on sale” because you will find something in your size. Always try it on before buying if possible. I’ve tried on a dress and it was great, seen a fault and just picked up another in the same size off the shelf and bought it without trying on, only to realise when I got it home that it pinched in places the other dress didn’t. There can be small variations piece to piece, different items in the same size and style will not always be identical.

Most people recommend having a classic white shirt in your basic wardrobe, but I live in hot and sunny Sydney, Australia where a white shirt is usually a bad choice for any season but winter because they tend to get hot and sweaty and unbreathable in summer months. I find I rarely want to wear or need to wear a white shirt. It is true if you choose a great cut white shirt they can be versatile but if you live in a warm climate like Australia you might find you don’t get much wear out of your cotton shirts. If you do want one, it is probably better to invest in one that is a more breathable material that resists stains like linen.

My secret (well, not so secret) way to save money on quality clothing.
Buy from thrift stores, second hand stores, vintage stores, eBay and save hundreds of dollars on your wardrobe. It is not only savvy to do this, it is also the most sustainable way to dress yourself, you are doing something good for your wallet and the planet but reusing clothing. The best things to buy second hand are vintage coats and jackets, for example woollen winter coats and trench coats which are often in great condition second hand because outerwear does not have the same stresses on it as everyday items like t-shirts. You can buy a woollen coat even if it’s a bit big because it is easy enough to have most coats altered to fit you. One of my best second hand coat purchases was a double breasted vintage cream coloured wool blend coat with wide lapels that cost me about $25, it is of the highest quality, exceedingly warm, and has attracted many compliments. As long as it is kept away from hungry moths and dry-cleaned occasionally it will last for decades. A similar coat bought new would have set me back at least $400, so I have straight up saved $375. The reason why you can buy vintage coats and look amazing is that coats often transcend seasons and years, a classic woollen coat, a trench coat, pea coat and black leather motorcycle style jacket will be wearable for years to come, you will even find if you hold onto them faux fur coats will also come, go and return to fashion every 5-10 years. In my wardrobe I always have a great trench in a neutral colour like black or beige, a woollen coat in black or beige and then a really warm coat for trips and those 5 degree Celsius days we get sometimes in winter, for example a long-line hooded down or synthetic insulated coat or anorak. These three coat types usually keep you covered in from mid-Autumn to Early Spring.

So what do you need to wear under this fabulous coat? A great versatile basic wardrobe. For me, this includes a few different styles of trousers because I do not wear dresses and skirts much. I find that separates make for a far more versatile wardrobe than dresses and one pieces. It is good to have a few nice dresses for summer but in cooler months your better off with tops and bottoms.

My basic cooler month wardrobe includes a pair of great fitting classic straight cut Levis jeans (or your choice) in a mid blue. It is good to also have a darker pair of jeans and a lighter pair of jeans or cotton jeans-look pants, they could be straight or skinny cut but I would avoid boot-cut jeans or flares that will very rarely be in fashion. For the lighter pair you could choose light blue, olive or grey but I wouldn’t choose white because they won’t stay white for long. I also like to have a pair of black jeans and really miss them when I don’t have them. I would also have at least one pair of wide legged black trousers which are nice enough to wear to work, and a pair of fitted suit trousers in black or grey. I keep wide legged trousers in a few colours, like navy and light grey because I mainly wear trousers and wide legged trousers are very comfortable.

For winter I like to have at least one black vintage leather skirt in my wardrobe. I would suggest either a mini skirt or a longer A-line or pencil skirt depending on what your preference is. You can generally get a nice vintage leather skirt for less than $50. If you get a second leather skirt for your wardrobe, get a different style in black or a different colour like brown or burgundy. You can also get great leather handbags second hand, if you shop around, for the same price or less than you would pay for a new synthetic handbag. I was lucky enough to find a genuine Rebecca Minkoff bag for $15 at my local Op-Shop. I have another Rebecca Minkoff bag I got from eBay for $30. The best colour handbags to get for long term use are black and brown. It’s nice to have some coloured bags, especially to brighten up an outfit, but you will find you tire of them faster than back and brown.

