buying a house advice

Sly21C said:
I disagree with you fully with regards to risk. Unlike you, I have zero tertiary education with regards to economics. I know what I know from reading economic books in my spare time. I'm in the Civil Engineering industry. I think you might have been fed lies by banks, just my opinion.

If a bank lends me R900k to buy a house, they don't take that much risk because they have collateral (the house). They can simply repossess my house and sell it back to someone else so as to recover the loan amount, and then some. If they sell/auction the house at a lower price compared to how much I owe them, they'll simply recover that amount from me personally. If they lend me R900k for me to buy a Range Rover and I skip a month or two, they simply take my car (repossess it). Same thing, if they cannot recover the full amount when the car is auctioned, they'll recover the balance from me personally.

If you're talking unsecured lending, the banks charging a higher interest is more than enough to compensate them from other defaulting debtors. African Bank failing are bankers being greedy. They make more than enough to cover people who can't pay back, they just don't want to part with their money.
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You can disagree as much as you want, my job is to measure the risk that a bank is taking and I assure you that we do lose money when people don't pay us back.

Yes, we lose less on home loans than on other loan types because, as you say, we have the house as collateral and houses, in general, hold their value much better than things like cars.

The car example is a good one, lets look into it. If I lend you R1m to buy a new car today and you default in 3 months time, you are still going to owe me pretty much R1m and the car is only going to be worth say R800k because it is now second-hand. In almost all cases, the reason that you default is because you don't have money to pay the bank. So we've taken the car and sold it and now you still owe us R200k but the reason that you have lost the car is because you have no money, so we could go after you to try get the R200k back but the lawyers fees will probably eat almost all of what we actually manage to recover and suddenly, 20% loss.

If you are interested in what the actual loss rates are on different product types, they are available in the Pillar 3 disclosures of all the banks.
 
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Jehosefat said:
You can disagree as much as you want, my job is to measure the risk that a bank is taking and I assure you that we do lose money when people don't pay us back.

Yes, we lose less on home loans than on other loan types because, as you say, we have the house as collateral and houses, in general, hold their value much better than things like cars.

The car example is a good one, lets look into it. If I lend you R1m to buy a new car today and you default in 3 months time, you are still going to owe me pretty much R1m and the car is only going to be worth say R800k because it is now second-hand. In almost all cases, the reason that you default is because you don't have money to pay the bank. So we've taken the car and sold it and now you still owe us R200k but the reason that you have lost the car is because you have no money, so we could go after you to try get the R200k back but the lawyers fees will probably eat almost all of what we actually manage to recover and suddenly, 20% loss.

If you are interested in what the actual loss rates are on different product types, they are available in the Pillar 3 disclosures of all the banks.
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I hear you.

All I'm saying is that the money the bank creates out of nothing and lend it to people, from where I'm standing (and with my limited knowledge regarding risk), is money that the bank can afford to lose without too much risk. I'm saying this because they created it, they made it appear from nowhere.

Let's say I own a storage warehouse (bank), and you store (deposit) your 10 jackets (R100k). Let's also say I, as the storage warehouse manager, am allowed to lend out 9 of those jackets (R90k) to other people. I must just keep 1 jacket (R10k) in storage (bank vault) at all times. I then create 9 new jackets (R90k) so they are storage credit (bank credit), so that you'll still see 10 jackets (R100k) when you open you storage facility (bank balance). The storage warehouse (bank) has created 19 jackets (R190k) from 10 jackets (R100k). The storage warehouse lending out 9 jackets (R90k) and the debtor not paying anything is no risk at all because there are still 10 jackets (R100k) in the storage facility, because it's the 1 jacket (R10k) kept as a 10% reserve and the 9 jackets (R90k) that the storage facility made appear out of nowhere. That's how I understand it, I might be wrong.

But let's leave it at that, I'll have look at the Pillar 3 disclosures and see if I'll eventually agree with you regarding risks banks expose themselves to.
 
Sly21C said:
I hear you.

All I'm saying is that the money the bank creates out of nothing and lend it to people, from where I'm standing (and with my limited knowledge regarding risk), is money that the bank can afford to lose without too much risk. I'm saying this because they created it, they made it appear from nowhere.

Let's say I own a storage warehouse (bank), and you store (deposit) your 10 jackets (R100k). Let's also say I, as the storage warehouse manager, am allowed to lend out 9 of those jackets (R90k) to other people. I must just keep 1 jacket (R10k) in storage (bank vault) at all times. I then create 9 new jackets (R90k) so they are storage credit (bank credit), so that you'll still see 10 jackets (R100k) when you open you storage facility (bank balance). The storage warehouse (bank) has created 19 jackets (R190k) from 10 jackets (R100k). The storage warehouse lending out 9 jackets (R90k) and the debtor not paying anything is no risk at all because there are still 10 jackets (R100k) in the storage facility, because it's the 1 jacket (R10k) kept as a 10% reserve and the 9 jackets (R90k) that the storage facility made appear out of nowhere. That's how I understand it, I might be wrong.

But let's leave it at that, I'll have look at the Pillar 3 disclosures and see if I'll eventually agree with you regarding risks banks expose themselves to.
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Dude, you should just stop.

Banks don't just create money out of nothing, and there is a risk involved.

Your example is massively oversimplified and doesn't convert from your example to the real world.
 
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