My grandmother and her generation had a
saying, “Look after the pennies and the pounds will look after themselves.” Simple,
sound - advice. Not dissimilar to
(sound) advice given by Scott Pape, in The
Barefoot Investor.
There is absolutely no doubt that financial
anxiety exists. For the young, it might be saving to enter the home buying
market. For the middle aged, paying that mortgage off and creating a
financially secure old age. Whilst to the elderly, it might be will my
superannuation and pension be, enough? And God help anyone with credit card debt!
This is why books such as The Barefoot Investor are so popular.
(Atheists look
away now)
Luke verses 12:19 – 21 does not prohibit
wealth, but clearly warns about its dangers. Simply highlighting that wealth
does lead to self-sufficiency, but it can also lead to greed.
Financial greed hurts, not only the
individual, but also society. A lovely example is negative gearing.
Negative Gearing, is essentially Government
sanctioned greed. It has hyper inflated house prices and pushed housing availability down. Combined with the arrival of Airbnb, renting is becoming harder to secure
and home purchase an impossible dream, even among middle-income earners.
Homelessness is no longer the domain of only the destitute.
So what is negative gearing? It is nothing
but a financial leverage, which allows investors to borrow money to buy, income
producing, (investment) property. The assumption is that the short-term income
will be less than the cost of owning and managing the property. The investor
then expects that when later selling the property, there will be a tax benefit
and capital gain on that investment, which exceed the losses.
The recent Royal Commission into the Misconduct in the Banking, Superannuation andFinancial Services Industry, has exposed the downfall of many ‘property
investors’. These individuals are not wealthy; many are simply individuals
seeking to be self sufficient enough to enjoy a comfortable old age.
Unfortunately, as the Royal Commission is beginning to expose, financial
institutions have targeted such individuals, providing them with loans they
couldn’t possibly afford. Many of these individuals will now be lucky to keep
their own home as they spiral out of control into their own financial crisis.
Perhaps it pays to remember that banks are
not ‘our friend’, they exist to make a profit and provide their shareholders
with dividends. Which brings us to another conversation – Labor’s recent
announcement on Dividend Imputation Credits. An announcement, which gave retirees
a great deal of anxiety.
There is little doubt that Australia does urgently
need serious tax reform, but it requires a bi-partisan effort, which of course
is utterly impossible within the current Australian political climate. Let’s be
honest, these overpaid suits are so dysfunctional, Australia doesn’t even have
a National Population Policy!
So, what does happen next? I’m not an
economist, but my suspicion is that the banks irresponsible lending, (as
recently exposed by the Royal Commission) may, potentially, have placed
Australia in a similar situation to that created by Sub Prime Mortgage lending
in the US – immediately prior to the Global Financial Crisis (Global Financial
Recession, to those speaking UK).
The question is, will this push interest
rates up? Will housing prices fall or would such a figure require the rolling
back of negative gearing as well? If negative gearing was rolled back - could the fall be as much as 20% ?
As my Mother-in-Law says, “Greedy gets
nothing.” Beware.