I also love having a pair of black leather trousers but it can be very hard to find a nice vintage pair so you might have to look out for them at sample sales or online auctions. I got my leather trousers for $130 at a sample sale, whereas new they sell for $700, that’s a saving of $570. If you live in Australia, then you can sign up to the Missy Confidential email newsletter which gives all the latest major sample sales in your city (for the cities covered). Just to be clear I’m not sponsored by Missy Confidential in any shape or form, I just find the emails useful.

For tops, I have a few well made black long-sleeved blouses and at least one cream or ivory coloured long-sleeved blouse. A well fitted ribbed top in silk or cotton with long or T-shirt length sleeves will also look good in colder months.  You’ll need a few nice jumpers or sweaters, I actually love vintage jumpers but if you want new, go for something that will last for a long time like a wool or mohair blend and buy it on sale (usually the beginning and end of winter). The best advice I have heard for buying a new cardigan or jumper is only to buy one you can see yourself wearing for the next 5 years, otherwise it’s just not worth it. Don’t buy cheap poorly made synthetic crap that will just fall apart after a few months, buy natural fibres like wool, mohair or organic cotton. Natural fibres are also better for the environment and pure wool and mohair are resistant to fire. Blends are not necessarily resistant and may burn hotter than synthetics so don’t go standing too close to any bonfires!

I have 3 pairs of gloves, a pair of black gloves, a pair in lighter beige and a dusty pink leather pair that I got this season from Forever New for about $50. I have invested in leather because a good pair will last you ten years. I also have a pair of beige felted wool gloves and they have also lasted well, they cost me about $15 from a pharmacy store. I got the black pair from a leather goods and formal dress store Chinatown 10 years ago, and it’s only this year they are starting to look tired.

You probably are picking up a trend in the basic wardrobe, the palette is white, cream, grey, denim-blue and black. This is because from this colour base you can co-ordinate with any bright accessory or jewellery you might want to throw in to look more on trend, like a bright handbag, beanie or scarf.

This means, when a new season comes around you will be looking to accessorise with cheaper items like hats, sunglasses, jewellery and scarves. You won’t need to fork out for the more expensive items because your basic wardrobe is always classic and fashionable.

For warmer months you will want a pair of cut off denim shorts or a mini skirt if you prefer skirts, and some feminine dresses and tops, because it doesn’t really matter if colour block is on trend this season, feminine looks are always going to look good year in year out. Whereas that colour block top you bought 5 years ago, doesn’t look so hot now. I am quite thin and have a fairly straight up and down body shape, so for me the best things to buy for summer are floral prints, plain light coloured frills over the chest, broidery anglaise and crochet, and bohemian (Bo-Ho) style blouses, shirts and dresses. I have a mixture of long and shorter dresses, I often prefer a long loose fitting Maxi-dress in summer. The best thing about this is, you probably guessed it, because they are a recurring fixture in fashion you can get great pieces second hand or vintage. If you have a bigger chest you might want to downplay it by wearing darker plain coloured tops which will make your top look smaller. If you have a more pear shape body, you might try wearing darker pants and lighter tops which will make your top look bigger and slim down your bottom half. It is up to you, but the main point is to buy items you can wear for several summers, that won’t look “so last year”. For this reason, I would often avoid prints unless they soft floral prints or are very artistic and can be worn as a statement piece. I would also avoid heavily embellished pieces unless they fit a recurring theme in fashion such as so called “ethnic” needlework and embroidery or tough girl styles like studded moto jackets.

I don’t have a or need many pairs of shoes, I have less than ten pairs of shoes, mostly flat because I prefer flat shoes as I can wear them all day, they include, leather Converse sneakers for weekends and causal days, black ankle boots, black knee-high boots, brogues or “nurse shoes” for wearing to work, a pair of sandals or espadrilles that can be dressed up or down for evening or day, a pair of Australian made Ugg boots for winter slippers and a pair of jogging sneakers. You’ll notice almost all my shoes are in neutral black and can be dressed up or down. If I still lived in the country I would also keep a pair of hard wearing elastic side boots to walk in the paddocks, and I would probably wear more flannelette shirts!

