Isn’t there some doom and gloom in the financial markets at the moment? What about Greece? I don’t want to pay my bills anymore so I’m walking away, if only it worked like that. The human behaviour aspect of the people in Greece is the interesting one. What is the first thing to happen? Banks are in trouble, quick run to the bank and withdraw all our cash. Then we have the mad panic when the bank won’t provide it all.
Why is that? The banks can’t allow everyone to withdraw their money at once because they lend more money than they hold. This is what can cause banks to collapse.
What about all the discussions on Australian Properties and the imminent bubble. Will there be a bubble won’t there be a bubble? What even is a bubble? A housing bubble is when the prices of housing outstrips wage growth couple with an oversupply of stock causing prices to drop. Interestingly in the media the causes written have been high price growth in markets such as Sydney coupled with the fact interest rates will rise and people carrying too much debt won’t be able to repay and will default. Comparisons are also made to the sub prime crisis that occurred in the United States.
A couple of interesting facts on this scenario however is the U.S.A has very lenient laws on bankruptcy compared to Australia. Another interesting fact is when you borrow money in Australia, banks don’t assess your repayments at the current rate, they use a buffer rate. It’s called a buffer rate to ensure if interest rates increase you can still afford the repayments. Some banks calculate your repayments at an interest rate of 8% others are in the range of 7 to 8%. So therefore a small interest rate rise won’t necessarily mean 100,000 Australia will walk away from their mortgages causing financial ruin, the message is be wise with your money. The other message I would take away from this is to have courage, when others sell in panic this is your opportunity to buy and gain wealth, are you going to be that person running to the bank? Receive the correct advice, have courage when others don’t and you will come out on top.