Posts Tagged‘property’

Super For Your First House? Please, No.

Breaking into the property market has become more difficult for first home buyers in Australia as of late mostly because of reasons I’ve explained in detail on this blog before. It’s not an easy problem to solve as many of the options championed by self proclaimed experts are politically charged and increasing the housing supply isn’t as simple as many people think it to be. Thus many of the measures that the incumbent government suggests are often things that don’t address any of the underlying issues directly and instead look to put more money in the hands of potential first home buyers. Joe Hockey’s recent brainwave to address this problem, by allowing first home buyers to dip into their super for a deposit, is a classic example of this and it will neither help first home buyers nor address the underlying issues that they face.

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Whilst it’s not a formal policy they’re looking to submit yet (hence the lack of detail around how the actual scheme would work) Hockey says that he’s been approached by lots of young people looking to tap into their superannuation in order to fund their first home purchase. On the surface it sounds good, younger Australians get to put a roof over their heads and get their foot into the property market, something which should hopefully sustain them for the future. The main problems I see with this are two fold; firstly most people won’t have enough super to make a difference and, secondly, it will likely set most people back meaning their retirement will likely not be fully funded by super.

On average your typical superannuation balance at 25 is on the order of $10,000, not a whole lot in the grand scheme of things. Even the most generous loans that let you get away with a 5% deposit would only see you able to get a loan for $200,000 with that amount of cash, not exactly the amount that many now first time home buyers are looking to finance. That figure doubles by the time they reach their 30s but that’s still not enough to finance the home on its own. Indeed first home buyers are likely to need double or triple that in order to buy their first homes which means that they’ll need to have at least $20,000 in savings for those meager amounts of super to help push them over the line. If they’re able to save that you’d then think that bridging the gap wouldn’t be outside of their reach, at least within a reasonable timeframe.

This then leads onto the conclusion that the opposite situation, one where someone couldn’t save that much and required their superannuation to bridge the gap, is the least preferable scenario for a first home buyer. You see a savings track record proves that someone will be able to cope with the repayments that a mortgage requires whilst at the same time still being able to afford everything else they need to live. If you don’t have this and are looking to get into property diving into your super isn’t going to help you, instead it’s going to put you in the unenviable position of having even less money available to you, eradicating any chance you had at getting ahead. You’d hope that the last batch of lending reforms would prevent most people like this from getting a loan in the first place but I think we’ve all seen people get themselves into this situation before.

On top of this using most or all of your super would essentially put you back 5 or 10 years in planning for your retirement. That might not sound like much when most people will have 50+ years of working life but a lot of the power of super comes from compound interest. When you take an axe to your initial savings it resets the clock, pushing back the compounding rate significantly. That means you hit the high growth part of your super much later in life, leaving a lot less than you’d expect for retirement. This would mean more people getting onto the aged pension sooner, something which the whole superannuation system was designed to avoid.

I’ll hold off on any other criticisms until I see an actual policy on this but suffice to say the idea is rife with issues and I think the only reason that they’re entertaining it is to win back some favour with the youth vote. If they do put a policy before parliament though it’ll be interesting to see how they address criticisms like this as I know I’m not the only one to find fault with this policy. Heck I’d love to see more people getting into property since it’d bolster my investments but honestly I’d rather see the underlying issues, like lack of supply and the owner-occupier CGT exemptions, tackled first before they start looking towards trashing people’s futures for short term gains.

Why Targeting Negative Gearing Won’t Solve The Problem.

My generation has been very vocal about the struggle they have with the high cost of property in Australia. The argument is not without merit with our 2 largest cities often ranking in the top 10 most expensive places in the world to live. Indeed in the past I’ve said that Australian property is out of reach for an average person on a single income although I did conclude that this wasn’t representative of how most Australians buy their homes. Still one target that almost always comes up in discussions around housing affordability is that negative gearing isn’t doing anything to help the situation and its abolishment would lead to cheaper housing everywhere. Whilst I’m sure my vested interest in this topic (I have a negatively geared property, soon to be 2) will likely have most tuning out before this paragraph is over I’d urge you to read on as getting rid of negative gearing, or modifying it in a way you think appropriate, won’t bring prices down like you think they would.