Now for probably the most important bit of advice…don’t go out and buy all of these items in one go. Don’t max out your credit card or use payment schemes like After Pay, Zip Pay and the like. I personally wouldn’t buy any clothes on credit EVER. The thing to know about building a classic wardrobe is it can’t be done well or effectively overnight, and it will take some work looking for pieces and some saving of cash to invest in the pieces you need to buy new. The key to not spending too much money is to slowly build up your wardrobe based on need and what funds you have available to spend on clothes.

For example, if you need a pair of great boots and already have 3 coats, then buy yourself the boots not another coat even if it’s on sale or the sales person says “It really suits you!”. If you hardly ever wear high heels or dresses, don’t buy another dress or high heels because “They would look so pretty on me”. I’m sure they would look pretty on you, but if you’re like me those high-heels and dresses won’t see the outside of your closet! If you can hold out for sales, great but make sure you go into the sale knowing exactly what you need and not buying anything but the item type you set out to buy and you will save money. This takes will power and the ability to block out advertising and pressure from sales staff. Most people will be swayed, but you can’t let yourself be swayed or you will waste your money. Going into a sale or a clothing store to buy clothes but not knowing exactly what you want, is how you will end up with a heap of clothes you won’t wear.

We unfortunately live in an era of mass consumption where most people feel like they are missing out in some way. Remember that you are in control and you don’t HAVE to buy anything if it’s not perfect and doesn’t fit your criteria. In economics we call this separating your needs from your wants which was one of the most important things I learned from my High School Economics teacher. Buy what you need first before you spend on wants. If you need to, make a list or inventory of your basic wardrobe so you know what you already have and from there you can figure out if you need to buy anything new that would make building outfits easier or if you simply need or organise your wardrobe better so it’s easier to find pieces that look good together.

I hope this blog post was helpful to you!

How I saved $10,000 a year, over 4 years.

A few years ago I had very little in savings in my savings account, let’s be honest and say I had nothing in my savings account after having to spend all my savings on child care fees before my son went to school while I was finishing my degree at university. It was a tough time and when I started living pay cheque to pay cheque I had to really evaluate my financial position.

I found that my Big Four bank account was giving me very little interest post financial crisis. Where I used to get about 6.00 % in about 2007 I was now getting less than 3.00 %  in 2013. The bank had also charged ridiculous fees such as a $35 fee for overdrawing my account by $20. I decided that something had to be done to change my financial situation and getting low interest and paying $6/month in bank fees to a Big Four bank (with billion dollar profits) was not going to cut it anymore.

So I started to do my research and looked up savings account interest rates online for local banks, credit unions and international subsidiaries operating in Australia. I found the best rate offered at that time was with ING Direct (now ING). I had banked with ING in the Netherlands so it was more familiar to me than other online high interest bank accounts. I didn’t have any savings so I didn’t really have much to loose anyway.

The positives for me were that there were no bank fees and that I could withdraw from ATMs for free (when I opened the account you had to withdraw $200 or more for the ATM fee to be paid by ING, now it’s any amount) or withdraw as cashout from the supermarket for free. If I deposited more than $1000 a month to my linked transaction account I would get a higher interest rate on my ING Savings Maximiser account which at the time it was about 3.8 % c. 2013, compared with my 3.00 % now it’s 2.8 % which is to the best of my knowledge still higher than all other online savings accounts in Australia, and much higher than the old Big Four bank account which is currently offering only ~0.81 %.

I actually kept my Big Four transaction account so that I could use cheques to pay my rent (by another financial justification because it was the lesser of two evils when it came to paying my rent). However it is only used and kept open for that reason. If I didn’t need cheques or my new bank account had that functionality I would close it in a heartbeat.

When I recently complained about my low interest rate on my online savings account to the Big Four bank they offered me the same interest rate the offer their new customers, which was ~2.30% for 3 months because I was “a long time customer”, which is really crappy considering I get 2.80% in my ING bank account all the time.

