GUMBOOTS
and SPINS
by David Van Der
Klauw
July 8, 2004
Two recent Australian radio advertisements for home loans go something like this:
In the 90’s DINKS cleaned up in the property market, Double Income No Kids, now it’s the SPINS turn – SPectacular Income No Savings”...
There’s a name for people who buy their first home in whoop whoop – GUMBOOTS – Gave Up Metro Bought Out Of Town. And there’s a name for people who are smart enough to escape GUMBOOT hell – SPINS - SPectacular Income No Savings”. …. we love SPINS and will lend them 100% of the purchase price plus all the stamp duty…
This is a clever advertisement, which is well pitched to the prevailing attitudes of today. I have no gripe with the company offering the loans. I am more interested in what these ads say about prevailing attitudes to risk.
Take note that a derogatory term is used for people who live within their means and buy only what they can afford. These people are called GUMBOOTS and they live in hell.
However people who spend all their money, can't save any money out of a high income, and who borrow 100% of the purchase price of a house plus the stamp duty are called smart.
My first concern is the source of all this money that has recently become available to these SPINS at historic low interest rates. Where’s the money coming from?
All market prices are set by the balance of supply and demand, including the price of loaned money (i.e. the interest rate).
Normally a low interest rate would cause a reduction in the supply of funds because people would take their hard-earned money somewhere else and not deposit it in the bank to be paid so little interest.
However the reserve banks of the world can peg the interest rate at an artificially low rate if they create additional supply of money (by printing it) and loaning it out to all takers. This reserve bank activity explains why so much money is available to be offered to the SPINS. It is not old-fashioned hard-earned savings money, it is modern stimulate-the-economy liquidity-money that has been recently created by the Reserve Bank.
Recent figures show that the Australian Reserve Bank increased M3 (a common measure of money) by about 20% in 2003. That’s a lot of new money they created, and it explains why large sums are available for loan at low interest rates.
As I stated, my first concern is the source of all this money. I am worried that it is unsafe to create such vast amounts of new money to force interest rates down, when it only leads to higher prices being paid by people hoping to “clean up in the property market”. It doesn't seem sound or fair to me.
Secondly, I worry that it is unsafe to lend so much money to SPINS.
If SPINS are currently unable to save any money out of a spectacular income then how on earth are they going to keep up the repayments if something causes their income to fall to more normal levels?
If home ownership means so little to these SPINS that they have been unable to save a deposit for a home out of a high income, then how hard will they be prepared to struggle to keep the house should its value start falling or repayments start rising?
Before this new breed of SPIN-loving housing lender came on the scene and coined the term SPINS, there was already a term for prospective house buyers with a spectacular income and no savings. That term was BAD RISK.
Now with property prices so high, and easy money being recklessly thrust onto bad credit risks such as SPINS, I feel that the property market has surely reached an extreme and is at great risk of reversal.
All it will take is a moderate interest rate rise, or deteriorating employment and these recent home buyers will discover that it is not so easy to SPIN when you are LOPSIDED – Losses On Property Still In Debt Eventually bankrupteD.
© 2004 David Van Der Klauw
CONTACT
INFORMATION
David Van
Der Klauw
Sydney, NSW, Australia
Email
The opinions of FSU contributors do not necessarily reflect those of Financial Sense.