Housing Prices

Taken by themselves the numbers around negative gearing do appear to be quite damning. Every year the government doles out about $4 billion worth of tax cuts to people who own negatively geared property, amounting to about 1% of total tax revenue. At the same time data would seem to indicate that  investors almost exclusively target established properties something which is at odds with the arguments that investors fund new property development. All this would seem to add up to a situation where investors are locking up existing property stocks which forces potential buyers out of the market. Whilst I’ll admit that negative gearing is a factor in all this it’s by no means the major contributor and making changes to it will likely not have the effects that many desire.

One proposed changes is to limit the number of properties that can be negatively geared to 1, putting a cap on the number of properties investors can draw benefits from. It sounds good in theory as it would put the kibosh on property barons snapping up large swaths of property however the fact is that the vast majority of property investors in Australia, to the tune of 72.8%, own only a single investment property. They in turn account for just over half the total number of investment properties in Australia. So whilst limiting negative gearing to a single property sounds like a good idea it would only affect half of the investment properties in Australia leaving the rest in the same situation as before.

Limiting negative gearing to new construction is an idea I’m on board with as it will more directly address the issue of housing supply rather than pushing investors away from property as an investment class. The one caveat I’d have to put on top of that would be the curtailing of the land agencies from charging exorbitant amounts for new land releases as that could easily erase any gains made from quarantining negative gearing in this fashion. Indeed if you look at just the land prices here in the nationals capital a small, 400m2 block will usually go for $400,000 meaning that even a modest house built there will cost upwards of $550,000. If you want to attract investors to building new properties then this is most certainly an issue that needs to be addressed prior to quarantining negative gearing.

However all of these ideas are flawed when you consider that there’s a much bigger tax break at work here that’s inflating property prices. As I’ve stated many times in the past Australian housing investors are something of a minority, accounting for around 20% of the housing market. Therefore it’s hard to believe that negative gearing is solely responsible for Australia’s house prices as the majority of the market is because of owner occupiers. What I didn’t mention in that previous post is the tax breaks that owner-occupiers receive in the form of exemptions from capital gains tax. Essentially when you sell your primary place of residence you don’t pay any tax on any gains that property may have made while you owned it which puts a strong upward pressure on prices (people want to maximise gains), enabling them to trade up to bigger and better houses.

That sounds fine in principle but it costs taxpayers a staggering $36 billion a year, 9 times that of negative gearing. You wouldn’t even have to abolish this to see savings far in excess of what getting rid of negative gearing would achieve. Instituting a 50% reduction in the capital gains tax payable (like is done currently with shares) for the sale of your primary place of residence would generate $18 billion a year and put a heavy downward pressure on property prices. Hell you could even apply the new construction only exception to this as well, giving people who build new houses something like 5 years worth of capital gains tax free whilst ensuring everyone else paid up. Of course this solution is a little less palatable since it targets everyone and no just those dirty investors but it would be far more effective.

Many will argue that abolishing negative gearing is a good first step towards solving the problem but in all honesty I don’t feel it will have the impact that it’s advocates think it will. Australian investors, whilst being a factor in housing prices, aren’t the major contributor with that responsibility falling to the Australian dream of owning ever bigger and better homes. Fixing the supply issue is a multi-faceted affair and if you want to attract investor dollars to it the solution has to be much more nuanced than simply removing one piece of legislation. You might not like it, hell I don’t like limiting things to new construction but I’ll agree it would work, but we have to face the fact that targeting Australian property investors likely won’t get us very far.

Think Negative Gearing is to Blame For High House Prices? Think Again.

Before I dig my hooks into the reasons why negative gearing isn’t to blame for high house prices (a seemingly controversial view these days) I will tell you, in the interests of full disclosure, that I’ve been negatively gearing property for the past 5 years or so. Back when we first bought our property I lamented the dearth of good properties that were available in our price range, focusing much of my anger of the property boom that took place mere years before we went into buy. However we found something that we could just afford if we played our cards right, even though it was out in the sticks of Canberra. During that time though I never once blamed the negative gearers for this predicament but the more I talk about it the more it seems my generation blames investors for it when they should really be looking elsewhere.