I went with ING because they were familiar to me, but there are other banks and credit unions that offer no monthly fees on savings and transaction accounts, online only high interest accounts. Money magazine ranked them highest that year in that category which was another reason I went with them. And I’m Dutch, so I like orange.

I’ve never really looked back since opening up my online no fee bank account. I deposit my salary into it and I save what I can each fortnight. With ING you can have more than one savings account and give them different names. The down side to this is that the secondary savings account does not attract the higher interest rate, the current rate as of January 2018 is 1.35% which is still higher than the Big Four account. However the advantage is you can have different accounts for different things which makes saving easier.

I have one primary Savings Maximiser account that I NEVER touch (as in I never withdraw from it), which is my home deposit savings account, originally it was going to be for a holiday to Europe, but after some deliberation of my priorities I decided purchasing our own home might be more important than a holiday. It receives the higher interest rate and contains the bulk of my savings. I have a secondary savings account where I save up for bills, school fees and other expenses which gets used regularly.

Because I often can’t afford to pay big bills like the electricity bill out of my fortnightly salary, having an account where I can save a bit each week so I have enough to cover all my bills when they come in is really handy. I also use this account to save for trips to Queensland to see my parents or little getaways once in a while or any large purchase, like a new computer or washing machine. I’ve called it “Expenses Rainy Day” account, but it could have easily been called “Bills and Expenses” account.

I said earlier that I kept my Big Four bank account for the cheque functionality, I did also keep the online savings account because it attracts no fees and I wanted to see if the interest rate would improve, but I again don’t touch this account. I kept this account because I am a highly skeptical and somewhat pessimistic person. I don’t place a huge amount of trust in any financial institution. I kept this account basically in the case there is a real emergency, and I need a few thousand dollars. A while ago I worked out the cost of moving house if we were evicted and our landlord refused to give us our bond back and we lost the tribunal would be about $3000. That would cover the cost of paying a new bond and movers to keep a roof over our heads. I decided that $3000 was the baseline savings I had to have for a real emergency.

I kept it in that bank because I wanted to spread my cash investments, like you would if you were investing in the stock market. You wouldn’t just invest all your money in one firm in case that firm failed. I figured in the worst case scenario, if Australia were to have a Greek style collapse of the banking system, I’d want my money to be in more than one bank. I never want to be in a situation where I loose everything because my bank fails and the government fails to bail them out. Luckily the chances of this happening are very low in Australia, but like I said, I’m a skeptical person. The fact that it’s in another institution to my transaction account means I am also less likely to be tempted to dip into this money.

Recently I’ve been looking at my dismal ~0.80% interest on this account and thinking along the lines of John Bull and 2% interest rates, to paraphrase, John Bull can stand many things but he cannot stand 2% and this is less than half that amount. So I have been researching interest rates again to see if I can find a better deal for my $3k that is at least in line with inflation. The best I’ve found so far is Suncorp’s eOptions account, currently offering 1.55% on savings, which is almost twice the rate of my unhappy account. It’s a bricks and mortar bank rather than purely online and it is larger than some of the other “small banks”. This would be a much healthier interest rate for my emergency fund. An account can easily be opened online, but the drawback is the easiest way to withdraw money due to Suncorp’s token and secondary password system is to also open a linked transaction account. The best thing to do is to either not get the card and go to a branch directly to withdraw funds or destroy the card or if you can’t bring yourself to do that put this card somewhere safe where it won’t be stolen and basically forget you have it, for instance if you keep your title deeds or another precious possession in the bank then put the card with that. By using another bank there is less temptation to spend my emergency fund money. The card definitely doesn’t belong in my wallet. Really I don’t even need this card, because I can walk into a Suncorp bank to make my withdrawal if that worst case came to be. However if there was a Greek style collapse, the banks may not open their doors and you may need a card to access the ATM.

I have been saving with my partner who gives me about 65 % – 70 % of his pay cheque to pay our bills, rent, sons school fees etc and keeps some aside for himself to buy groceries and general expenses like pay for his various hobbies or if we have a day out. I use his pay cheque for most of our expenses and cost of living and basically try to save as much of my pay cheque as possible. From saving this way and focusing on saving as much as we can afford I have managed to save with my partner over $40 000 over the past 4 years which is more than I could have hoped for considering our living expenses are fairly high in Sydney but I am still working towards having enough for a home deposit. I try to save regularly and save what we can afford.

