Admit It: You Were WRONG, Barefoot

Scott,
 
Late 2020, hubby and I were renting a granny flat in Sydney for $520 a week. He saw on the news that house prices were set to rise as much as 30% and said we needed to buy our first home ASAP. The boom had started. We managed to scrape together a 5% deposit and bought our townhouse 15 minutes from the Wollongong CBD for $565,000. Our house is now worth about $750,000. There is NO WAY we would have been able to buy our house with a 20% deposit if we ‘waited’! And, because we bought at a time when rates were at a historic low, we got that benefit too, locking in 1.98% for three years. Again, if we had waited we could have ended up buying now, when rates have more than doubled. You are not always right, Scott. You KNOW there are scenarios where your rules do not always apply ... and this was one of them.
 
Linda
 
Hi Linda,
 
So were you lucky, or smart?
 
The thing I’ve learned about people who make money through luck is they tend to believe they’re smart, and you can’t convince them otherwise.
 
Personally, I don’t think the value of your home matters that much (though prices in Wollongong have come back 14.5% in the last 12 months, according to realestate.com.au).
 
In other words, you’re talking paper profits – let’s instead talk bangers and mash:
 
You’ve said that you’re not a saver, so you don’t have much money behind you. In the next few months your repayments are going to skyrocket. Will you be able to make them?
 
The most important question you need to ask right now is “How long will my luck last?”

Scott.

The Seven Stages of Grief

Hi Scott,

My fiancé and I purchased our house in December 2021 and had a fixed rate for two years at 2.59%.

With the constant increase in rates, he says our repayments will revert to around $5,000 a month come December, and I am freaking out! He earns $115,000 a year (pre-tax, less his child support!). I earn zero. What do we do? Should we sell our house and hold on to our money until rates come back down and try again? This is so overwhelming and confusing.
 
Natalie
 
Hi Natalie,
 
My calculator just broke: you’ll be paying 70 PER CENT of your take-home on your home loan?!
 
Cracker Jack!
 
So it sounds like you’re in a state of shock …    
 
Excellent!
 
That’s the first step. Now we need you to move through the other stages of grief, and pronto.
 
The next step is denial.
 
Here’s you: “Maybe everything will sort out … and rates will come down … and we’ll be okay?”
 
Here’s me: “No you won’t. Even if rates come down slightly, you’ll be shooting in a paper bag with only 30% of your take-home left over.”
 
Let’s move on to anger.
 
Here’s you: “It’s the bloody bank’s fault for lending us so much!”
 
Here’s me: “That’s it, let it all out! Do you feel better? Good. Still, it won’t change your situation one iota.”
 
Next, let’s move on to regret.
 
Here’s you: “Why did I borrow so much money?”
 
Here’s me: “Woulda, coulda, shoulda … but you did … and here we are.”
 
And now, to depression:
 
Here’s you: “It’s hopeless … there’s no way out.”
 
Here’s me: “This is where most people who are in severe debt end up: feeling defeated and depressed. That causes them to stop talking to their lender, and the situation gets worse.”
 
Natalie, I know it’s hard but you need to break through to the final stage of grief – acceptance and hope:
 
You may need to accept the harsh truth that you can’t afford your home based on your current income. So, unless the two of you can bring in substantially more, it’s likely you’re going to have to sell your home.
 
And what about the hope?
 
Well, the hope is that you take control of your situation early, rather than letting things happen to you.
 
So please call 1800 007 007 and team up with a financial counsellor, and take control today.
 
Scott.

How to Get a 30-Year Home Loan Fixed at 2%

Hi Scott,
 
I’m an Australian expat living in the United States. In the US the vast majority of people have either 15-year or 30-year fixed-interest-rate mortgages, with most of these loans having very few restrictions or prepayment penalties. Prior to the recent Federal Reserve interest rate rises, you could lock in a mortgage for 2% to 3% per annum for the entire loan term (and if rates dropped, you could also refinance and get a lower rate!). It isn’t clear to me why the Australian banks can’t offer these products. Maybe all this is not the fault of the RBA (they’re just trying to do their job of managing inflation) but of the Australian banks!
 
Matt
 
Hi Matt

Yes, our banks could offer 30-year fixed-rate home loans if they really wanted to … just like I could choose to mow my paddocks with a Victa push mower if I really wanted to.
 