Negative Gearing Income 2010-11

Depending on what figures you’ve read though I’d find it hard to blame you like the table above (from this ATO document) that has been doing the rounds lately. On the surface it seems pretty hefty with some $7.8 billion in total losses being claimed by investors with negatively geared property. Realistically though the total cost to the government is far less than that as even if everyone was on the top marginal rate (which they aren’t, most are on $80,000 per year or less) the total tax revenue loss is closer to  $3.5 billion. Out of context that sounds like a lot of dosh, especially when this year’s budget came in at a deficit of $18 billion, but it’s like 0.9% of total tax revenue which is significantly dwarfed by other incentives and exemptions. If your first argument is that it costs the government too much then you’re unfortunately in the wrong there, but that’s not the reason I’m writing this article.

The typical narrative against negative gearing usually tells a story of investors competing against homebuyers (usually first timers), driving up the price because they are more able to afford the property thanks to negative gearing and the higher amount of capital that they have. Whilst I won’t argue that this never happens it fails to take into account the primary driver for upward trending house prices: owner occupiers. Initially this idea sounds ludicrous, since homeowners aren’t taking advantage of negative gearing gains nor are they in the market for new property, but the thing is that the vast majority of capital gains in Australia are held by just such people, to the tune of 84% of the total property market.

In Australia the primary mechanism which drove house prices up, with most of the increase occurring between 1994~2004, was current home owners upgrading their houses. For a current homeowner  especially ones that own their property outright, the cost of upgrading to a larger property is a fraction of what it would cost to buy it outright. However anyone looking to upgrade will also try to extract the maximum amount of value out of their house in order to reduce the resulting loan and thus the cheaper priced houses get pushed up as well. Couple that with the fact that the majority of Australian owner/occupiers move at least once every 15 years and that selling your primary place of residence is exempt from capital gains tax and you have a recipe for house prices going up that’s not predicated on negative gearing’s influence.

Indeed the ABS Household Wealth and Wealth Distribution supports this theory as the average value of an owner occupied property is $531,000 which is drastically higher than the Australian average (which includes all investor properties) at $365,000. Considering that the bulk of the Australian property market is dominated by owner-occupiers (since investors only make up 16% of it) then its hard to see how they could be solely responsible for the dramatic increases that many seem to blame them for. Most will retort that investors are snapping up all the properties that would be first home owners would get which is something I can’t find any evidence for (believe me, I’ve been looking) and the best I could come up with was the distribution of investment property among the 5 sections shown here which would lead you to believe that the investors are normally distributed and not heavily weighted towards the lower end.

The final salvo shot across the negative gearing bow usually comes in the form of it providing no benefit to Australia and only helps to line the pockets of wealthy investors. The counter argument is that negative gearing helps keeps rent costs down as otherwise investors would be forced to pass on the majority of the cost of the mortgage onto renters, something we did see when negative gearing was temporarily removed. Indeed the government actually comes off quite well for this investment as using that revenue to instead build houses would result in a net loss of rentable dwellings which would put an upward pressure on rents.

I completely understand the frustration that aspiring home buyers go through, I went through it myself not too long ago when I was in a position that wasn’t too different from average Australian. But levelling the blame at investors and those who negatively gear their property for the current state of the Australian property market is at best misguided and at worse could lead to policy decisions that will leave Australia, as a whole, worse off. You may believe to the contrary, and if you do I encourage you to express that view in the comments, as the current Australian property market is a product of the Great Australian Dream, not negative gearing.

Maybe I’m Answering the Wrong Questions About Gen Y’s and Property.

I’ve long been of the opinion that many of my fellow Generation Ys are suffering from a crisis of desire in regards to the Australian property market. It’s an understandable phenomenon as most of us grew up in what are now quite nice suburbs, central to a lot of services and now considered to be an extremely desirable place to live. It then comes as no surprise that our generation would want to replicate this with their first home purchase and regrettably this leads many to believe that the property market is unaffordable, which at that level it most certainly is. Buying out in the mortgage belt, like most of their parents did back when the time came for them to do so, has been my solution to the issue for quite some time now but some recent reading has pointed me towards http://fhareversemortgagecalculator.com/ which in turn pointed me in another direction, one that I hadn’t considered previously.

To give you some background on where this thought came from I’ll point you in the direction of a really solid article from The Atlantic on the drastic change in spending habits between Gen Y’s and their predecessors. In it Thompson lays out the idea that perhaps Generation Y has replaced the home and car as the most desirable objects with modern technology like smart phones. This is coupled with an increasing tendency towards sharing those same goods (called collaborative consumption) that have such a high capital cost which means total ownership plummets whilst use sky rockets. It’s an interesting idea and I was wondering if the trend translated across to Australia.