My partner pays me as soon as his pay cheque clears and I distribute this money as soon as it enters my account (either paying bills immediately or putting into my cheque account for rent or the bills savings account). I put my money into savings as soon as my pay cheque clears so there is no temptation to spend it. Saved money does not exist in my mind as spending money. I figure out approximately how much my major bills like phone, internet, electricity, gas, ambulance insurance, swimming lessons for my son etc for the year cost add a bit extra for unexpected costs and divide that number by 26 weeks, so I know how much I need to save in my bills savings account each pay. I work out how much I need for rent and set that aside too. Then I figure out how much I need to spend on travel and food and leave that in my transaction account and then I put what I have decided I can afford into my home deposit account. Sometimes I might put some of the money destined for the home deposit account into my bills account just in case other expenses come up like an expensive school camp or new school uniforms or shoes.

I try to be aware about my expenses but I don’t let my self worry about bills because I know I am prepared and I have enough to cover all my bills saved. It’s a nice feeling to have peace of mind, and takes away a lot of stress in your life.

I want to make a disclaimer that you should not take the general advice on my blog as qualified financial advice and that you should make your own decisions or seek advice from an independent qualified financial advisor about your own finances based on your unique circumstances.

I recommend listening to any good financial advice that is offered to you and considering if it is best for your circumstances before following it. Don’t blindly follow what people tell you to do including me, always consider if it’s right for you in your own situation, and if you’re not good with money seek professional advice or go to the government website moneysmart.gov.au

Before I make any major financial decision I always try to remember my friend who in university lost $20 000  that their parents had given them to cover their living expenses on the stock market, thinking they could make a profit and who after loosing all that money was very very poor for the rest of that year. At the time being a poor student myself I could hardly imagine having $20 000 in the bank let alone loosing it on the stock market. Knowing what can happen when you make a poor financial decision made a huge impression on me. 

Last Christmas my mother bought me a book called The barefoot investor by Scott Pape. Scott Pape has formed a very similar savings strategy to mine, he is a good writer with a style that is easy to digest and I recommend the first chapter of the 2017 edition on savings accounts. I didn’t follow his strategy when setting up my savings account strategy, I hadn’t even heard of Scott Pape before my mum gave me the book. Previously to me Barefoot was a film from Germany about a girl with mental illness.

 

 

 

 

 

 

 

 

 

The Looming Sydney Housing Crisis

What is it that people say? It’s a recession until you loose your job, then it’s a depression. I feel it’s a bit like that with the Sydney housing market. It’s not a crisis, it’s a bubble, until your bubble pops and you are pushed out of the property and rental market because you’ve been out priced.

One of the problems with the Sydney housing market is that it’s been treated by many as an easy no brainer investment class. I’m talking about people who buy houses as an investment to sell at a profit rather than to live in them. It doesn’t really matter whether they are local baby boomer investors or overseas investors, the end result is that because there has been so much speculation in the market for so long, we in Sydney (and Melbourne) have seen an artificial elevation in house prices that is not linked to wage growth. This has ultimately out priced many younger people from the market, and basically anyone who wasn’t on the property ladder to begin with.

Now there is a phrase I have a real problem with “the property ladder”, which implies a buying and selling of properties to upgrade ones housing, presumably for comfort, but more recently (say the last decade at least) for sheer profit.

The thing about houses is they don’t generate any income until they are rented out or sold, and if you have a very big loan you won’t really see the revenue until you sell. People have seen housing as an easy get rich quick scheme, they don’t tend to loose value because people always need somewhere to live, and the more people started investing, the more new investors were drawn in. Until recently property investors (that sounds a bit ominous “investors”, but here I mean anyone who was not buying a property for themselves to live in long term) could buy in parts of Sydney and sell a year later making a 20% profit. It’s a bit reminiscent of other bubbles in the past, most recently the Bitcoin bubble which worked on the same easy money principle.

