Preparing for Apartment Armageddon

Hi Scott,

A few years ago I read your prediction that inner city apartment prices would fall. Since then I’ve been saving hard and am relieved to see property prices finally going down! I am now a few months away from having enough for a 20% deposit. Do you have any advice for first home owners looking to buy in the next year?

Tammy

Hi Tammy,

Well done for playing the long game!

(In 2015 I wrote ‘an open letter to the young people of Australia’ where I predicted that 2018 would be the year that first apartment owners would get their revenge, because of an oversupply of newly built inner city apartments.)

My first bit of advice is that there is no need to rush.In fact, 2019 is shaping up to be an even tougher year for the property market. A NAB survey released late last month found that confidence in the housing market has hit new lows (then again, NAB’s own behaviour hasn’t exactly been a confidence-builder either).

The apartment market has gone from FOMO (Fear Of Missing Out) to FONGO (Fear of Not Getting Out).

Use it to your advantage. With a large (and growing) deposit, and the ability to negotiate, you’re in the box seat.

FONGO on!

Scott

My Lover Works Too Hard!

Hi Scott,I am 23 and have fallen in love with a 28-year-old who earns $135,000 a year (a lot more than me). He works in construction six days a week (overtime on Saturdays) and he is absolutely set on buying a house ASAP. I love his commitment to the future and to us, but he is always tired and rundown and is rarely available to spend time with friends and family. Is he doing the right thing by working as much as possible? I would like him to take Saturday off occasionally, or am I being immature?

Christina

Hey Christina,I’m pretty sure my wife said the same thing about me when we first met!Sounds to me like your bloke has his head screwed on properly: he’s working hard for the future. You can get away with doing that in your twenties, before the triple Ms (marriage, mortgage and midgets). After that it gets tougher: your time isn’t your own. It’s often said that you spend your twenties learning and your thirties earning -- and that it sets you up for living a very different life in your forties and beyond.There are two books I’d suggest you read -- both of you I mean: The first is mine (obviously!), which sets out the Barefoot Steps that will keep you safe. The second is How Much Is Enough? by Arun Abey. This book has practical exercises that you can do, as a couple, to ensure you put work and the accumulation of wealth in its proper context.I’ll leave the final word to my dearly departed 92-year-old grandmother, who always advised:“Whatever you do, don’t marry a lazy person.”Good advice, Grandma.

Scott

“Housing to Fall 50% by 2020”

Hi Scott,

After reading your column on mortgage stress, I was curious what you think of American demographer Harry Dent’s predictions for Australian property. He seems like a pretty educated man and his predictions seem terrifying ‒ our housing market could fall by over 50% by 2020, according to him.

Neil

Hi Neil,

Harry Dent has, in his own words, “predicted nearly every major economic trend over the past 30 years”.

True.

Though that’s possibly because Dent predicts the future like my two-year-old plays ‘How many fingers is Daddy holding behind his back?’

Namely, by yelling out random numbers and giggling hysterically: “12!”, “4!”, “382!”

Or in Dent’s case, his financial finger game is about predicting how much Aussie property prices will crash:“55%!” (2009), “60%!” (2011), “50%!” (2014). All wrong. Not only did prices not fall, since 2009 they’ve risen nationally by 69%.

And now he’s saying prices will fall “50% by 2020”.Mind you, he’s had no more luck picking the Dow Jones index: “40,000!” (2004), “5,600!” (2014), “3,000!” (2018).

(The Dow is currently at 25,000.)

Dent’s economic theory is based on tracking how the life-stage spending of Baby Boomers affects the share market and property prices. And that’s one point we agree on: that our demographics eventually become our destiny. Yet, as Dent has also proven, that doesn’t mean it gives him a crystal ball that will pick future prices.

The bottom line is this: you have zero control over what the market does, but total control over what you do.

Plan accordingly.

Scott

I Feel Defeated

Hi Scott,

I am a 21-year-old single female. For as long as I can remember I have wanted to buy a house, because my family rented and we did not have financial security growing up. I have been conservative with my spending, worked two jobs and managed to save $90,000, but house prices are skyrocketing. This is not even enough for a deposit on an entry-level unit in far outer-east Melbourne. I feel absolutely defeated. Maybe it is better to invest money in ETFs (Exchange Traded Funds) and just rent for life?

Anna

Hi Anna,

You need someone to sit you down and show you just how amazing you are, and that person is me.

You should be really proud of yourself. There aren’t too many people who’ve saved up $90,000 on their own steam. Fewer still who have achieved it at age 21, by scrimping, saving and working two jobs.

There’s absolutely no reason to feel defeated. On the contrary, I’m here to tell you that you’ve already won.

See, financial security doesn’t come from a dollar figure, or buying a house.

It comes from behaviour. It’s the grit to work hard, sacrifice and save, and you’ve got that by the bucketload.

So, after years of doing this, let me make a few predictions:

First, to answer your question, you will buy a house ‒ when the time’s right.

Second, you’ve already changed your family tree ‒ you will never be financially insecure.

Scott

Escape to the Country

Scott

I keep falling in love with the idea of moving to the country. Whether it’s you or a happy-go-lucky couple I recently met, it seems many people are singing the praises of the ‘simple life’ ‒ ditching expensive inner city rents for a modest country abode with a manageable mortgage. But is the country life only suited to freelancers who have flexibility and work from home, or is it still worth it for those of us in our early 30s who will face a long and possibly dreary commute?

Roxy

Hi Roxy,

You’re falling in love with the ‘idea’ of moving to the country. Understand that the grass never looks greener than when you’re stuck in the concrete jungle, tailgating a Kia Rio.

Now, if you can run your own show (like I do), living in the country is bloody brilliant.

