Archive for the ‘Housing’ Category

Want Affordable Housing? A Super Idea Is Limiting Negative Gearing.

Tuesday, April 11th, 2017

Incredibly expensive housing in Australia is nothing new. For several years now we have had record or near record house prices across the country, combined with very low inflation. It means that the ratio of average income to average house price is such that I can’t work out how people are able to convince their lender that they can repay a mortgage.

The lack of affordability is something that has been discussed, but not addressed, by state and federal governments and is now hitting the headlines again. The latest harebrained idea is to allow first homebuyers to access their super to use as a deposit, and the average gen Y would think that would be great. Until they retire and realise that they had missed out on 30 or 40 years of their super compounding. Or perhaps they would twig when they see house prices continuing to increase as a result of all their peers having more money at the auctions. After all, increasing demand pushes up prices.

So what’s the answer?

This is where I get controversial. Firstly, abolish the First Home Owner Grants. They are a smokescreen designed to think that they’re helping young people when in actual fact all they do is push up prices. (How?! Go back and read that paragraph above).

Secondly, introduce an incentive to encourage first homebuyers to save as large a deposit as possible in the form of a grant for people who have at least a 20% deposit. Grant amounts could be for a maximum of 10% of the saved deposits, up to a maximum of, say, $150,000 (so that’d be a $15,000 grant). 20% deposits mean lower mortgages due to not having to pay Lender’s Mortgage Insurance, which in turn lead to reduced repayment times.

This would lower mortgage amounts and encourage buyers to look for cheaper first homes as well as providing a reason for builders to make smaller homes of 2-3 bedrooms rather than the 4-5 bed monsters you see in display villages.

And lastly (drum roll please because this is the really contentious bit), negative gearing must be limited to amounts over around $3 million. I’m not saying that people can’t own more than $3 million worth of property, just that you couldn’t claim a tax deduction for amounts greater than this.

The average Mum and Dad investor would not be affected but the few who exploit the system by claiming a tax deduction on 10, 20, 100 properties or more would likely be forced to sell their portfolios, freeing up housing stock at lower prices for first homebuyers.

For every winner there’s got to be a loser, right? Yes, and in this case it would be investors with more than 3-5 properties as well as banks and companies selling Lender’s Mortgage Insurance.

Yes there is every likelihood that this idea, if implemented, would lead to a housing market crash that would impact many more people than just those in the aforementioned groups, but this housing bubble is going to burst either way.

We just don’t know when.

Will The Property Bubble Burst?

Thursday, June 4th, 2015

You would have to be living under a rock to not know that property in Melbourne and Sydney is very expensive and that houses and units in other major centres are not very affordable either. That’s not news. What is news is the recent talk about the property bubble and whether continual price rises are a good thing. As with any argument, there are two sides to it.

Firstly the case for. Most property investors will want the value of their investment to go up. The average landlord is negatively geared, that is they pay out more in maintenance costs and interest on the property loan than they are receiving from their tenants in rent. They rely on the increase in the property’s value to rise so that they can make money out of it.

The owner occupiers (people who live in their own homes) like to see an increase in the value of their homes but they don’t really need to. A rise in the property’s worth will make them feel better and will mean they have more equity in the home. This allows the homeowner to borrow more money against the property to spend on a new car, holiday or to invest. Borrowing for consumables that don’t rise in value is something I am very strongly opposed to, while borrowing for investment carries with it significant risk.

Now the case against. Anyone who does not own property sees the home-owning boat sail further and further away every time prices go up. It is simply not sustainable for house prices to continue to rise at a rate faster than the incomes that go towards paying for those houses. Eventually it has to get to the point where only those on the highest incomes will be able to afford to buy. As those people in society on the lower end of the income scales are so highly represented in younger generations, Australia is coming to terms with growing numbers of people who believe they will never own their own home.

None of this is new, and yes, I realise I’m preaching to the converted. But I reckon it’s a kick in the guts for generation Y to hear very highly paid politicians talking about the benefits of rising property prices while seemingly ignoring the people who are paying for it.

The only consolation is that one day it will have to come back to equilibrium. When the bubble does burst, those who are currently saving up a deposit will be the winners.

Is The RBA Wrong?

Tuesday, July 15th, 2014

There’s a story doing the rounds today that the Reserve Bank of Australia (RBA) says that it’s an even bet between renting and buying the property you live in. They’ve crunched the numbers to show that, depending on the general rate in the rise of house prices, it would take anything between nine and 30 years to break even on your mortgage compared to your neighbour who’s renting.

