Sometimes it feels like all money conversations come back to this issue. Can I buy my own home? Will I be a failure if I don’t? Can I ever afford one?
And it’s not a daydreamy, hypothetical convo, like ‘What if I called my kid Joaquin? Would people know how to pronounce it? Did the Pheonix family really lay the groundwork here?”.
No, the tone is more like ‘Will I die in a gutter, languish in poverty, or be photographed collecting mail in nothing but a bedsheet, if I don’t get onto the property ladder?’.
There is a sense of panic, as if not hobbling yourself with a million dollars in debt means you will end up on the scrapheap of life.
So let’s all just take a moment and STOP PANICKING. People who panic don’t make good decisions. You know that dress you bought the day before a high-stakes date with Mr Future Husband? Let’s admit: you’ve never worn it again.
Instead, let’s have some realtalk about property, saving and wealth.
Because there are more ways to build wealth than buying a house. Property is just one ‘asset class’, as the professionals call them. There are many more (read a whole post about it here) and they are all viable ways to build wealth.
However, there are some valid reasons that people go nuts for property in Australia. For example:
- It can increase in value without you doing anything (aka ‘capital growth’)
- It is easy to borrow money, because it’s a secured asset. In other words, the bank can repossess it if you go broke, to get its money back. It’s more complicated for banks to do that with something likes shares.
- You get great tax breaks. If you sell the home you live in and make a profit on it, you don’t have to pay capital gains tax on that profit. If you did the same with any other investment – e.g. shares, bonds or an investment property – you would. And then there is the old negative gearing heist (which I won’t go into here – but basically the government rewards you for losing money – wtf?).
- You get to live in it and nobody can kick you out. You can also renovate and hang hooks and shit. (Although why anybody in their right mind would renovate is beyond me. Dust, paint splatter and interminable trips to Bunnings. Lord give me strength).
These are all compelling reasons that I acknowledge warmly. I own property and it has been a good investment.
But here are some downsides that don’t get a lot of airplay, especially in the media.
By the way, the mainstream media has a huge vested interest in talking up property. Ever notice those thick, glossy real estate liftouts in the paper? Yep, they are rivers of gold for media companies, so it’s not in the interests of News Ltd, Fairfax or their mates to say ‘hold up, property is totes overrated!’, is it?
But here are some counterpoints to the national narrative.
1. You pay a huge amount of interest over the life of a mortgage
This graph is from an earlier post (which you should also read). I include it here to defy the people who say ‘renting is just giving money away to someone else’. Well, Mr Mansplainer, a mortgage is just giving interest payments to a bank.
Say you borrow $500,000 over 25 years, you will pay nearly $300,000 in interest (at 4%, which is a historically low rate in this country). That interest amount is represented by the light pink below.
Hopefully the property increases in value so you make some of that money back. But it’s not guaranteed. Which brings me to the next point.
2. House prices don’t always go up
I know, they do in your living memory, and certainly in the last few years. Mr Mansplainer may even tell you ‘house prices double every seven years’.
HOWEVER, this somewhat dubious assertion is based on averages, which don’t tell the whole story. You know, your ex-boyfriend was only an arsehole to you half the time, on average. But that didn’t make it worth staying with him.
Don’t just take my word for it – take the Reserve Bank’s! I know you won’t read their paper on the topic, so let me summarise. House prices rise faster and slower depending on other stuff going on in the economy.
But over the long-term, that shit is all over the place. The graph below gives you an idea of how house prices resemble a 5-year-old kid high on fairybread and Cheezels at a birthday party.
Source: RBA (which is why it’s crappy low-res). NB: This shows prices when inflation is removed.
So it depends on when you bought, and also where you bought. And so we come to another point.
3. Picking property is a lottery
When we talk about property going up by, say 7% a year, that’s averaged out across the country. It masks the fact that some people bought gems, while others bought dogs.
Maybe they paid too much in the first place. Maybe they bought in an area that hasn’t gone up much, or worse, in an area that has gone down. Places like Mackay or Townsville boomed as a result of mining a few years back. Now, they have bust, with prices actually dropping.
Here’s a real-life example. A couple I know, let’s call them Kylie and Jim, bought a new house in an estate in Townsville in 2004. They paid $254,000.
Five years later, having been sent interstate for work, they sold it for $379,000, netting them a tidy profit of $125,000 (less taxes and costs). Nice deal.
That same house sold this year for $340,000.
Yep, eight years later, it sold for nearly $40,000 LESS than it did in 2009.
Kylie and Jim were just lucky that they caught the cycle on its way up, and got out before it went down.
If you live somewhere like Sydney right now it’s easy to feel like there is only one direction and pace for prices: up and fast.
But I know another couple with an investment property on Brisbane’s outer edges, whose property value has grown at about the same pace that I lose fat, i.e painstakingly slowly.
I did some sums on it and the capital growth has been about 2.5% a year. That’s not taking into account the extra money they need to find every month for the mortgage, because it’s negatively geared.
The moral of this story is not that Queensland property is a mug’s game. It’s not – plenty of people have done well there, and all over Australia.
The point is that there is a good deal of luck and timing involved in buying property. The same is true of any asset class. But don’t look at the headline figures and decide buying a property is a rolled-gold, surefire way to get rich. As with any investment, there are risks. And so, to the next point…
4. We may be in a property bubble – and it could burst
Now I am not a crazy doomsayer. I am only saying we might be in a bubble.
But some people are convinced of it. Here’s a chart of house prices since the 19th century from a blog called macrobusiness (they are a little ‘out there’, but I read widely). All the labels on it are theirs, btw.
A while back, I fan-girled Greg Medcraft, the head of ASIC (our corporate watchdog in Australia). He was on the 389 bus to Bondi, so I went up to him and started chatting about property bubbles. (True story, I swear). He said words to the effect that when people are in a bubble, they’re in denial about it.
“This time it’s different”, they say – like an ex-boyfriend who’s trying to win you back.
For my mate Greg, this market looks, smells and tastes like a bubble. And that was 2015, before we hit the point of a $1 million median house price in Sydney.
Other people disagree, and point to population growth, lack of supply and a bunch of other factors driving prices ever upward. I see their point too.
The fact is, nobody knows for sure.
If house prices stay high, there are benefits, mainly to people who already own them.
If house prices fall, the economy will definitely suffer – but it will also mean aspiring buyers get a better shot at affording something.
Either way, you shouldn’t give up on the idea of buying your own pad eventually. Which brings me to…
One last (very important) thing.
If you can’t afford a property yet, that doesn’t mean you can piss your money away in protest or despair.
There are plenty of options for building wealth (check out this post). But you have to get serious about saving and investing to do it (check out this post about the four best friends who will make you rich).
Just because you don’t have a white picket fence doesn’t mean you can’t be a serious money saver or investor.
It doesn’t matter how much you have, saving and investing is a mindset and a habit. So work on that and ignore the noise about house prices, smashed avo and property bubbles.
You’ve got this!
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