The Australian Wellbeing Index has repeatedly shown that people living in regional Australia are among the happiest in the country. Part of that is because you can avoid becoming what I call a ‘postcode povvo’. Deakin University Emeritus Professor Robert Cummins and his team have found that financial insecurity (read: mortgage stress) produces similar feelings to that of physical torture. Struth!

However, the grass starts to look a bit patchy if you have to commute back into the city each day. A study from a university in Sweden found that relationships where one partner commutes longer than 45 minutes are 40 per cent more likely to end in divorce.

My view?

I’d look at it as a three-year plan.

First, swing on the employment trapeze by building up some freelance work.Second, after that, look at renting in the country for 12 months to try it out. (That’s what we did. While I’m from the country, I shacked up with a woman who was born and bred in the hipster suburb of North Fitzroy, where even the ducks have their own bike lanes. So we both had to be certain that country life would work for us.)

Finally, if after all that you’re still in love with the idea, make the move!

Scott

Mortgage or Super?

Hi Scott,

On page 156 of your book it says: “So with your home deposit saved and your house bought, it’s time to give your super contributions a boost.” Could you please settle an argument for my husband and me? Do you mean house bought as in mortgage paid off, or do you mean purchased but still paying off the mortgage?

Kirsten

Hi Kristen

After you buy your home, you boost your super.

As the little girl on the taco ad says, “Why not do both?”.

To clarify, here are the relevant Barefoot steps:

Step 4: Buy your home.

Step 5: Increase your super to 15 per cent.

Step 6: Boost your Mojo to three months of living expenses.

Step 7: Get the banker off your back.

Now, there are three reasons you should follow the steps and the little Mexican girl:

First, for the average wage slave, super is still the best tax dodge going round.

Second, you’re diversifying your nest egg ‒ most people end up retiring with too much home and not enough super.

Third, it puts your retirement savings program on autopilot. The current compulsory employer contribution of 9.5 per cent isn’t enough ‒ you need 15 per cent if you want to spend your golden years swilling sangria in Spain rather than necking a stubby in Shepparton.

Finally, if you follow the Barefoot Steps, you’ll use your ‘fire extinguisher’ account to eventually hose down your home loan quicker (Step 7), which will have you livin’ La Vida Loca sooner.

Thank-you for reading.

Scott

The First Home Super Saver Gets Up!

Hi Scott,

I heard you on Triple J this week talking about the fact that the First Home Super Saver Scheme has finally been passed by Parliament. My parents, being traditional hardcore Asian parents, are telling me I have to open one up. But realistically it will be 10 years before I buy a house (I am 23). What do you think I should do?

Mandy

Hi Mandy,

Honestly, I thought the First Home Super Saver Scheme was as good as Sam Dastyari’s political career (dead and buried). Yet after seven long months the Government took some legislative laxative and passed it into law.

Here are the basics:

First home buyers can now divert extra money into their super (maxed at $15,000 per year), and then draw it out as a deposit on their first home. The maximum they can save is $30,000 per person ($60,000 a couple).

For someone earning $65,000 a year, after three years of using the First Home Super Saver Scheme they’ll have $6,314 more than if they’d saved via a standard bank account.

So I’d certainly use the First Home Super Saver Scheme if I knew I was going to buy a home in a couple of years and I’d already saved up a big deposit. For an average-earning couple it’s an extra $12,628. I wouldn’t kick it down a drainpipe if I was walking along the street and saw it. Do it.

However, if I were in your shoes, Mandy, I honestly wouldn’t bother. There’s ‘legislative risk’ to doing something 10 years out (i.e. Krusty the Clown could be our PM in 2027). Instead, I’d focus on getting your buckets set up and sorted.

Scott

ScoMo’s $250 million air kiss

Right now Parliament House reminds me of a seedy share house I lived in when I was at uni: no one could quite work out who lived there, or where they came from, and everyone was busy screwing each other.

Poor old Malcolm. With the current state of his house, it’s understandable he hasn’t been able to get his housemates together to deliver on the ‘First Home Super Saver Scheme’.

You remember that, don’t you?

It was announced by our Treasurer, Scott Morrison, on Budget night (way back in May) as a $250 million ‘air kiss’ to housing affordability. As ScoMo crowed on the night, “Most first home savers will be able to accelerate their savings by at least 30%”.

And then … everything went quiet.

Yet I’ve been dutifully following it up … like Pauline chasing a burqa. In July, I called Treasury and asked what the hell was going on. It was clear to me that the Government needed a legislative laxative — the scheme was having trouble being passed into law.

“Not correct”, said a spokesperson for the Treasurer.

Before adamantly adding: “The First Home Super Saver Scheme will be passed in the spring session of Parliament”.

Well, on my farm, spring has sprung, and my lambs have been sold at market.

It’s bah-bah for them, and if they can’t get it passed soon, it’ll be bah-bah for the First Home Super Saver Scheme.

So what can you do?

Start saving for a deposit on your own.

And the best way to do this is to set up your Barefoot money buckets, including a ‘Fire Extinguisher’ online saver account, and then start allocating 20% (or more!) of your take-home salary towards getting your deposit.

Sure, it’s not as tax effective as what was on offer on Budget night, but you can start right now — instead of sitting like a lamb waiting for the grass to grow in Canberra.

Chop, chop, ScoMo!

Tread Your Own Path!

Banker Bait

Dear Scott,

My 18-year-old daughter lives at home, pays no board, works full time, and is saving for her first property. She also wants to buy a new car ($20,000) so she can get a credit rating, which will make it easier to get a home loan. Should she keep driving the old car and put all her money towards the house deposit, or get the car loan and take a bit longer to get into the property game?

Fiona

Hi Fiona,

Congratulations on raising such an ambitious daughter!