I don’t doubt the ability of the RBA to use a calculator, but the way this story has been reported may make younger renters in particular stop saving for a home deposit and think that renting is the better alternative. The truth is that you can be better off financially by renting, but there is a very large condition attached.

If you are renting and save the difference between what you pay in rent and what you would pay in mortgage repayments into growth assets, over the long term you will win. You have to ensure that you have a very disciplined savings plan into property and shares over many years, but if you do, history shows you will be better off than the family next door (except that at the end of your experiment you can’t live in a share portfolio).

Although I have heard of a case or two where people do employ this strategy, I have never come across it personally. I reckon it’s because it requires an enormous amount of discipline, very much like the discipline required to pay off a mortgage. The difference is that if you stop paying off your house, the bank will come knocking before they eventually take away your keys. If you stop contributing to your growth asset portfolio (which, ironically, might contain an investment property or two) nobody cares.

A Prediction For Canberra

Thursday, December 12th, 2013

This one is specifically for my Canberran friends – don’t buy a property in the ACT for the next year or so. I predict that the ACT economy will tank and with it house prices will plummet.

 

For the benefit of the rest of the country, the workforce in Canberra is made up of a large amount of federal public servants (yeah, we know that the average Aussie hates public servants) as well as those in the private sector who support them. That means there are a lot of tradies, solicitors, shop assistants and even teachers whose jobs are reliant upon the income generated from what those public servants spend. When public servant numbers are cut, and I mean in a big way, it will force thousands of families out of the ACT to find work in other states.

 

How can I be so sure, I hear you say? Because it’s happened before.

 

When the Howard government was elected in 1996 they cut huge chunks out of the public service. Thousands of people lost their jobs and left, whacking their homes on the market. Canberra was awash with houses and units for sale and it brought prices crashing down. With the new Abbott government looking at cutting large numbers of the ACT’s workforce, the scene is set for a repeat of the recession we suffered after ’96.

 

I expect average Canberra house prices to fall by anything between $50,000 – $130,000 peaking in around 12 – 15 months. For first home buyers it is really important that you don’t spend any more than you absolutely have to, so if you want your fist home to be in the nation’s capital, wait. If you already own here and are looking to sell, get your act together fast.

 

I had hoped that the possible influx of same sex couples wishing to marry in the only jurisdiction in the country that allows it might counteract the worst of the cuts, but today’s High Court decision has quashed that chance.

The real value of housing

Saturday, July 20th, 2013

Many people believe, quite rightly, that shares are more volatile than property. Share prices can go up and down from one day, one hour or one minute to the next. But housing isn’t this volatile, is it?

Although they’re hard to compare directly like this, property looks much less volatile as it is usually only bought and sold (and therefore valued) once every couple of years/decades. What you don’t see is the price/value of property rising and falling in those years when it’s not sold.

If your house was bought and sold as often as, say, a parcel of BHP shares are, it would start to mirror the same degree of ups and downs as the shares.

Don’t just take my word for it. Ask a dozen people who are familiar with your place of abode the most they would pay for it. Then you could start to see the real volatility of bricks and mortar. After all, something is only worth what someone else will pay for it.

Things I Don’t Quite Understand

Saturday, March 23rd, 2013

There are a bunch of things I don’t really get. I don’t understand how the bottled water industry remains viable when their biggest competition should be free tap water. It amazes me why anyone who owns both a car and a mobile phone would not be able to afford to purchase a $40 phone holder for their car without taking up the offer of “Five easy payments of $7.95!” I don’t get people who believe the Facebook ad claiming that you can make thousands of dollars a week from home with nothing other than your computer and six hours of your time. And why anyone would ever think that money spent on a Star Wars figurine is a better investment than purchasing shares in the chain of stores that sells them, is beyond me.

But a big one I can’t understand is how the people behind We Buy All Homes can sleep at night. The two pics below are ads that may be similar to ones you have seen in your area. Handwritten in texta on a bit of cardboard, you could be forgiven for thinking that someone is trying to make an honest buck by dabbling in real estate without you having to deal with an estate agent.

At this point I must disclose that I hate the average real estate agent with a passion. But these “Homes For Cash” type real estate speculators are something altogether different. They’ll tear you a new arsehole.

Take the sign below. How much do you reckon you would get for your house if you were able to make a quick sale? Market price? Above market price? Or would the buyer pressure you into an offer tens of thousands below what your place is worth? Nothing illegal in doing that and arguably nothing unethical. After all, the seller doesn’t have to hand over any keys if the price isn’t high enough.