Turns out part of it does.

Whilst I couldn’t find any good information around car ownership with Australia being a country that’s heavily focused on property ownership there was a lot to dig through in regards to Gen Ys attitude towards property. Shockingly, at least for me, the vast majority of Generation Ys do intend to buy, somewhere on the order of 77% which is actually above previously generations. Faced with the decision of not being able to get the home they own many will consider a cheaper investment property initially in order to be able to leverage it later into the property they actually want. That’s not the interesting part though, what I found out is that 72% of Australian Gen Ys would buy a house with a friend or family member. Whilst I’ve known people who’ve done this I had no idea that it would be so common and that’s an intriguing insight.

I’ve long held the position that the median house price on a single income is unaffordable in Australia and it appears that Gen Y is aware of that, at least on some level. Collaborative consumption of the housing resource then is our way of reacting to this, in effect shrinking the affordability gap by spreading the pain around a bit. Indeed I did something very similar to this when we bought our first house in Canberra by renting out two of the rooms to friends for the first year. The experiences from others are similar as well with the sharing arrangement usually only being temporary (on the order of years, not decades) before they’re able to part ways into a home of their own.

This means my hammering away at the point that Gen Y is suffering under a crisis of desire (they still are, at least in my opinion) probably isn’t going to help them change their minds. What I should probably be focusing on instead is the ways in which to structure these kinds of sharing arrangements in order to make the desired property more affordable or what strategies they can use in order to get themselves into a position to make it affordable. As you can probably tell I’m still wrestling with the best way to approach this and the ultimate idea will have to be a post for another day.

A Crisis of Misinformation: Generation Y’s Property Conundrum.

I’ve gone on record in the past about how the median house price is unaffordable for the median income earner in Australia. In the same breath I also explained how rare that this kind of situation was due to the number of assumptions made when you just equate median income with median house price. Still it seems to be a sticking point for many people of my generation that housing prices are just too damn high for them to be able to afford something, even if their incomes are above the median. While I’ll admit that it is harder in some areas rather than others (like Canberra for instance, which I explain below) the generalization the property is straight up unaffordable for our generation just simply doesn’t hold water and the reasons are far more likely to be ones of desire than affordability.

The Canberra Times ran an article yesterday that showed Canberra’s cheapest house prices were $100,000 more than the cheapest places in other capital cities. The cheapest suburb Charnwood (where I just so happen to live) had a median price of $382,000. In comparison to the other 2 suburbs listed in the article this seems kind of ludicrous but there are some pretty good reasons for this discrepancy. Firstly the suburbs that Canberra was compared to aren’t exactly identical with Charnwood being only 20 minutes to the CBD of Canberra and the other suburbs being around double or triple that distance. In that respect it’s more apt to compare property in Queanbeyan and the surrounding region which has several areas with a substantially lower median. There’s also the fact that Canberra is disproportionately affluent thanks to the high concentration of public service jobs and low population which skews the median further. That doesn’t change the fact that property in Canberra is more expensive than it would be elsewhere but it does show that straight up comparisons like the one in the Canberra Times aren’t exactly apples to apples.

Whilst the zeitgeist around the property market for my generation might be “it’s too expensive” a recent survey showed that a large majority of my generation are considering buying property within two years. Unfortunately only 30% think of it as a good investment (although what investment vehicles they consider good doesn’t seem to be included) which makes me then wonder why so many are intending to buy. The biggest challenge according to the survey is saving the required deposit for the house, not financing the loan as you’d expect. The article then references the high median price in Sydney as a source of this barrier which, in my mind, isn’t a barrier at all.

The first folly here is to assume that a first time home buyer should be buying at the median. For starters a good 50% of the housing market will be below that price range, especially if you consider some of those cheap suburbs that the Canberra Times article alluded to. This reduces the “required” (more on that in a sec) deposit from $110,000 to something more like $60,000~75,000 still an non-insignificant amount but a lot less than what the article insinuates. There’s also the assumption here that you need to get a 20% before considering buying which I can tell you is misnomer.