Now it’s up to you to teach her some common sense:

Spending $20,000 on a brand-new car will not help her buy a home in any way, shape or form.

Instead, she’ll just end up forking out roughly $30,000 for a car that will only be worth $10,000 in five years’ time.

The idea that you need to take out a loan so a bank will lend you more money is absurd.

Just like Sam Dastyari, the credit reporting agencies have done their darndest to convince everyone they’re more important than they really are.

Now it is true that if you’ve got something bad on your credit file it can be a red flag to lenders. But for a cleanskin, like your daughter, it’s really not a big deal.What is a big deal for lenders is:

1) a stable income that can comfortably meet the proposed repayments;

2) a verified savings history; and

3) a meaty deposit (I recommend 20%).

If your daughter can tick those three boxes, she’ll get her loan.

Scott

10 Years Without Money

Hi Scott,

Ten years I have been a monk and therefore ten years without money. Now, at age 52, I am leaving the monastic life and coming back into the regular world. (Scott, I notice you are a bit older, wiser and chubbier than when I last saw you on TV all those years ago.) I am earning $52,000 a year but have no assets or savings. I am not sure I will ever have the chance to buy a home, but I would really welcome your advice on how to build up some wealth. The world has changed a lot, I see.

Doug

Hi Doug,

My wife calls me her ‘Barefoot Buddha’ (mental note, when your wife and your work are commenting on your chubbiness, it’s time to hit the gym).

Anyway, you’ve got a couple of good things going for you:

First, you don’t have a wife, or children, so you can focus 100 per cent on yourself.

Second, you’ve spent the last decade without an iPhone, a butler’s pantry, or KFC. In other words, you’ve broken the chains of materialism!

Having said that, you still need financial security, so your priority should be to increase your income so you can sock away three months of living expenses in a Mojo account.

And the house? Well, if you’re willing to move to a rural area, you could eventually afford a cheap home, too. (They’re cheap in Manangatang, and if you can stick it out in monastery, you’ll be a shoo-in for Manangatang.)

Remember, you’ve got at least 20 years of full-time work ahead of you. Repeated studies have shown that, once you earn over $75,000 a year, money doesn’t make you any happier. But you’re only earning $52,000, so you have $23,000 worth of happiness to gain!

Thank you for reading

Scott

The Present I Gave Malcolm Turnbull

Last week I sat down one on one with the Prime Minister.

A journo from a rival rag snivelled, “He’ll answer questions from hosts who aren’t wearing shoes” … which, unless Malcolm has been doing vox-pops with homeless people, is a swipe at yours truly. (And for the record, I not only wore shoes, I even donned my wedding suit jacket for the occasion.)

Anyway, I found him to be a good bloke — though maybe that’s because we’ve got a lot in common (like me, in his line of work he tends to upset people, and, like me, he’s even been known to cop it in the neck from his own … err … kitchen cabinet).

The video is on the Barefoot Investor Facebook page … but here are some of the highlights from our chat:

(note the shoes)

Power to the PM

Barefoot: You’ve recently given the energy retailers a slap. I’ve saved $540 on my power bill by going to energymadeeasy.gov.au. Have you run the numbers on The Lodge?

PM: (laughs) Well, I’m pretty sure my son-in-law has …  but I must say your savings are representative of what a lot of people are making by switching.

Financial Education in Schools

Barefoot: Something close to my heart is financial education. The Commonwealth Bank is one of the biggest providers of financial education in schools. Do you think there’s a conflict of interest in having the banks teaching kids about money and then getting them on a database to sign up as customers?

PM: Well, um, I can understand that argument but I think the important thing is getting plenty of people in schools giving that financial education. I mean financial literacy is critically important as you say, so it’s a fair point, Scott.

Barefoot Community Q&A with the PM

Barefoot: Now to some questions from our Barefoot Investor community. Laurie asks, “Why does our government continually reduce the amount we can salary-sacrifice into super?”

PM: I don’t think it’s fair to say we continually reduce. We made some changes in the last budget to make the super system fairer and more flexible, but we don’t have any plans to make any other changes.

Barefoot: Elle asks, “Why is so little being done to help housing affordability? There are so many tax deductions for property investors, like negative gearing, but those of us trying to buy just one home get jack!”

PM: You’ve got to recognise that there’s nothing special about negative gearing … It’s been part of the income tax system since the Income Tax Act was passed in 1911.

(Barefoot aside: Though in 2005 he agreed with you, Elle, labelling it ‘tax avoidance’.)

Barefoot: Finally, I’d like to give you a copy of my bestselling book. I think you’ve got your money sorted, but you might want to give that to ScoMo — it could help him balance the budget.

PM: (laughs) Thanks very much, Scott.

Tread Your Own Path!

What’s a Girl with Bad Credit to Do?

Hi Scott,

In my early twenties I had a drug addiction which resulted in me having my car repossessed and taking out huge loans I could never repay. Three years on, I am in a reliable job (earning $55,000 p.a.) and have paid off all my debts. However, as you can imagine, I have terrible credit. I want a chance at buying a house, but what’s a girl with bad credit to do?Please help! 

Tegan

Hi Tegan,

You’ve been able to beat drugs and you’ve been able to repay your debts, so I have no doubt you’ll eventually buy your own home. You’re a fighter!

I’d suggest you grab a copy of your credit report (go to www.checkyourcredit.com.au and following the links to get a free file sent out in the post) and make sure any debt you’ve repaid is marked as ‘settled’. If not, you can ask your creditor to do it for you.

Honestly, though, there’s no way to ‘clean’ your bad credit file, despite what those dodgy ‘credit repair’ companies claim. It’s really a waiting game: overdue accounts and defaults drop off your file after five years, while more serious matters last for seven years.