Photo of a sign that reads "We buy houses fast" with a mobile number below.

Now look at the next photo (yep, it’s the same mobile number). I was interested to know what “NO Bank Req’d” meant, so I rang.

Photo of a dodgy sign that reads "No bank req'd. 4 bed 2 bath $747 p w with a mobile number underneath.

“Have you heard of radio rentals or Flexirent?”, asked the voice on the other end of the phone.

“Yeah, I have,” I replied, but neglected to add that I have a specific case on my website where Flexirent’s fine print is explained in simple terms so that they can be seen for the rip off merchants that they are.

“Well this works the same sort of way. Let’s say the house you’re after costs $545,000. You pay rent of $747 per week for three years, then you buy it for $545,000, even if the value has gone up in the meantime.”

Wow, that’s really generous. You can lock in the price of a house now and buy it in three years without having to worry about house prices going up. All you have to do is give the guy $116, 532. Over a hundred and sixteen grand in “rent” for the privilege of locking in a house price.

This is such a big rip off I had to do the calculation twice before I believed my calculator. All done in the guise of helping renters to get into the housing market. Good luck raising a deposit.

If you’re wondering wether or not $747 a week rent’s a bit steep, a rule of thumb is that the value of a property divided by 1,000 will be a fair weekly rent. So normal rental prices for a $545,000 property are closer to $545/week. Much higher than this amount and it means the place is under-valued or that the rent’s too high. A bit of quick searching and I found the property in question on a prominent real estate website advertised for not $545,000 but $505,000+. So as well as being a rip off, they’re using bait advertising.

As for the “NO Bank Req’d” unless you can pay cash for a $545,000 in three years time, it’s just delaying the inevitable.

The House Price Oversight

Saturday, February 18th, 2012

House prices in Australia are high. “No shit, Sherlock,” I hear you say, “Tell us something we didn’t know.” Ok, um, Kevin Rudd actually would like to be PM again. Already knew that one too, eh? Well I will tell you something you don’t know about Aussie housing, but first, some basic economics.

The price of everything from a loaf of bread to illegal drugs is dictated by supply and demand. Where you have an increase in demand for a product, like a Justin Bieber album (God knows why there is any demand for him), the price will go up so long as the supply of that product remains stable. Where there is more supply than people wanting to purchase, the price goes down (just you wait and see, Justin). For Aussie housing, exactly the same rule applies.

For many years there has been a large demand for houses, units, townhouses and land in Australia due to a couple of factors, mainly to increases in population from high levels of migration and our fertility rate. Our fertility rate isn’t huge (we’re rooting only slightly more than we’re dying), and migration accounts for between 200,000 – 300,000 more residents every year. As we don’t build enough new houses, to the tune of about 25,000 a year, we currently have an undersupply of about 200,000 homes. So say the economists. Seems simple enough, but I reckon that there are a few things being ignored.

The first is that, thanks to McMansions, the average size of a house today is twice the average size from 1950, and there are heaps more bedrooms. So there is enough room at the parents’ place for many gen Ys to be happy enough to stay, and sometimes to stay there with their partner. After all, the undersupply of housing in Australia has not led to an incredible increase in homeless people.

The other bit overlooked by economists is about the migration figures. Given that there is a large number of people coming from countries with higher population densities than in Australia, it’s quite plausible that migrants are happy living in more cramped conditions than the average Aussie. For example, a guy moving from Japan, where the average amount of housing is just 47 square metres per person, would gladly move into a “cramped” sharehouse in Australia where the average floor space is about 84 square metres per person.

So an increase in migration may not equate to a corresponding undersupply in housing, especially when the economies in other countries start to pick up and those countries call for skilled migrants. Many a skilled worker has left Australia for more money overseas.

I’m not predicting a migrant-exodus-led house price crash in Australia, but I am saying that I believe the simple figures that you hear about on the news need looking at more closely, especially if the undersupply problem is addressed by an initiative to build lots more houses, and whilst ever the people pushing the undersupply line have a vested interest in keeping house prices inflated.

In the end, house prices simply can’t continue to rise as they have over recent years as the average income earner, and above average income earner, will not be able to afford to buy one.

