by Scott Pape - March 27th 2007
The Barefoot Investor has excess emotional baggage, commitment issues and is generally regarded as unreliable around the house’. Well, according to a snap poll of three of his ex-girlfriends anyway.
Surveys are often conducted and concocted to deliver a desired outcome – how else can you explain that 77 per cent of Australians believe that Simone was right in going back to Shane?So when I read about a recent survey by the Residential Development Council which found that ‘property experts believe only seven per cent of Generation Y will ever be able to afford to buy their first home’, I smelt a rat.
I placed a call to the RDC’s national executive director, Ross Elliott, who confided to me, “I am the property industry’s answer to the movie Thank-You for Smoking”. Ross is a lobbyist, in charge of pushing property developers’ political barrows – who of course were the respondents of the survey.
Although it’s ludicrous to believe that younger generations will never attain property, for the short term at the very least the RDC survey is probably right. The latest quarterly review on housing affordability by the Housing Industry Association and the Commonwealth Bank found that housing is more unaffordable than at any stage in the 22 years they’ve been tracking it.
The free and easy credit that we’ve been consuming over the past decade has put the price of housing out of reach of many first home buyers, who struggle under the weight of $12.5 billion in HELP (formerly HECS) debt, record credit card debts, and meagre savings.
Sweaty palms
Even those first homebuyers who have recently made the plunge on property with a telephone-number sized mortgage will be anxiously awaiting the outcome of next month’s RBA meeting. Economists are already factoring in a 50 per cent chance of a rate rise. The sweatiest palms will be with those who couldn’t really afford to borrow in the first place – and who financed their fort with a low, or in some cases no, documentation loan together with high gearing levels.
The US version of these loans, referred to as ‘sub-prime’, have hit the headlines this week because of the supposed ‘sub-prime mortgage meltdown’. Stripped of its financial lingo, this means that some big lenders are close to hitting the wall as defaults on these loans reach four-year highs.
The proportion of these riskier loans is higher in the US than in Australia but even in America they represent only a small fraction of the total mortgage market.
A much more pressing problem for the US, which has direct ramifications for the entire world, is how to protect the collective egos of Americans. Consumer confidence has immediate implications for every country that trades with the US.
Free-spenders
Deeply indebted, free-spending Americans have shouldered much of the growth of the country’s economy since the dotcom bust. They’ve done this not because of patriotic pride, nor because they needed that latest plasma TV, but because their houses kept on increasing at a rapid clip. What’s the big deal about throwing a few grand around when your biggest asset is increasing by tens of thousands of dollars a year?
The worry is that American consumers may stop spending money they don’t have – which would slow their economy and send shudders down the spine of ours. Maybe that’s what former US Reserve Bank chief Alan Greenspan was getting at when he suggested last month that the US had a 30 per cent chance of heading into a recession this year.
For those readers who have reached their learning limit for the week, here’s a summary: houses up – good; houses down – not good. Reading about lenders hitting the wall, and awakening from a property party with a raging hangover after too many credit-cocktails – bad.
Stressful environments
The HIA has found that 500,000 Australians live in ‘housing stress’. This has nothing to do with living with your mother-in–law – it means you are spending 30 per cent or more of your income on either rent or loan repayments.
Luckily this is an election year, so our politicians are all ears. Unfortunately the only thing they are offering is knee-jerk reactions to a long-term problem. Intervention, or meddling by Government sounds like a good idea, but in reality all it accomplishes is throwing more fuel on the fire.
The much-lauded first homebuyer’s grant has only served to increase the prices of the bottom end of the property market by the value of the grant. Similarly the Western Australian State Government has introduced a shared equity scheme whereby the Government kicks in some coin to help low income earners get into their first home.
A noble idea until you discover that only one in 17 first homebuyers will qualify. So effectively one buyer gets a helping hand into the property market at the expense of the other 16, who have to compete against a buyer who is backed by the Government’s bucks.
In need of relief
There are also plans for a rent relief scheme whereby superannuation funds and other financial institutions are encouraged to invest in residential property at a loss. The proposed scheme involves investors providing rents at about 20 per cent below market value in return for receiving a subsidy. Yet in the absence of a property fairy, someone has to pay for their losses. So who do you think eventually ends up picking up the tab?
Despite what John Howard would have you believe, the man responsible for interest rates is RBA chief Glenn Stevens. Thankfully he has a solution to housing stress: ‘Frankly, what you really want is lower prices – the rental yield is very low. A big factor is that the capital value for these properties is so high’.
What would most help struggling first homebuyers is something economists call ‘revision to the mean’, and what our RBA chief advocates – lower property prices. Despite what our politicians tell us, the only way to achieve housing affordability is not by artificially setting the price of rents or houses, nor by adding incentives, but by letting the market sort itself out.
In that case a shakeout of the low doc loan segment of the mortgage market may well be a good thing, in as much as it may finally force lenders to start to become more sensible about who they lend to. Higher interest rates may be the carrot that curbs consumers spending and encourages saving – and as a bonus returns property prices to their (lower) historical levels.
As someone who is in the middle of negotiating a fresh round of financing, I fully understand the old adage that my banker is not my friend – any more than a politician in an election year.
Tread your own path!
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