What’s done is done. Instead, focus on increasing your income and boosting your savings. You’ve got this!

Scott

I’m a Homeowner!

Hi Scott,

I do not have a question for you, I just wanted to say thank you. After three years of planning, last year I told my husband I wanted a divorce. There was a high level of domestic abuse in the relationship. The past 12 months have taught me who I can and cannot depend on, and you and your fantastic book have supported me through this time. Today I collected the keys to my new property -- I’m a homeowner! I would not have got here without your help.

Thank you xxx

Lisa

Hi Lisa,

Well done!

Your question (like the one previous) shows why it’s critical for women to understand, and take control of, their financial situation. I’ve met far too many women who stay in unhealthy relationships because they’re fearful they won’t survive financially on their own. You’ve proven that’s not the case. You’ve got this!

Scott

How Would You Invest a Spare $10,000, Barefoot?

Hi Scott,

I’ve just turned 28, and after reading your book I came to the realisation that my savings have been sitting in my bank account for several years doing nothing. I have no investments whatsoever, but I do have $10,000 I could invest. Based on your previous advice, I am looking to invest $5,000 into AFIC and $5,000 into Argo. Is this a good idea, thinking about the long term (30-40 years)? And if I continue to add to them over time, is that better than adding the money to my super?

Rick

Hi Rick,

If you’ve read my book, you’ll see that I set out a time-tested plan: do a monthly date night (Step 1), set up your buckets (Step 2), domino your debts (Step 3), then start saving a 20 per cent deposit for a home (Step 4). Step 4 is where you’re up to at the moment.

So right now you have $10,000 sitting in a bank account. I want you to give that account a nickname, call it “my house deposit”. I know it sounds like I’m making you suck pea and ham soup, but make no mistake, the act of naming something is powerful. It gives you clarity and purpose.

If you’ve been Barefoot for a while, you’ll know that I love low-cost index funds as investments, but everything at the right time. Now, after you buy your home, you’re onto Step 5, where you boost your pre-tax super contributions from the standard 9.5 per cent to 15 per cent (or up to the annual cap of $25,000). If you can do that before you’re 35, your retirement will be soupy.

Scott

Reminder: I first wrote about this years ago and highlighted the low costs. Today there are better deals on offer. How do I know? Because my readers constantly email me about them! So before you do anything, do a quick google.

An Update on the First Home Saver Super Accounts

I’m a little ‘dusty’ as I write this.

You see, as a card-carrying DIK (Dad I Know), I don’t get many leave passes from my wife … so when I got an invitation to an EOFY (End of Financial Year) finance shindig, I couldn’t pass it up.

After all, the EOFY is the one time of the year it’s socially acceptable for bean-counters to get on the grog.

You can picture it, can’t you?

Sharon was in the storeroom dishing out Cabcharges like party pills. Craig had a shandy. And late in the night Dennis got loose and moved his superannuation investment option from ‘balanced’ to ‘high growth’.

Boom!

So today I’m a little like a bear with a sore head.

And when I’m hungover, my tonic of choice is to call Treasury and talk tax policy on behalf of a reader.

Paula’s Problem

I got this question from Paula last week:

Hi Scott,

I’ve been reading your newspaper column since I was in primary school (my dad got me into it)! Now I am studying nursing at university, working part time in aged care, and saving for a home. I am very interested in setting up a new ‘home super saver account’. However, I called up my super fund (HESTA) and they don’t seem to know much about it, and they actually said it won’t come in till next year. Can you please clear this up for me?

Paula

My first reaction was “hell, have I been doing it for that long”?

My second reaction was, on Paula’s behalf, to follow up on the progress of the First Home Super Saver Scheme (which, if you remember, I talked about in my column some time ago). What I found is that it looks about as well planned as my son’s finger-painting, currently stuck on our fridge:

“What do you think of my picture, Daddy?”

“Oh that is beautiful! It’s a …. truck … right?”

“No! It’s a picture of you and mummy riding a horse.”

“Oh, yes! So it is!”

A quick refresher for those of you in the back row:

The First Home Super Saver Scheme was announced by our Treasurer on Budget night as a $250 million air kiss to housing affordability. As ScoMo crowed on the night, by making voluntary contributions of up to $15,000 per year and $30,000 in total, “most first home savers will be able to accelerate their savings by at least 30 per cent”. For an average earning couple it’s worth an additional $12,000.

From ‘Yeah!’ to ‘Meh’

That was in May.

The First Home Super Saver Scheme is set to launch on 1 July but, like Paula mentioned, none of the super funds I spoke to had the foggiest. And after speaking to Canberra, I worked out why.

The Government has had a bit of legislative constipation — the scheme hasn’t yet been passed into law. A spokesperson for the Treasurer said they were adamant that it would be tabled in the Spring session of Parliament, and that it would be passed.

Fair enough. But, to my mind, there’s a lot of uncertainty around it.

So should you open one up?

Maybe … (and, of course, only if it actually makes it into law).

You could consider opening a First Home Super Saver if you’re planning on buying a home in the next few years, and you already have a decent deposit. After all, it could be worth $12 628 extra to an average earning couple, compared to saving in the bank. Not bad.

However, since the Government announced these accounts I’ve had a lot of well-meaning parents and grandparents — not to mention savvy young savers like Paula — write and ask about opening one up for the long term.

My advice?

Don’t touch it.

Quite apart from the fact that the Government is still in need of some legislative laxatives, what happens if the current mob is voted out and the new mob decides to ‘ghost’ the First Home Super Saver Scheme (like you did with that mummy’s boy you dated twice in 2004)?

Well, if the scheme were scrapped, it’s possible your savings could be locked up in your super till you retire.

So, Paula, all I can say right now is: watch this space.

