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@ Jake Woodhouse
2024-01-16 19:44:26Debt.
Useful tool?
Or trapdoor into a life of fiat slavery?
As with most things in life, this is a horses for courses scenario, with the answer being wildly different from person to person.
What is no doubt true: our status quo financial system is built with debt, so if you can master the use of it, then your ability to leverage is a superpower.
Is this useful to me?
Not right now.
As I found out yesterday.
In my morning meditation, I was downloading thought after thought as usual, and a bunch of stuff came up around taking a mortgage to buy a house.
I was inspired to re-visit that discussion to see where it might take me.
Having walked the dog past a broker’s office multiple times over the past year, I knew who I was going to cold call, and minutes later I was on the phone to Brendan.
He admitted to having over 20 years experience navigating the mortgage market.
Perfect.
For 40 minutes we spoke through multiple scenarios, which was simultaneously fascinating, but also extremely confusing.
The more time I spend in the world of Bitcoin, the more I’ve begun accustomed to the simplicity of it, born from the beauty of utilising a bearer asset.
Whereas fiat… well that’s another story.
“Jake there are 2 key area’s a bank will look at”
“Ok, sounds straight forward”
“1: what level of deposit? 2: what can you afford?”
In my case, answering the first question wasn’t too bad, in that I am fortunate to have accrued a healthy asset base; I could easily sell down some Bitcoin to put a deposit on a house for example.
The hard part was answering the second question…
Because I choose to create value outside the fiat system, without a fiat employment contract, I have very little income to show; it’s not easy for me to therefore demonstrate affordability.
We spent a long time discussing serviceability of the loan therefore.
And frankly it was such an eye-opener.
Indeed, it highlights the total mess the real estate market is in, with a huge disconnect between what people are earning and where the house prices are.
Let’s talk through some numbers.
Firstly, any foreign income you might be earning, is taken at a 60% discount by Australian mortgage providers “being conservative”.
Of course fiat earned in GBP or USD is worth less…
That didn’t make sense to me.
But then it was the raw calculations that surprised me.
Let’s say you are on a $100k aud salary in your job, which is higher than the average Australia-wide of circa $75k, you’re likely only able to borrow $500k.
Let me explain why.
The banks like to have a “buffer rate” in place, so with interest rates at around 6%, they want to see a borrowing capacity (serviceability) of 9%.
For sake of this example let’s just say the buffer rate is 10%.
If you then borrow $500k aud, the theoretical interest payments are $50k per year, more if you’re paying interest plus principle.
When one has $100k come through the front-door, it’s then taxed to a net income of circa $70k, then deducting the $50k debt payments one is left with $20k…
How on earth does that person live on $20k per year?
Surely no-one is able to do that?…
Which is why, as Brendan explained, often both parents are working.
Say the household income is more like $200k aud, then their borrowing capacity increases to more like $1mil aud, due to the double salary of $120k and $80k.
This imaginary couple would then have $40k per annum net to live on.
Perhaps they have 2 kids…
As you can see, this debt is hard to carry in this rate environment, and I would be very surprised if people chose to leverage up with disposable income squeezed so hard.
(Note: the real rate they're being charged is 6% not 10%, so this example is from a Bank's perspective, and heavily simplified)
In short: does it really make sense to take a mortgage?
Interestingly, Brendan explained that in some cases one needed to be in a job for literally just a day to get debt, highlighting once more the farcical nature of “box-ticking” that the credit managers must go through.
It seems such a strange way to manage risk when one can own a bearer asset like Bitcoin.
Anyways…
We’re here to dissect debt.
So, there was another route to showing serviceability I want to mention, other than some kind of employment contract.
You can use the cashflows of a company.
Had I been a Doctor in the medical profession, setting up a new practice, I might have been able to leverage with just projections alone.
But if I could supply 6 months of tax returns, showing income from a business, then you can potentially use that for leverage.
Interesting.
The entrepreneur in me felt much more drawn to this.
So, if I build cashflow from a business I own, that might work much better…
Brendan also pointed out that dealing with the business department, rather than the retail, can be much more useful long-term.
Here was an angle that might make more sense.
As I still like the idea of investing in real estate, but with leverage, to really boost the return on capital employed.
Importantly that means one can keep more equity in Bitcoin as well.
Anyways, returning to the numbers a little more.
Let’s flip to the real estate market side of things…
We would like to buy a place in an area of Melbourne called Bayside, aptly named as an area next to the beach, which is where we’ve rented the last 18 months.
Admittedly its an affluent area.
But either way…
House prices are certainly not $500k aud.
Not $1mil aud even…
The average house price in Bayside is $2mil aud.
Wow.
So even a husband and wife earning a combined income above average are miles off the market.
They might have saved the the 10% deposit of $200k aud, and shown they can service a $1mil loan, but that still leaves an $800k hole.
And I haven’t even factored in the cost of purchase.
Stamp duty tax.
Agents fees.
I think you get the picture.
So how the hell are these house prices where they are?
“You’d be surprised how many people earn $500k” Brendan commented.
Ok, fair enough, so maybe there is more money out there.
But either way, none of this makes sense.
In the 18 months that debt has tripled in cost, the Bayside real estate market has barely blinked, hovering around the same on average for the last 2 years.
I for one think the real estate prices have to come off.
And this conversation hammered that home.
But who am I to say?
As my great friend Dale pointed out when a guest on his podcast recently "it's the most manipulated market there is"
Let’s wrap this up.
I’d love to know, what is the real estate market like in your local area?
Are you also seeing this crazy disconnect between borrowing capacity and prices?
Let’s see how it all plays out.
Whilst I confess, I rather like the idea of setting up a company, which I can then utilise as part of a wider investment strategy that enables leverage.
With the status quo system being debt based, a hybrid strategy with debt in traditional markets, combined with HODLing a digital bearer asset such as Bitcoin, might well make a lot of sense.
Best, Jake
PS - throughout this story I’ve not mentioned risk. What is risky? Lately I’ve truly come to terms with the idea that Bitcoin is the best risk-reward return you can get, indeed you can’t beat it, however you could augment it. This is why I like the idea of taking a traditional asset such as leveraged real estate, as well as Bitcoin, into my portfolio. But is taking on mounds of debt as “risk-free” as they would have you believe? Enough time in the Bitcoin rabbit hole suggests quite the opposite…