Big House Big Mortgage

Saturday, November 19th, 2011

Claudia and I own a big house. We own a massive house. It wasn’t that big when we moved into it a couple of months ago, and we haven’t done any extensions. We’re painting. Yes we (as in Claudia and I) are painting it, and with every room we paint the house seems to get bigger and bigger. I’m not the world’s best handyman, although I can bang a nail in the wall to hang photos with amazing competency, so this paint job has proved to be a big job and a big learning curve. Especially as I’m less competent at home maintenance than my wife.

Claudia and I looked for a house for quite a while. We knew that we couldn’t live comfortably in our old 2 bedroom townhouse for too long and proved ourselves correct when our little chicken was born in January. With all the baby crap that we needed the place very quickly became cramped.

In terms of square metres, our house is not that big. At 1502 metres it’s not small, but it’s certainly no mansion. When we were searching for a house we did a lot of looking around at places that ranged in size, starting from about 1202 metres for a house in an established suburb. But looking around the new places in display villages was a real eye opener.

The houses currently up for offer as house and land packages are, to put it lightly, friggin’ huge. Finding places smaller than 2002 metres is hard, blocks larger than 4002 metres are uncommon, and two and three bedroom houses are as rare as a smiling emo. The average house in a display village is a 4 or 5 bedroom energy sucking monster with space for 3 large plasma tellies. Some of the houses for sale even show you where you can put all these TVs. With bugger all yard, it worries me that the future generations of Aussies will contain no decent cricketers (Bangladesh is counting on this).

Walking around these display homes it quickly becomes apparent how many first home buyers there are looking at buying large houses. One place we were in had a couple asking the salesperson if the display furniture could be sold with the house as well. It got me thinking that the size of the mortgages of the average display home buyer would match the floor size of the building being purchased. A hell of a way to start your life as a couple or with a young family.

It seems to be the case that many first home buyers are looking to buy a house that has everything that the home they grew up in had – lots of bedrooms, large living areas, large car accommodation, etc. What many first home buyers overlook is that if their parents ended up in a place like that, chances are they started in a smaller, more modest house that was extended over the years to fit a growing family.

It may seem great to live the great Australian dream in a big house in the first place you buy, but somehow you have to pay off the great Australian mortgage.

And some time down the track, a big house has to painted again.

It’s enough to do your block

Sunday, August 21st, 2011

I’ve just watched the final episode of the reality TV show The Block. For those who are unfamiliar, it’s the one where four couples compete against each other in doing the best renovations on four run down properties adjacent to one another, which are offered up for sale at auction after all the work is complete. The couples are average people and the renovations are done quickly under heaps of pressure.

I guess in a way it is meant to reflect what lots of people do all over the country – buy a run down property, do it up then sell at (hopefully) a profit.

When the four properties in The Block went up for auction, three of them were passed in (they didn’t sell). The one that did sell sold for only $15,000 above the reserve. The reserve price in a normal auction is the lowest price the seller will accept, but for The Block properties, the reserve price was based on what the properties were professionally valued at before the renovations were done (yep, when they were dumps – holes in walls and floors, etc).

Why did only one property sell? Was it because auctions will never get you the highest price, because the renovations were done too quickly or not to the potential buyers’ liking, because the property market in the area has dropped significantly since the valuations were done, or because potential buyers did not want their face to appear on TV? Perhaps it was a combination of all these factors.

And here is a scary thought for people holding lots of debt laden investment properties: will the millions of Aussies watching tonight’s program think to themselves that this is signalling a turn in the property market? What effect do you reckon that will have on investment properties, particularly if they are ones that have had lots of time and money spent on doing them up?

Don’t get mad, get even

Wednesday, November 3rd, 2010

In the last few days we have seen some interesting things happening in Australia. Official interest rates have risen and at least one major bank has moved their mortgage rates higher than the official rate rise. It’s likely the other big banks (who hold around 80 per cent of mortgages in Australia between them) will follow suit. These same institutions have also just announced their latest round of profits and they are BIG numbers. The last 12 months has seen more than $20 billion profit go to the big 4 banks. Massive increases from companies who are crying poor about increased funding costs (which are being passed straight onto mortgage holders).

It’s enough to make the average Aussie spew.

What can you, the little guy do? You could complain to the government (who will “strongly urge” the banks not to screw their customers, but not stop them by legislating). You could chuck a brick through the front window of a bank (then get arrested, fined and be worse off for breaking the law). Or you could beat them at their own game. Pay off your credit card. Pay off your car loan. Pay off your mortgage. Don’t let a bank win by taking more money from you.

If you don’t know how to pay off your mortgage quickly, then you need to learn how. Sign up to this website. There has never been a better time.