Tread Your Own Path!

If you want to buy a cheap inner city apartment … read this

Tick. Tick. Tick.

That’s the sound of the inner-city apartment market.

There are 15,000 brand-spanking-new apartments due to settle before 30 June this year.

Many of these apartments won’t settle … because the buyers can’t come up with the balance of their money, after paying a deposit.

A couple of years ago I wrote a click-baity story:

“2018: The Year First Home Buyers Get Their Revenge!” (Not bad eh?)

I was writing about the opportunity for first homebuyers to buy a brand new inner-city apartment — at fire sale prices. Much, much cheaper than they were selling for at the time.

Here’s what I wrote: “In three years’ time there will be an oversupply of inner-city apartments in many parts across the country. It’s actually not hard to forecast today, because we can see what’s coming down the property pipeline in a few years’ time: apartment towers take years of planning and regulations to get approved. When the market is hot, like it is now, lots of developments spring up to feed the demand … but there’s a lag.”

Basically, I argued that too many investors had put down too little a deposit, and when payment was due they’d struggle to come up with the dough — causing them to either default with the developer, or sell at a massive loss.

Today I want to revisit that topic, to see how we’re faring.

Blood in the Streets

The housing boom has been fuelled by property investors, and in inner-city apartment markets it’s been driven by Chinese investors buying up big.

So this week I caught up with Li Ming, a co-director of Aussiehome, who specialises in selling Aussie property to Chinese investors.

Ming: “The Melbourne off-the-plan apartment market is the worst I have seen in the last 10 years.”

Barefoot: “How long have you been in the market?”

Ming: “5 years.”

Ming believes that around 80% of Chinese buyers won’t be able to settle on their Australian apartments.

So what’s happening?

Well, Chinese investors are caught in a ‘pincer grip’.

Here’s a real-life example of one of Ming’s clients:

Three years ago his client bought a yet-to-be-built, off-the-plan, two-bedroom apartment in Melbourne’s Southbank for $750,000.

They put down a $75,000 deposit (10%) and planned to organise a loan for $675,000 (90 per cent) in three years’ time when the apartment was built.

Now, at the time his client was flipping through the glossy apartment brochure Melbourne prices had soared 35% in the three years prior … so there was a chance the investor could turn around and sell the apartment for more than $1 million by the time the apartment finished.

Yeah, Nah.

Let’s get back to the present day.

The Pincer Property Grip

Because of the oversupply of inner-city apartments, the Aussie banks are now being cautious about how much they’ll lend (and they’re also charging investors a higher interest rate for their loans). They told Ming’s client they wouldn’t stump up 90% of the purchase price — only 80%.

Remember, Ming’s client was still contractually bound to pay $750,000 to the developer.

Bottom line: he was $75,000 out of pocket.

So where does he find the extra money?

Well, that’s the second part of the pincer grip: the Chinese Government.

For the past year, the Chinese Government has been clamping down on investors taking money out of this communist country. Investors used to be able to take out $US50,000 per person per year … yet now many state-owned banks are lowering the amount, or outright blocking the money going overseas.

“So what did your clients do?” I asked Ming.

“They had no choice. They walked away … and lost their $75,000 deposit.”

Ming told me he has other clients who flat-out couldn’t get finance from the banks.

“They managed to negotiate to flip their apartment for a 7% loss … but even that is getting harder to do. Everyone is getting desperate”, he said.

60 Minutes Says …

Australia’s ‘flagship’ current affairs program, 60 Minutes, did a story last week on housing affordability. They interviewed two of our biggest inner-city apartment developers about the issue.

However they didn’t press them on the fate of Chinese investors. They didn’t ask what effect the banks repeatedly jacking up interest rates on investors was having on demand. And they certainly didn’t ask why the Reserve Bank has openly stated this week that it’s worried about the inner-city apartment market … along with flat-as-a-pancake wages growth, heavily indebted households, and sluggish growth.

Instead, they simply walked around in hard hats, grinned, and pointed at skyscrapers. And, in turn, the two rich white dudes gave two bits of incredibly condescending advice to young first homebuyers:

“Suck it up” and …

“Let us build more apartments.”

Seriously, that’s what they said.

Angry Millennials took to Twitter to vent their frustration about being labelled unrealistic, coffee-swilling, avocado-eaters.

My advice?

Don’t get angry … get even. Falling prices are coming, and right on cue.

Tread Your Own Path!

How to get into your home 30% quicker

When I was a kid, all I wanted for my birthday was a pair of Air Jordans.Mum and Dad got my hopes up. Then on the big day, they presented me with … a pair of Dunlop Volleys.

“They’re great sandshoes”, said Dad. “You know, Newk used to play in these. A phenomenal sportsman.”

Uh-huh.I felt the same way last Tuesday, on Budget night.

See, in the lead–up to Tuesday, the Government had been leaking like Clive Palmer, dropping hints that the centrepiece of the Budget would be a plan to tackle housing affordability — once and for all!

What we got was the legislative equivalent of Dunlop Volleys (before hipsters made them cool):

A feeble attempt to get some oldies to downsize, and an air kiss to negative gearing and capital gains tax reform. And … the First Home Saver Account 2.0* (*now with less KRudd!). In fact, the name is eerily similar — the ‘First Home Super Saver Scheme’.

“I was right!” I yelled at ScoMo (who was … talking on the telly).My wife sat there, arms folded, rolling her eyes.

“I predicted months ago in my column that the Government would only let people withdraw their voluntary super contributions to put towards a deposit”, I said, punching the air triumphantly.

“You are turning me on so much right now … my husband, the tax whisperer”, she said (mockingly).

Harsh … but fair. It’s not like I’d just answered the million-dollar question on Hot Seat.