For starters the 20% threshold is usually just to avoid paying Lender’s Mortgage Insurance (LMI). Now this isn’t insurance for you, it’s for the bank in case you default on the loan. What a lot of people seem to think is that this is either some astronomical one off cost or a recurring charge that’s tacked onto the loan. For both of the home loans we currently have we had little more than a 5% deposit and the LMI charge was a couple thousand dollars, much less than the amount of cash required to get the 20% deposit. Of course your choice of loans might shrink a little as well but we never struggled in finding a suitable loan at a decent rate, even when we had such a small deposit. Put this all together and cracking into the property market doesn’t seem as bad for my Generation Y cohorts but you wouldn’t read that in the papers.

Realistically it all comes down to a lack of information and understanding which is unfortunately fuelled by articles like the ones I’ve linked to. Whilst I know that many won’t do the research and then continue to lament their position I’m hoping that at least a few will see articles like mine and start doing some investigation for themselves. Knowledge, as they say, is power and the Australian property market is no exception to this.

Want Cheaper Housing? Hope For Global Turmoil.

One thing that always gets me riled up is when people bitch to me about the housing prices in Australia. I’ve said in the past that yes, for an average single income earner, the median is unaffordable but I’ve long been of the stance that that situation is far from typical. What I feel is that Australians looking at the property market today are suffering more from a crisis of desire more than anything else, wanting to stay in the same level of housing that their parents had without the decades of living in the mortgage belt that preceded it. For the whiners out there however there might be a saving grace that’ll let them get into the house that they want, so long as they can keep their jobs through it.

So the reserve bank decided to drop rates by 25 basis points on Tuesday, confusing a lot of people as inflation was hovering around the Reserve Banks target rate of around 3%. It was the first time that the rates had dropped since April 2009 back when the fallout from the GFC was still causing problems. The decision seemed t0 be based around the fact that despite good economic figures Australian families were still struggling with mortgage payments and as such a drop in rates was seen as being more beneficial than keeping them on hold again. Taking a step back however I believe that they’re attempting to soften the blow of a potential upcoming crisis.

I am, of course, talking about Greece and the potential for a repeat of the events we saw with the GFC.

Rewind back a month or so and everything was starting to look better for Europe with Germany approving the rescue package albeit with some rather harsh provisions in order to make sure Greece didn’t do the same thing again. However just recently Greece has decided to put the rescue package measures to a referendum putting the future of the financial situation in Europe in the hands of the Greek people. Since there’s been rather hot and heavy opposition to the austerity measures that they’ve tried to implement in the past it’s understandable why everyone in the Eurozone is concerned about what might happen. Indeed with the way the markets reacted it’s seems like everyone thinks it’ll fall flat on its face.

But how, pray tell, does this affect property prices in Australia?

Well for the past year or so prices for Australian property have been declining slowly, on the order of single figure percentage points. Primarily this is because of many people coming out of the honeymoon period they had when they secured a massive mortgage during the GFC at spectacularly low rates, many below 5%. Once the pressure was back on with more sane interest rates many chose to sell up and this has lead to a downward pressure on the Australian housing market. It’s still not enough on its own to make property affordable though, for that we also need cheaper mortgages.

Markets are fun little beasts and are, for the most part, driven by irrational thought processes and fear. You’ll notice that during the GFC Australia remained relatively unscathed yet we still had as much panic as if we were going to go down with the rest of them. Indeed there was supposed to be a tightening of credit during this as well but many banks aggressively dropped their rates in order to draw people in. The fallout from the Greece’s financial problems is a very similar trigger to that of the GFC, enough so that if those measures don’t pass you can almost guarantee that interest rates will fall through the floor again as everyone tries to withdraw from the markets and the desire for credit dries up. Of course this will also mean that companies will use this as an excuse (both legitimately and illegitimately) to start downsizing again, pushing the unemployment rate back up.

For a financial sociopath like myself it’s like being a kind in a candy store as I’ll have my pick of the loans and properties available. However it’s not a situation that everyone can take advantage of, indeed only a select few (although not just the 1%) will be able to. However if you’ve got a decent deposit up and have been waiting for “just the right time” to get into the market then holding off for another couple months or so whilst this disaster unfolds could prove beneficial for you, especially if you take the banks current fixed term mortgage rates as any indication of where the market is heading.

Buying Property: A Geek’s Perspective.