In reality, what works for the banks is selling simple variable rates that track the RBA cash rate. And that explains why the majority of borrowers choose a variable rate: it’s generally the cheapest deal on offer.
 
Conversely, the banks make the act of fixing your rate much more complicated and expensive. In most cases, the longer you fix your rate for, the higher the rate you pay. And you can only fix for a relatively short time (less than five years), and then you’re dumped back onto a variable rate.
 
Now the reason the Yanks can offer 30-year fixed rates, with no penalties, is that the US Government basically set it up that way by guaranteeing the loans, which the Australian Government hasn’t done.
 
Having our Government create something similar would lessen the impact of these bulldozer rate rises from the RBA and give borrowers more flexibility and security. However, it would be a huge undertaking. 
 
So the real question is whether any of our politicians could be bothered bending over, cranking the Victa, and pushing things forward.

Scott.

*&*# you, Barefoot!

So … it seems that many readers are worried about the state of my mental health.
 
Like Raffy, who wrote:
 
“Last week’s column on interest rate hikes was a bit more adversarial than normal. Given you’re out helping the community, I just wanted to ask how YOU’RE doing?”
 
Thank you, Raffy – I’m doing okay, though I certainly copped it in the inbox this week.
 
Here’s a cracker from Linda:
 
*&*# YOU Barefoot
 
Dear Scott,

As you enjoy your perch high up without mortgage stress, you won’t join in our ‘pity party’. Yet my heart breaks telling my kids they can no longer do swimming lessons, no longer go to birthday parties, and no longer afford new shoes (cue the Supa Glue advert), among countless other sacrifices. Meanwhile my husband and I have added second jobs in our evenings and weekends to deal with the devastation caused by the rate rises and cost of living. For the first time in my life, I’ve started lining up at food banks each Tuesday so our children can have fruit and bread.
 
We can no longer do the Buckets. Our Fire Extinguisher account is extinguished. Our Mojo has no mojo. And so, despite our best efforts, here we are. *&*# you.

Linda
 
Hi Linda,
 
I understand where you’re at right now … and just how stressful, and scary it is ….
 
… though it’s not that stressful or scary for your bank.
 
They would have modelled the scenario we find ourselves in – where 800,000 borrowers will see their home loan rate go from 2% to 6% – but they decided to err on the side of their … bonuses.
 
Let me explain:
 
At the height of the pandemic the RBA flooded the banks with billions of dollars at the super-low rate of 0.1% to support the economy.
 
The banks shovelled out this money as quickly as they could … and for that round of limbo lending they made it super simple for borrowers to shimmy across the line: they assessed them on the rosy scenario that rates wouldn’t go higher than 3%.
 
Wrong!
 
So are the banks fretting about their stuff-up?
 
Nah.
 
Do you know the old saying, “The bank wouldn’t lend me money if they didn’t think I could pay it back”?
 
Well, it’s true.
 
The banks know that the vast majority of their customers are like you, Linda – they will sell off their kidneys to keep their house.
 
Yet it gets worse.
 
If you recently borrowed more than 80% of the value of your home – which I have always advised against! – you’ll find that you are effectively trapped. And your bank knows it.
 
Why?
 
Because the bank made you buy a very expensive insurance policy in case you defaulted – called Lenders Mortgage Insurance (LMI) – which can cost (you) upwards of $15,000 and is not refundable if you move to another lender.  
 
Realistically, if you don’t own at least 20% of your home, you’re about as popular as Malcolm Turnbull at a Liberal Party fundraiser: it’s highly unlikely another bank will offer you a better rate than your current bank. And that means once your fixed term ends they don’t have to do you any favours. After all, where else can you go?
 
Nice, eh?
 
Linda, I’ve spent years in the financial trenches with people who have their backs to the wall.
 
And I can tell that you’re going to make it.
 
Reason being, you’re doing whatever it takes to keep food on the table and a roof over your head. And it takes a lot of stress, and shame, and sacrifice, and bloody hard work to get that banker off your back.
 
So you’re right, I don’t pity you. I admire you and the grit you’re showing.
 
You got this.
 
Tread Your Own Path!

A Super-Simple Way to Stop Rate Rises

Hi Scott,
 
If inflation is a society-wide problem, why is our only reaction to take money from a specific group (mortgage-holders) and give it to a specific industry (banking)? I read an ABC article that suggested it would be fairer and more effective to let people stash that money in something like super (which reduces people’s spending) so it still belongs to them and can flow back into the economy through spending once the crisis has passed. What are your thoughts?
 