Yet given that I’ve always been a fan of first homebuyers saving up to buy a home, let’s take a look at what’s on offer. Today I’m going to tell you exactly what you should do with the brand-new First Home Super Saver Scheme.

Specifically, who should open one  … and who shouldn’t.

How to Get into Your Home 30% Quicker

At least, that’s the line ScoMo used on Budget Night.

So let’s see how it works.From 1 July 2017, you’ll be able to ask your boss to divert extra money into your super fund to save for a deposit, and then draw it out to buy your first home (the earliest time you could withdraw it is 1 July 2018).

The maximum you can save is a piddly $30,000 per person (so a couple can save $60,000).

Why would you do that?

Because you’ll pay less tax … and the less tax you pay, the more money you’ll have to put towards your deposit.

Let’s take the case of Mandy.

Mandy earns $65,000 a year as a professional wrestler, and she’s saving a deposit for her very own wrestling ring.

At her top rate, Mandy pays out 32.5 cents in the dollar in tax, plus the Medicare levy. So she could earn $10,000 and be left with just $6,550. Yet if she salary-sacrificed the same $10,000 into her super fund (with a 15% flat tax rate), she’d be left with $8,500. Even better, the interest she earns on that money in super would also be taxed at the same rate — another tick for her super fund.

No-brainer, right?

Okay, so that’s quite simple.But the cardigans in Canberra love complexity, so let’s go deeper.

Game on!

First, Mandy is limited to putting in a maximum of $25,000 into super per year pre-tax, and that includes her employer contributions. (And if you’re self-employed, or your employer doesn’t offer salary sacrifice, you can still claim a tax deduction on your personal contributions.)

Second, how much interest does she earn?

Well, that’s the thing.

The money isn’t paid into a separate account; it all goes into the one super pot (deposit savings and long-term savings together). The ATO doesn’t want to calculate the interest Mandy will earn on her deposit savings, so they cheat and use a formula for guessing (they call it ‘deeming’). Currently, it’s set at 3 per cent plus the current bank bill rate, making a total of 4.78 per cent.  

Again, that’s not how much she’ll actually earn on her deposit savings, just what they deem she’ll earn. If the market crashes, her super balance will take a significant hit — but the ATO will still deem that her deposit savings increased by 4.78%, and she’ll be allowed to take it all out. Trouble is, it hasn’t actually increased, and what she’s taking out is dipping into her long-term super savings — not good. Now I’m not saying this will happen, but it’s possible.

Finally, she’ll be hit with an exit tax (set at 30% below her marginal rate) when she takes her deposit savings out of her super.

Seriously, can you imagine Pauline Hanson trying to work this out?

Please explain?

If your eyes glazed over for the last few lines, that’s okay. Here’s the guts of it:After three years of saving using the First Home Super Saver Scheme, Mandy will have $25,833 available for a deposit, or $6,314 more than if she’d saved via a standard bank account.

So how does this all apply to you? Well, it depends.

Who should open a First Home Super Saver?

If you’re planning on buying a home in the next few years, and you already have a decent deposit saved up, you’d have rocks in your head if you didn’t open one up.

That’s because it’s worth $12,628 extra to an average earning couple (based on Mandy shacking up with the Hulk), compared to saving in a basic bank account. Sure, that’ll buy you the equivalent of half a dunny in a capital city, but it’s twelve bloody grand for filling out a few forms! I’d bend down and pick up twelve grand if I saw it on the footpath. Wouldn’t you?

Who should not open a First Home Super Saver?

Anyone with a longer timeframe — who isn’t planning on buying for up to five years. Parents, grandparents — don’t open one up for young kids. Conscientious kids, that goes for you too.

Huh? Isn’t the Barefoot Investor all about the long term?

Sure, but there’s one more risk with this scheme that I haven’t mentioned yet — and it’s a doozy. What happens if you meet and settle down with a good-looking young rooster (or hen) who just happens to own their own home already?

Under the current rules, the money you’ve saved up can only be used as a deposit for your first home. So, because your partner has already bought a home, you’ll be forced to keep that money locked up inside your super and won’t be able to access it until you’re in sandals and socks.

Or Air Jordans.

Tread Your Own Path!

The Government’s Plans to Fix Housing Affordability

“Waaaah!” wailed my son.

Tragedy had struck: our golden retriever had used his favourite toy tractor as a makeshift bone.

“Dad … can you fix it?”

I looked at my distraught son.

I looked at the mangled remains of his little John Deere toy tractor, covered in bite marks, missing two wheels, and encased in a film of dog slobber.

“You can fix anything  … right Dad?”

“Oh … umm … sure”, I mumbled, avoiding eye contact with son number one.

Hello, Mr Fix It

A thousand kilometres away another Scott (Morrison, the Federal Treasurer) was having his own chewed-up screwed-up moment: right now millions of kids are asking the Treasurer  … “Please Mister Sco-Mo, can you fix the housing market for us?”

Like me, deep down Sco-Mo knows he can’t really fix anything.

Like me, he also knows no one wants to hear that ... so he’s just trying to keep everyone happy (and keep his job).

Still, he and Malcolm-in-the-Middle have only themselves to blame for the political pickle they’re in. After all, they were the ones who boldly declared that the centrepiece of next month’s Federal Budget would be policies to fix the mangled mess that is housing affordability. And, just like my son, first homebuyers are now staring at Sco-Mo expectantly. A good example of which was the front webpage headline in the Fairfax papers this week: “Government aiming to fix housing deposit problem so young buyers can purchase ‘as soon as possible’.” (No pressure, Sco-Mo!)

