A house of (credit) cards

Investors make up roughly 30% of our real estate market – they are the buyers who will only step in when confidence – like a pseudo Jiminy Cricket – dictates at least the perception of solid growth.  Without this, they’ll simply invest their hard-earned cash elsewhere (these days, usually in the form of a term deposit), which does little to assist business and growth.  They – along with first-home buyers who make up roughly 17% of the market, are the reason overall turnover has been at its lowest ebb since 2008. No one wants to purchase into a market they anticipate will drop. 

While Wayne Swan is busy assuring us all is OK because now he’s abolished mortgage exit fees we can just play “switch-a-roo” with our lenders and become “powerful” consumers, it’s worth pointing out that back in February, Treasury documents revealed the unintended consequences likely to occur once the fees were scrapped.  This included an increase in other fees including interest rates to recoup lost revenue.  It also stripped smaller lenders of their competitiveness, and the big banks have quickly found other ways to hit consumer pockets, such as hefty establishment fees.  Therefore, at best, Swan’s words only instigated a comforting and temporary placebo effect that at least something was being done. 

We can become like the “Occupy” protestors and stage a demonstration against the banking system that has us well and truly over a barrel, however most have little time to spend walking the streets. With unemployment still low, we’re too busy juggling our financial assets to step outside the daily rat race and camp out in Treasury Gardens.  Instead we have to develop a new psychology of self-regulation – and wisdom – when it comes to future investments and property purchases. We can’t control external matters, but we can control how we react to them. 

Building wealth from debt is an addictive occupation, once the foothold on the ladder is secure, equity enables the pyramid to grow and the ”leveraging tree” begins. However, managing debt and investment involves a degree of self-restraint in order to service the repayments – something our 21^st century mentality rebels against.

Indeed – market research shows the only way our younger generation now feel able to purchase is by means of a “gifted” deposit from family or friends (usually borrowing against equity on family assets).  It’s widely known that roughly 70% of Australian’s own their own homes, however the larger proportion of this (80%) – are an older generation at the high end of the income stream.  Of Gen Ys, ABS statistical data shows 57% rent and 16% are still living at home.  Therefore gifting or not, there’s clearly an increasing number falling through the net. 

A glance at the fall out across the Atlantic should be warning enough for those who can only see a resolution to this problem in terms of a national housing crash of some 40 to 50% – it’s not a pretty picture.  Instead the solution needs to come in terms of education and self-regulation, switching Gen Ys’ mentality towards the growing trend of saving rather than spending. The practice amongst mature households has already stated with research from RateCity revealing an unparalleled increase in deposits (particularly from businesses, which have accounted for an extra $120 billion over the past three years.) 

The reason this is so very important is because it’s becoming increasingly clear that we really have no idea what the banks will do to rates next year or what the world will throw at our feet as Europe and the US struggle with increasing debt and mismanagement.  Therefore, my one piece of advice for anyone purchasing in 2012 is: “invest within your means.  Don’t get carried away taking advantage of lower rates and jumping into various advertised schemes – such as house-and-land packages that are designed to make property look like a Harvey Norman interest-free sale.  Housing is a dream we can all achieve if we take a considered long-term approach to saving, investing, and insuring our debt does not exceed our ability to manage the repayments. 

House prices are no going to drop; neither are we facing a financial meltdown on a par with the US or Ireland.  Due to a continuing shortage of feasibly liveable accommodation close to transport and jobs (another issue that urgently needs to be addressed by state governments), low unemployment, an increasing population and an overall good economic position, not to mention the preference Australian’s have towards home ownership, we’re currently well insulated from disaster.

However, it doesn’t mean the average buyer is well insulated if they make poor choices.  It was reported only a couple of months ago that home owners in Victoria alone, had lost over $290 million over the past three years (to July 2011) selling their properties for less than the contract price. Building wealth through property will only work if you invest for the right demographic, in those “blue-chip” areas which have a proven history of consistent solid demand.  If you’re unsure of the terrain ahead seek qualified independent advice, but above all, property is not an area where you want to learn from past failures.  It’s best to learn from the mistakes of others – and by the sound of it, over the past few years, there have been plenty of examples.

Catherine Cashmore is senior buyer advocate for Elite Buyer Advocates. With extensive experience in all matters regarding real estate, Elite Buyer Advocates purchases and negotiates more than $100 million worth of property each year for its clients.