Doug
 
Hi Doug,
 
I think it’s a deliciously simple solution …   and it will absolutely not work.
 
Mainly, and most boringly, because the level of our interest rates – relative to other countries – determines the value of our dollar. If we keep our rates low, our dollar will likely be hit, which will make everything we import more expensive.
 
My view is that the real problem we’re grappling with is that money should never have been priced at zero. That decision – which was driven by central bankers around the world, not just the RBA – was pure madness. It fuelled a mania in housing and the sharemarket (and, in the late stages, even in rubbish like Dogecoin). The net result? The rich got richer, the poor got screwed, and an entire generation has been priced out of the property market.
 
And now you want low income earners to bail you out?
 
Because that’s effectively what would happen. Those people at the bottom of the income ladder, who are struggling with the cost of soaring grocery prices and rent, would be forced to take home even less in their weekly pay packet (because they would be forced to put more into super), so they can save homeowners’ (and their landlord’s!) backsides.
 
Good luck with that!

Scott.

Launching a Class Action Against the RBA

My inbox is still melting from last week’s column on interest rates!
 
It seems that right now everyone wants to stomp on RBA Governor Philip Lowe’s spectacles.
 
One of my readers was so ‘alpaca angry’ that he’s actually talking to his lawyer about launching a class action against Phil and his funky bunch of bureaucrats.
 
Here’s what he said…
 
Launching a Class Action Against the RBA
 
Hi Scott,
 
Why is there no class action being taken out against Philip Lowe and the RBA? How can the head of the RBA make unequivocal statements (not predictions) that interest rates will not rise until 2024 and then wash his hands and take no responsibility for the trauma (financial and mentally) his words have caused? Thousands of people, myself included, proceeded to purchase property based on these statements and are now in serious financial stress. To my mind, Philip Lowe’s statements were grossly negligent and have caused serious financial stress to thousands of hardworking Australians.

I have contacted my lawyer to investigate what options are available, but I am surprised that I have not heard of any legal action. I will willingly join in any class action that might be looming. What are your thoughts?

Ben
 
So I have a couple of thoughts.
 
First, Philip Lowe deserves to be benched.
 
He is, after all, one of our most powerful and highest-paid officials, and he stuffed up right royally.
 
(And, in doing so, ‘the Guv’ actually proved something I’ve said for years in this column: no one can predict where interest rates are going … even the bloke who sets them!)

Yet what he doesn’t deserve is the ugly media pile-on that’s happening right now. Apparently, there are paparazzi camping out at his home. What juicy pic are they thinking they’ll get? A snap of Old Filthy doing his morning sudoku over a cuppa on his porch?
 
However I agree with you: as taxpayers we should hold our highly paid (unelected!) officials accountable.
 
But while we’re talking about accountability, Ben … where is yours?
 
Did you really base a significant long-term financial decision on a relatively short-term prediction from the Reserve Bank?
 
And did you even read the published RBA statements before you went in paws and all?
 
If you had, you’d have realised there was incredible uncertainty around Covid, and that the global economy was in a state of flux (which is why Phil should have known to put his crystal ball away).
 
Instead, what most people did was listen to the pundits in the media who took Phil’s soundbite and shouted it from the rooftops. The same people who are now calling for his head. It’s not financial advice, it’s financial porn, plain and simple.
 
Look, no one put a gun to your head and told you to borrow too much money when interest rates were at their lowest levels in recorded history. I’ve written about this every week for the last decade, mate! So sorry, Ben, but I won’t be joining your pity party.
 
 Tread Your Own Path!

What’s Next for Property Prices?

The Reserve Bank (RBA) is in full arse-covering mode.
 
They had one job to do: keep inflation (that is, prices) from rising out of control … and they failed.
 
 And, now inflation is running rampant, the RBA has no other option than to keep jacking up rates each month to try and bring it down.
 
Yet it gets worse.
 
As a result of their previously terrible forecasts (“no rate rises until 2024 at least”), right now many Aussies find themselves paddling on a boogie board.
 
And this year they’ll look up and see a tidal wave approaching them: the fixed rate period is about to end for one in four home loans …  causing their repayments to go from 2% to 6% (or higher).
 
Wipe-out!
 
Again, despite all this, the RBA has to keep hiking.
 