And so the pre-Budget tradition of leaking ideas to the media to see what sticks or stinks is in full swing. The big idea that has had more leaks than the Titanic is allowing first homebuyers to raid a few years of their super contributions to build up a deposit. This week the Treasurer again refused to rule the idea out. Though in this he at odds with his boss, who described it in 2015 as a “thoroughly bad idea”. And, as I go to print, the Prime Minister appears to have put his foot down (though with Malcolm that would be a gentle tap of his $800 brogues) and said it won’t happen.

In reality, their hands are tied. The Government doesn’t have the political ticker to touch negative gearing, despite the fact that the current rules favour investors over homebuyers and encourage loss-making property speculation.  (Research from Digital Finance Analytics this month shows that one in three Sydney landlords risks being under financial stress should rents fall or rates rise. History shows that, when a downturn occurs, property investors often rush to sell -- unlike owner-occupiers, many of whom would sell the dog to keep their family home.) And while the Government is making noises about trying to encourage oldies to downsize, they don’t have the kahunas to include the primary residence in the asset test for the age pension.

Canberra Can’t Solve a Damn Thing

Look, I’m no Rhodes scholar (like, say, Tony Abbott, who incidentally is a big fan of raiding super), but the only sustainable ‘fix’ for housing affordability is lower property prices.  And it’ll happen anyway at some stage. Fact is, Australia’s household debt is out of control. Our household debt-to-GDP sits at 123 per cent -- the third highest in the developed world, and much higher than the Poms (88 per cent) and the Yanks (79 per cent), and basically twice as much as the bloody Greeks (62 per cent)!

So, as I’ve said many times before, we’ve got debts at all-time record highs when interest rates are at all-time record lows. When interest rates rise -- and they will, eventually -- house prices will fall, and housing affordability will be fixed (YAY!). The only problem is, you may not have a job as we slide into recession (BOO!).

But don’t expect anyone in Canberra to talk about this.  Even though they’re chauffeured around in fancy cars with little flags on the bonnet, that doesn’t mean they know what’s going on … or that they’ll admit how worried they really are. Heck, even the people who set interest rates don’t have much of an idea. Case in point: at the height of the US housing boom, Federal Reserve Chairman Ben Bernanke was interviewed on television:

Interviewer: "We have so many economists saying this is a bubble, and it could even cause a recession at some point. What is the worst-case scenario, if we saw prices fall substantially around the country?

"Bernanke: “Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So what I think is more likely is that house prices will slow ... maybe stabilise.”

The US housing bust triggered the deepest financial crisis in living memory. Yet here’s the interesting thing: the beginnings of the US housing bubble can be traced back to 1995, when then President Bill Clinton passed legislation to … tackle housing affordability. So the lesson here is simple: don’t look to anyone -- except yourself -- to fix your problems. After all, Scott has enough of his own. “

Waaaah!” 

Tread Your Own Path!

A $25,000 Gift to First Home Buyers?

Should first home buyers be allowed to raid their super to fund a house deposit?

“No”, declared Malcolm Turnbull boldly in 2015, before adding that it was “a thoroughly bad idea”.

Then again, in 2015 the Minister for Networth also said that he thought Tony was doing a dinky-di job …

And that’s the perfect frame for what’s going on with the current housing debate: it’s got nothing to do with creating effective policy — and everything to do with politics.

Right now housing affordability is the ultimate “bbq stopper” issue, and the Government wants to be seen to be doing something about it on Budget night.

My worry is that if first home buyers aren’t careful they may find themselves with apples in their mouths and a banker sharpening up a pointy metal rod in the years to come.

Let me explain.

What do you think would happen if I walked around at an auction and handed first home buyers an extra $25,000 from their super funds?

They’d just throw in a few higher bids.

Then after the house sold they’d say … “By jingo, look at how much prices are jumping! Thank god I was able to access my super!”

A Lesson from the Canadians

Thankfully we don’t have to rely on make-believe scenarios where I walk around doling out dough like some housing super Santa. That’s because our resource-rich cousins, Canada, already have a similar super-housing scheme that’s been running since the 1992.

It’s called the Home Buyers’ Plan, and it allows first home buyers to borrow $25,000 from their retirement account to fund a deposit. The catch is that you have to make tax-free repayments each year — otherwise you’re hit with penalty tax.

So how’s it worked out for the Canucks?

Not well.

Data from the Canadian Revenue Agency in 2013 suggested that almost half the borrowers had yet to pay anything back.

Why?

Well, I’ll take a stab in the dark and suggest it’s probably because they can’t afford to make the repayments. They’re what I call ‘postcode povvos’. All the 25 grand did was help stretch themselves into a tight spot that they now can’t get out of.

D’oh!

A Massive Mistake

Okay, but has the Home Buyers’ Plan at least helped make housing more affordable over the last 25 years?

Well, no.

Canada is recognised as having some of the most unaffordable property in the world. In fact, the Bank of Canada (our version of the Reserve Bank) has gone so far as to produce a Youtube video that warns the public how their record high household debt and inflated house prices could combine to devastate the economy.

Scary stuff.

And guess what? Australia actually has higher household debt, and more unaffordable homes, than Canada.

Double d’oh!

One of the original Canadian MPs who signed off on the Home Buyers’ Plan, Garth Turner, now calls the program a “massive mistake”, and has warned our government not to go down the same path.

Turner calculates that young Canadians have taken $30 billion from their long-term retirement accounts that may never be repaid — money that should be compounding away and providing for their retirement.

So will it happen here?

Well, we’re still seven weeks away from Budget night. And the fact that the Government refused to rule out the idea this week suggests that — in the time-honoured political tradition that is Budget night — they’re contemplating putting common sense aside.

Whatever happens, just remember that 2015-Malcolm was right: this is a thoroughly bad idea.

Tread Your Own Path!

Update: Pay The Screamers First

Just over a year ago, I wrote about a company called Nant Whisky.