Buying a house is an experience of many varied emotions, from excitement to confusion to being overwhelmed and finally the ultimate reward of having a place to call your own. I’ve been through the whole process twice now and suffice to say I’ve had my share of trials and tribulations along the way. Today I’m going to walk you through a rough outline of the process (note that this will be Australian centric, sorry overseas readers!) so that those aspiring property owners looking for a bit more information on the process will hopefully come out feeling a bit more confident when they start looking for a place to call home.

First of all before you start looking at any houses you’re going to have to know what kind of budget you have to work with. At this early stage I’d highly recommend seeing a mortgage broker as they can look at your financial situation and find a loan that’s appropriate for you. They can also teach you how to build business credit, which can be useful to you in the long term should you be short on capital. I have personally used Aussie Home Loans as my brokering agent every time I’ve looked for a property and have never been recommended the same loan twice (nor any of Aussie Home Loans products either). There are of course dozens of firms around and none of them charge any fees so I’d wholeheartedly encourage you to talk to a few of them if you’re not completely happy with any one of them. At this point you can also get pre-approval for a loan, meaning the bank is ready to finance you and will make the whole buying process a lot faster than if you’d found a house then had to get finance.

With your finance sorted you can now go about looking for a place to call your own. In my experience this is a whole lot of fun for the first couple weeks as you get to see many great houses (and some not-so-great) but it can be exhausting if the process drags out over a long period of time. Whilst I said before you shouldn’t bother looking before you’ve got finance it can help to do a little market research in the months prior to fully committing to getting a house. This will let you know how the market is doing and which properties have been on sale for a while. A rule of thumb is that the longer a property has been on the market the more likely that the seller will be flexible regarding the price (although it could also mean the property is overpriced, in need of dire repairs or has something else preventing it from selling).

Once you’ve found a place that’s within your budget the next step will be to make an offer¹. This process is wholly dependant on the agent selling the property and can be as informal as a telephone call to the agency or could involve multiple forms in order to register your intent to buy the property. It’s at this point you can negotiate the price for the house if you so desire and it’s quite possible that the house will go for below or above the advertised price. Should someone else make another offer you will, most of the time, be notified by the agent should the offer be higher than yours. Strictly speaking agents are not meant to tell you how much other people are offering for the property but inevitably most do. Depending on the instructions given to the agent by the seller there might be predetermined sell point or they may leave the property open for offers until they’re satisfied with the price. Should you be lucky enough to place the accepted offer you’ll be contacted by the agent and will usually have to supply a $1000 deposit to confirm your intentions to buy the home (this is counted towards the asking price).

According to Think Conveyancing’s website, at this point its time to bring in the lawyers or a conveyancer, as part of the formal offer acceptance you will have to nominate one such agency to deal with the legal paperwork required by the sale. Just like if you were seeking the aid of an injury attorney in Orlando for example, you have to do your research. In my experience you will be better served by an actual lawyer rather than a conveyancer as they will be able to provide qualified legal advice in the event something should go wrong. They can also help with explaining some of the legalese and add provisions and protections into the sale contract should they be required.  Once you’ve nominated the agency the agent will send them the required paperwork and you’ll be required to sign a few things in order to get the process going. Soon after (usually before 10 business days) your and the selling party’s lawyers will then exchange contracts, allowing both sides to inspect them prior to agreeing to continue with the sale. Again at this point you’ll be required to sign the paperwork to say that you’re happy with the terms of the sale. At this point you have a financial interest in the property so it’s recommended to take out insurance on it at this point.

Once the paperwork is completed the next major event will be the settlement, the formalisation of the sale contract that both parties have agreed to. Before this happens however there are usually a few things that need to be sorted out. Probably the largest of tasks is the payment of stamp duty which has to be done either directly to the Revenue Office or through your lawyer’s trust account. There are also things like arranging financing for paying out rates or water bills (usually paid to your lawyers who hold it in trust for use at settlement) and having one last final inspection of the property to make sure you’re still happy with it. The bank will also send out a representative at this point to do an evaluation on the property to make sure the property isn’t worth substantially less than the loan they’re giving you. Once they have been completed (can be anywhere from 2 weeks to months, in my experience) then both party’s legal representatives convene to complete the sale. Shortly after this you should be contacted by the agent who will hand over the keys and you’re officially a home owner.