The current thinking is that the RBA will continue pushing rates higher until something snaps in the economy and forces them to paddle in the foam for a while.
 
So, the $64 million question is: what will break, and when will it be?
 
To find out, this week I decided to talk to one of the few experts who accurately predicted both the COVID boom and the subsequent fall in the property market: Christopher Joye, the founder of Coolabah Capital, who manages $7 billion of fixed interest assets.
 
“So when do you think the housing market will break?” I asked.
 
“What do you mean ‘when’? It’s already breaking!” he told me.
 
“Across the five capital cities, index prices are down 10% right now, and they’re falling at more than 1% a month. So we are one month away from the biggest losses on record in 40 years.”
 
Back in October 2021 – before the RBA had started hiking – Joye stuck his neck out and suggested that property prices would fall between 15% and 25% because the RBA would be forced to hike.
 
Today, he has three forecasts:
 
First,  he believes the RBA will hike three more times before they pause and paddle.
 
Second, the impact these rate rises will have on the economy will be widespread and painful.
 
(I agree.)
 
Finally, property prices will continue to fall at least another 5% to 10%, which would be smack bang in his original forecast.
 
Look, it must be said that I have no crystal ball, and neither does anyone else. 
 
Still, even a grommet in floaties understands there had to be consequences for going on a borrowing binge when rates were at all-time historical lows. This year we’ll find out just what those consequences will be.

Surf’s up!
 
Tread Your Own Path!

Don’t believe them

Did you know that Australians are officially the richest people on the planet?

It’s true, according to Credit Suisse’s latest annual global wealth report.

And yet it’s also true that Australians have some of the highest levels of household debt on the planet, according to the Bank of International Settlements (BIS).

In other words, we’re rich – on paper at least – because we have high house prices.

Yet that appears to be rapidly changing, with prices now falling at one of the fastest rates on record. Nationally they’re down 4.5%, with some analysts suggesting it’s only just beginning, with predictions of much larger falls of up to 25%.

I’ve consistently argued that I wouldn’t be surprised if house prices eventually gave up the 30% gains they made during the COVID period.

After all, what the Reserve Bank (RBA) giveth … by slashing interest rates to 0.1% and promising to hold them there during the pandemic … it can also abruptly taketh away. The 2.5% of hikes this year have added a massive $715 a month in extra repayments for the average borrower.

That’s huge.

It’s the sort of shock to the system that drives an economy into recession.

So where to from here?

Well, a lot will depend on how far the RBA hikes. Yet the problem is that the RBA has proven to be as accurate at calling interest rates – which they set! – as my youngest boy is at peeing standing up. Despite his best aim he invariably ends up spraying it all over the walls and floors.

“You promised me you got it in the bowl!” I yell.

“Oops. Sorry Dad” he says sheepishly.

My view?

We should enjoy our win – because much like my beloved Melbourne Demons – it ain’t going to last.

Tread Your Own Path!

Your biggest financial worry right now

My long-suffering editor, Wally, loves to joke that you can tell the financial pulse of the nation from a glimpse at my inbox. After all … thousands of people of all ages, from all across the country, write to me about what’s stressing them out.

So, after doing this for almost two decades, I can tell you exactly what worries Australians the most:

Whatever the media is banging on about at that moment.

It’s true. Right now the ‘threat’ of rising interest rates is at fever pitch. It’s been spurred on by some experts predicting that interest rates will hit 3.5% by next year. To put that in context … that would be thirteen additional hikes in almost as many months.

Personally, I find that hard to believe.

However, the surging inflation that is happening around the world will require much higher interest rates going forward … yet I have no idea how high they will go, or when.

My main point is that higher interest rates were entirely predictable — heck, I’ve been talking about them for years! In January 1990 the cash rate was 17.5%, and they limboed it all the way down to 0.1%.

Where did we think they’d go next?!

Now I am not saying that interest rates will get back to 17.5%.

Yet the one takeout from the last few years is that the world is a risky and unpredictable place. Weird stuff happens when you least expect it. Bad stuff happens if you haven’t prepared for it.

So what can you do?

Well, if you’ve been following the Barefoot Steps, the answer is: you’re already doing it! You’re aggressively paying down debt, building up a cash buffer, and investing long term into shares via your low-cost, tax-effective super fund.
In other words, focus on what you can control. More Date Nights, less TV news.

Tread Your Own Path!