Nant had come up with a neat little investing scheme that involved investors buying Nant whisky barrels via their Self Managed Super Funds (SMSFs). Nant guaranteed to buy the barrels back in four years for a 9.55 per cent per annum compound return. Smooth stuff.

The problem for the investors was that the person behind the ‘guaranteed buyback’ was a bankrupt Gold Coast businessman by the name of Keith Batt.

In the process of writing the piece, I interviewed Batt and said to him point blank: “Keith, I think you’re selling whisky barrels that don’t exist … so what I want to know is this: when are you going to run off with people’s money?”

Batt didn’t bat an eyelid: “We will buy back the investors’ barrels in four years’ time.”

After my piece was published I was flooded with emails from Nant investors.

They nearly all said the same thing: “Well, I guess I’ve lost my money (sad emoji).”

Yet there was one investor, a bloke by the name of Fraser, who played it very, very well.

I actually spoke to him on the phone and gave him this advice:

“Look, this thing is going down quicker than a scrawny teenager who’s drunk way too much of his dad’s whisky. But these guys almost always have some money set aside to pay off the screamers. So be the screamer.”

At that stage Keith Batt was still publicly assuring his investors that things were hunky dory … but wasn’t giving them back their dough.

Fraser started screaming. He must have emailed Nant 30 times demanding payment.

That’s not an exaggeration.

I know, because he cc’d me on every one of them.

It was like I was in inter-office corporate hell: “Why I am getting all these freaking emails?!”

Well, turns out I wasn’t the only one with email fatigue: Fraser got all his money back from Nant.

Last week the ABC reported investors were “terrified” of losing their money, after the Herald Sun revealed an audit had found that over 700 barrels (sold to investors for $12,500 a pop) never had a drop of whisky in them.

And now the receivers have been called in.

And what about Mr Batt?

Well, he told the media that he’s no longer a director of Nant, and that he has “no legal connection to Nant Distillery or any Nant company”.

I spoke to Fraser last night and got his approval to tell you this yarn.

It sounded like he was in a pub … hopefully enjoying a smooth whisky.

Cheers, Fraser.

You played a screamer, mate.

Here’s a Shout Out to All the Renters

I froze.

Live on television.

The sweat welled up my back, and in my ears, making the voice coming from my plastic earpiece crackle.

“Scott … What do you have to say to the caller?”

Thankfully this moment happened at the start of my career. And thankfully it happened on Sky News (audience: seven Young Liberals) on a low-budget talkback show that consisted of the audience calling up and asking an expert money questions.

(I was the expert.)

Unfortunately for me, the first caller happened to be a bitter former colleague, who decided he was suitably sloshed to call up the show and take me down a peg or two, live on TV:

“And why should anyone lisssen to yoo? You don’t even own ya own home. You’re a … RENTER!”

For a good 20 seconds I sat in front of the camera saying nothing, swimming in my own insecurities.

Maybe he was right. I mean, what sort of financial expert was I if I didn’t even own my own home?

At the time my lack of homeownership gave me an inferiority complex. I felt like I was locked out of the grown-ups club. Like I didn’t belong at the big people’s table at Christmas lunch: “Put on your silly paper hat and go and sit at the card table with the other kids.”

“But I’m 28!”

“But you’re still a renter!”

If you, dear reader, are a renter, you know the feeling.

And you probably wish it didn’t matter to you as much as it does.

That’s why I’m doing a shout-out to all the renters.

Don’t Become a Postcode Povvo

There’s a lot of pressure on young people to become postcode povvos. That’s the name I give to people who hock themselves to the hilt so they can live in a fancy suburb … and end up living lives of quiet desperation.

In January, an extensive study of 26,000 Australian households by Digital Finance Analytics found that around 20 per cent of homeowners — one in five — are so stretched that they could lose their homes if interest rates rose by even 0.5 per cent.

O.M.G.

So let’s put down the crack pipe for a moment. What the hell are these people thinking?

I’ll tell you what they’re thinking, because I have conversations with them all the time:

“My mother is so proud of me” (plus, she also gets to brag to her friends that you’re ‘sorted’).

“The bank lent me the money, and they wouldn’t have done it if I couldn’t pay it back … right?”

“House prices are going through the roof, so while things are tight now, it’ll surely pay off.”

Like a cranky old high school maths teacher, I’m continually amazed that most people make the biggest financial decision of their lives without actually doing the sums. Don’t get me wrong — plenty of people spend hours working out ‘how much can I borrow, and what will that get me?’

Yet very few people calculate the total cost of homeownership (rates, maintenance, insurance, higher interest rates in the future) or think realistically about how long they plan to live in the home they buy. Upgrading in less than 10 years is almost always a wealth-reducing exercise when you factor in stamp duty and agents’ fees.

You’re Not a Loser if You Rent

Despite what everyone around you might say, there are many intelligent reasons why you would choose to continue to rent and save, rather than borrow and buy:

Like that you haven’t found your prince (or princess) yet. Or that you’re not sure where your career will take you. Or that you can’t afford it right now — that’s a bloody good reason.

Fifteen years of being the Barefoot Investor, together with the 19,000 questions I have sitting on my email database right now, has taught me this: very often it’s the case of the rich renter and the poor homeowner. So chin up, renters. Pull those shoulders back. Delaying gratification is a sign of maturity — a sign of strength.

If I could teleport myself back to that TV show, I would stare down the barrel of the camera and say:

“While I think everyone should eventually own their own home, I don’t think you should rush into it. I don’t own a home because I’m still saving up my deposit. It’s not easy. In fact, it’s a bloody hard slog. But it’s a much better than being a broke homeowner or — worse — a postcode povvo.”

Tread Your Own Path!