This scenario does not mention anything that might go wrong during this entire process. Should all things go well the time from accepted offer to moving in is usually around 4 weeks however this can easily balloon out should any part of the process be delayed. The most common problems are finance related, usually either delays in sending out appraisers or not releasing the funds for settlement. There can also be issues at settlement like unapproved structures or disclosure of required sale information (like if it’s a flood plain, for example). However if you have a good lawyer behind you most of these problems will be made clear to you and options presented for remediation.

So in a nutshell that’s what the process is for buying a house in Australia. I’m sure there are details I’ve missed or haven’t given enough attention to but if you were wondering what’s actually involved in securing property than this should give you a good insight into what’s required. It can seem daunting at first but realistically it’s really just a whole lot of talking, walking and sending money to people in the right places. If you have any questions about a particular part of the process feel free to ask in the comments below and I’ll do my best to ask.

¹I’m deliberately writing this from the perspective of buying a house through a negotiated price rather than at an auction. Buying a house at auction is an inherently more risky scenario due to emotional involvement and the removal of many buyer protections. The process before and after the auction is identical however.

The advice provided here within is general advice and should not be considered professional financial advice. It does not take into consideration your personal circumstances and can not be used in any financial decision process. No party should take action or refrain from action based solely on the content of this post or any other contained here on The Refined Geek. Please seek professional financial advice before proceeding with any investment.

Australian Property’s Reaction to the Financial Crisis.

The last 6 months have been a real roller coaster ride for pretty much everyone financially, even more so for the people like myself who have tried to buck the trend and continue investing during these times. Whilst the majority of the hyperbole has died down over the past couple months there’s still a strong feeling of doom and gloom from a lot of people. This is despite signs that the property market, which was everyone’s favourite punching bag, is on the mend and the unemployment rates whilst increasing are not as bad as was predicted. This then begs the question: is there still potential for Australia to suffer a major hit to it’s property markets?

Ever since this crisis was thrust upon us by the collapse of the sub-prime market in America the outlook has been that Australia would soon follow suit with our property prices plummeting anywhere from a reasonable amount of 5% all the way up to 50%. The gap in speculation should show that no one really has a definitive idea of where the Australian property market will be going and depending on what data you use you will get a different story. The first problem that most of these predictions make is translating the problems that the American sub-prime market had and translating them to Australia. It’s really not that simple.

Let’s step back from the current crisis for a moment to study what lead to the economic crisis over in America. The straw that broke the camel’s back was the fallout from the sub-prime mortgage market. In essence this refers to the practice of lending to individuals who do not meet prime lending criteria and as such have a much high chance of defaulting on their loans. With the helping of insurance companies like AIG banks were able to repackage these liabilities as mortgage backed securities which then allowed them to put these high risk loans back on their books as assets. Banks are typically allowed to lend out more money than they have, and the repackaging of these loans means that they could then re-lend that money out to someone else. You can now see that when one of these loans went belly up it would have a much bigger effect than it would previously. Due to the way the loans were written at the time most of the home owners were on honeymoon rates for the first 2~5 years. After that they reverted to a much higher rate, of which most of them could not afford. What you then had was a lot of loans all defaulting at the same time, which brought the banks and insurance giants to their knees.

I can not stress enough how different this is to Australia. What the American banks were suffering from was a lack of capitalization, I.E. they didn’t have enough real assets under them to back up the money they were lending out. Banks in Australia do not suffer from this and can not perform the kind of magic accounting that the American banks did due to the much more strict regulation they have to comply with. Lending criteria in Australia is also much more strict than what America had prior to its collapse and was tightened significantly after the crisis hit (I got loans before and after the crisis hit, and the second time around was far more stressful than the first).

The next couple facts I generally see is that house prices are unaffordable and the current increases are merely due to a boost in the first home owner’s grant. Whilst I’m not going to argue that Australian property is cheap it’s definitely not as bad as some and with interest rates so low now renters are usually better off buying a house if they have the savings for it. The next 12 months will show us how the market is going as I will admit the figures are somewhat distorted by the FHOG extension.

At the heart of the doom and gloomers is a desire for more affordable housing for everyone and their idea of reducing house prices is for the market to crash so that everyone can jump in. With 70% of the houses in Australia being owned by the people that occupy them (with 50% of those having no mortgage) there’s not really a lot of pressure on the market to sell. The only sector of the market that stands to make a great loss, and as such would have motive to sell quickly and below market, are the investors. With only 30% of the market at real financial risk it stands to reason that the property market won’t be suffering too much price wise, but there are some other factors to consider.

