Myth 1: Australian housing is a great investment. FALSE.
This chart shows the Actual Real Rental Income on properties that are rented out by investors.
Since the expansion of easy credit has allowed for higher rates of speculation for investment returns on total house price, investors for the past 10 years have been willing to take on a Real Rental Income loss on their properties. This is amazing because it defies all rational logic for an investment. It means that investors truly believe housing prices will go up no matter what. This means that rental returns are no longer a driving force behind property investment, and total asset price-appreciation is the over-riding driver. They say that rent money is dead-money, but I would argue that housing investment money is foolish money, and renter money is patient money. It is cheaper to rent than it is too buy and the next point explain this further.
Myth 2: It's better to Buy than it is to Rent in the long-run. FALSE.
Not in this economy. Maybe 10 or 20 years ago, but im sorry generation X and Y but your baby boomer elders have sold you out. They lived on easy money and rode the debt train all the way to the end of their lives, and guess what ... they left you to pay for it all. How can we get revenge on them? EASY. Do NOT buy their overpriced houses. This will cause house prices to fall and leave them with negative equity, this means that Gen Y and Gen X wont have to pay someone else's bill's, and it means that we get our revenge at the last minute. Do you really want to buy still anyway? Well take a look at this chart below...
Sorry I don't have the figures for 2012 but I assure you nothing has changed. Now notice what happened in 2007-8. There was downward pressure on dwelling price-income rations, and we all know that this was the US housing Bubble popping and the GFC. US home-owners were stretched to their limits at a ratio of 2.7 before it collapsed. Australians are willing to live in the 4 to 5 ratio ... Do you know anyone who despite low interest rates still struggles to pay of their mortgage? Notice how the ratio for Australia dips below 4 towards a correction and then spikes back up. That's the effect of the First Home Owner Scheme, the Government stimulus designed to avoid the housing market correcting itself. The Government decided to kick the can down the road on a housing market collapse. This has only delayed the bubble bursting by fooling more and more investors into the market with their hard eared savings on house prices they cannot afford. This 4-5 ratio is of concern to the RBA who is keeping interest rates low, but unless incomes rise substantially it is not financially sustainable for Australians to be affording the cost of home-loans. Even at our historically low interest rates it is still increasingly expensive for people to enter the market. Cracks are already appearing in the housing market with fewer people taking up the FHOS grants.
Myth 3: Housing is in high demand because of high population growth, and this supports future price growth. FALSE.
In Australia the annual dwelling starts index has always followed the annual population growth index. But there emerged in 2009 a massive disconnect as people started to swallow the red pill of reality. But the Government scrambled to produce blue pills of fantasy called FHOS (first home owner scheme grants). This brought the ratios back in line over 2011, but as you can see in 2012 this was drifting away again and now in 2013 it is drifting even further, and people are not taking the blue pill anymore.
But you might be thinking that this doesn't make sense. How can more people not equate to more dwellings? Why can't I fix my computer with only just a hammer? Well the other week I went looking at the rental and share accommodation market in suburban inner-west Sydney. Through 10 different places I saw people renting our their living rooms, normal apartments converted to dormitories, and parents sharing rooms with their children whilst trying to rent out their only other spare room to strangers.
Its SIMPLE, people increasingly cannot afford to buy or own homes at these prices. Supply and demand only works when prices are affordable. You can raise the population all you want, but with real wages not rising in accordance with real prices you get jammed. The FHOS grants are not helping people, but rather inflating house prices and acting in a similar way that teaser rates were used in the sub-prime mortgage market in the USA. People need a dwelling they can afford and debt they can manage, and this means a new trend will be people choosing to share homes. People need to survive, and the government can only distort the marketplace for so long before the illusion no longer works.
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