The problem with the housing bubble, is that it’s not just currency like in the case of Bitcoin, it’s houses, that is homes that people live in. If prices get too high many people are spending too much of their income on loan repayments or rising rent prices. This becomes a delicate balance and if something happens, like you loose your job or prices go up again or let’s say interest rates rise, some people are ultimately going to be pushed off the edge, when their bubble pops (e.g. they can’t make their mortgage repayments and default on their loan). This  can even be the first step towards homelessness. If you are a young person paying high rent with low wage growth and probably low wages due to the casualisation of the workforce that is happening in Australia, you can’t even save enough money to become an investor or home buyer to get yourself out of paying high rents.

The problem is, houses only really generate income when they are sold, and because people have seen the housing market as an easy way to make money there has been a massive wave of speculation. The housing market isn’t as complicated as the stock market, prices have tended to go up without the investor having to do much research or anything much once they have invested. Sure this has made some people rich, but the purpose of housing, something I think people in Australia and some other parts of the world have forgotten, is that houses should be viewed primarily as places for people to live in, not an income generating stream or investment class.

Investing in housing only pushes house prices up and doesn’t have any real benefit. Because really, if you own a place that is overvalued, there will eventually be a price adjustment (read price fall). You don’t really have a million dollars if you own a house valued at million dollars. You own a house and if you sell you will only receive what the market says it’s worth. You only have a million dollars if you sell that house for a million dollars and put that money in the bank.

People should be investing in local businesses and companies as those forms of investment do generate income and they can cause growth in the economy in areas that actually have some benefit to Australia like growth in jobs and wages. Australia has had so many great new technology companies leave because they couldn’t find investors here. The ones that spring first to my mind are the new energy solar power companies that went to China or the US when they couldn’t find investors here. There are your jobs of the future and they’ve all gone overseas and will never benefit Australia.

Australia having a trillion dollars in private home loan debt is not benefiting anyone except the banks that are selling the majority of the loans (1), who will see even more profits roll in when interest rates eventually rise, and they will eventually rise . It wasn’t that long ago real interest rates were around 6% and in the 1980’s they came close to 8% (2). I’m talking about real interest rates too here, not what the banks charged as the interest rate on their home loans which reached staggering levels close to 17% in the 1980’s. Anyone with a large home loan should be very concerned about what interest rate they are paying. If interest rates were raised a few percent higher without wage growth in Australia, many borrowers would default on their loans.

Being tied to high home loan repayments and rents also limits what households can spend as consumers, because all their income is going into housing. This also does nothing to stimulate wage growth and other parts of the economy.

To exacerbate the problem there has been very poor housing affordability policy by all levels government which has played a part in rising house prices and household debt.

The Housing Bubble and Homelessness

We are already seeing the effect of this bubble in the increase in homelessness in Sydney. Don’t think there is a connection between homelessness and rising house and rental prices? Think again. When the Government doesn’t provide enough crisis housing or long term housing for people on low incomes, and the unemployment policy is that if you leave an area with more jobs (like Sydney) for an area with less jobs (like a country town with a cheaper cost of living) you could be cut off unemployment benefits.

So picture the scenario,  you loose your job or you get sick and can’t work for a long period, then because of the drop in income you can’t pay your rent or mortgage and you loose that place. You can’t afford rent on a new place in your area because you haven’t found work again and there is not enough crisis accommodation for all who require it, so you have to find somewhere to go. You probably can’t leave Sydney and move somewhere cheaper because you will be cut off any unemployment benefits by the Government. If you can’t find a place you can afford in the city and unless you have someone who can support you you might eventually end up homeless. you might couch surf for a while, but one day you might run out of people to stay with or you might have some kids, and your friends don’t have room for all of you, so you are living in your car, until you can’t afford your car anymore.

This is a reality, and it is partially caused by housing speculation. There are however many other contributing factors to homelessness. Low wage growth, poor housing policy by Government, poor (or should I say stagnant and un-evolving) unemployment benefit policy and poor mental health and domestic violence policies by Government have all contributed to homelessness in Australia.