Comments on: Sub-Primes on LateLine

By: Steve Keen

Steve Keen — Thu, 15 Mar 2007 21:31:13 +0000

Mistakes like that are easy to make with spreadsheets foundation–I made a similar stuff up when first doing the numbers too (dividing by 52 for a weekly repayment but then using calculations elsewhere for a monthly).

I’m being interviewed tonight for a New Zealand current affairs program on this topic, and if I can in the meantime, I’ll do a more general analysis of these loans using my favourite analytic program, Mathcad.

However I have to do a court appearance as an expert witness on debt in the meantime! No rest for the prescient, to coin a phrase…

By: foundation

foundation — Thu, 15 Mar 2007 20:53:25 +0000

Meh… turns out I’d subtracted the ‘equity loan’ twice. Here it is again, corrected, with an extra line showing ‘profit’ for those who suffer from a particularly common form of money illusion. The one where a dollar at sale is a dollar ‘profit’ - even if it cost them a dollar-twenty in interest…

http://img59.imageshack.us/img59/9914/crazy2nm6.jpg

By: Steve Keen

Steve Keen — Thu, 15 Mar 2007 04:58:02 +0000

Your numbers work out very well foundation–I hadn’t yet finished putting my analysis together, but that was my expectation: that while it makes it easier for someone to buy a more expensive house now, it also wipes out the attraction of capital gains for the buyer!

In a funny way this is a “positive” about this development: while making it easier to inflate housing prices now, it also removes one of the main attractions of inflated prices to buyers. However I doubt that many of those taking up the product will do the analysis as deeply as you have done–which worries me, because they will be the ones left with negative equity at the sharp end of the loan.

By: foundation

foundation — Thu, 15 Mar 2007 01:15:02 +0000

â€œBuy up to a 25% more valuable homeâ€

Yep, that works out real nicely:
http://img405.imageshack.us/img405/3474/crazyro8.jpg

Divide all the big numbers by 10 and you’ve got the same comparison between a $180k house and a $230k house. Shocking really!

By: Steve Keen

Steve Keen — Wed, 14 Mar 2007 23:08:18 +0000

They’re not quite sub-primes, in that that do require accurate disclosure of income (i.e., they’re not “low docs”), but I believe their impact will be to help drive asset prices still higher. A main selling point they put on their web page (http://www.efm.info/) is “Buy up to a 25% more valuable home”.

I’m writing a comment on this product which I’ll post on the blog in a few days.

As for where we’re headed, I was astonished when I graphed the two country’s household debt to DGP ratios–ours has risen at perhaps twice the rate that the USA’s has! And we now have a higher household debt to GDP ratio than they do. So while we might be better protected (in the sense of having a better regulatory regime–maybe), we’re exposed to the same disease.

I’ll try to post that graphic to the blog now.

By: cray

cray — Wed, 14 Mar 2007 22:58:14 +0000

Steve, good to see that you are getting some ‘air-play’.

I note the new loan product of 20% equity by others and Wizards 100% loan and consider that these sorts of products mirror the US ’sub-prime’ loans - in their efforts to squeeze the last drops of credit from the least financially secure borrowers.

Is Australia better protected from the types of problems seen in the US by our financial systems or could we be headed for the same fate?

(This may have been asked in the ‘Late Line’ report as I have not seen the transcript yet.)