When people can’t sell a property for what they want/need there’s few options left for them: refinance or rent it out. With the tight lending market currently you’re not going to see many banks offering favourable deals so many will choose to rent it out. What you will then see is a glut of rental properties which will put a downward pressure on rents, which we have already seen. This will continue for a few years until America and the worst hit countries find their feet again which, in my view, will lead to a short to medium term stagnation in property prices. In real terms this means a decrease in property prices in line with inflation over the same period, or about 3% annually. There will be no crash but housing will become more affordable.

The government on the other hand could easily make housing more affordable by releasing more land and pumping more cash into base infrastructure to get the new land releases fully serviced. One of my good friends just recently finished building a house in a new suburb in Canberra for which he purchased the land almost 3 years ago. This kind of delay in new housing puts an upward pressure on established buildings and is one of the many causes of the affordability problem. Right now would be the perfect time to speed up development of new areas as the market is primed for a influx of affordable properties.

So overall I don’t believe that the markets will suffer as much as the doom and gloomers believe. Whilst the potential is there for properties to come down in value there’s several key factors that are missing and without them a decrease in real value is all that aspiring home owners can hope for. As I’ve said previously though property is a long term investment and any hit that it might take now will be recovered in the years to come.

Times are tough, but not as tough as some would have you believe.

Bigger is not Always Better.

I used to have a lot of pride in the idea of big corporations. After spending much of my life working for the public service (and indeed I still am although in a different capacity) and lamenting at the inefficiencies the private sector looked like the greenest pastures I’d ever thought of. It was then interesting to note that when it came time for me to make the jump into the private sector my initial impressions were pretty much as I had expected. After a while though it all started to morph into the same story I had experienced for the past few years.

Take any large organisation and the one thing you’ll notice is the increase in bureaucracy and this is not necessarily a bad thing. As organisations grow larger they will require more people to lead and facilitate communication between disparate sections. However what I traditionally saw in the public service was that restructures often caused redundant positions to retained instead of removed. This often lead to the too many chiefs problem where you get a lot of people who are in charge of something or someone which tips the management to underling ratio unfavourably. This is not to say I didn’t see the same thing happen in the private sector, it was just less common as when you’re trying to turn a profit from your business it becomes much easier to remove those people who aren’t really adding value to the business.

More recently I’ve encountered this in my own personal financial matters. A couple years ago my fiancée and I took the plunge and bought our first house here in Canberra. The process was actually pretty easy for us and we managed to find our beautiful home in the first week, although we held off making an offer for a while to make sure it was the one we wanted. After a couple quick signatures and a couple of phone calls to our broker the process was over and done with in a matter of weeks. Needless to say we were pretty impressed with everyone involved.

Naively believing that it would be the same deal the second time around we took the plunge yet again to buy an investment property. Now I know most people would be telling us we’re crazy for trying this (I did the figures, and believe me it still surprises me how good an idea this was) but we went ahead anyway. We found a beautiful place that would rent fantastically which unfortunately fell through. We since then found another house which was in good shape for its age and was in a great location. So we went ahead and decided to purchase.

Queue the last 2 months of my life spent dealing with the bureaucracy that is one of the big 4 banks of Australia. Our first loan was from a smaller bank that was from outside of our state and was a painless process. Our new bank had so many different sections that communications between myself, my broker and the bank would usually hit at least 3~4 different sections, all of which were responsible for different things. Not only was settlement delayed over a month because of a simple question I asked they also lost several critical loan documents twice over, something I’d never experienced before from a professional institution (let alone a bank). I was left pining for the smaller banks, at least then there would only be one central location that dealt with everything.

And so marked the end of the idea that a bigger corporation could do something better. It seems that there’s a sort of bell curve phenomenon going on here. When you’re too small you can’t do all the things that the big guys do. Once you’re at the peak you’re doing just as well as the big guys without the inefficiencies. After that it’s all down hill and whilst your company might be more successful you’ve traded in your efficiency to achieve that. It does keep the stock holders happy however.

I guess now its time for me to put my money where my mouth is and start my own company and do better then them. I’ll take the easy route out and blame the global financial crisis for it instead 🙂