Albo should have known better

WHACK!
 
Last week I got the Treasurer to answer readers’ questions, and the verdict was swift and brutal:
 
Old Jimbo may have been Barefoot for the day, but readers thought the bloke had bunions!
 
Yet for me it was his advice to a young first home buying couple – that they only needed to save up a 5% deposit (thanks to the Government’s First Home Loan Deposit Scheme) – that caused my left eye to twitch and made me sweat all the way down to my mangoes.
 
My view?
 
Look, it’s not going to win me any votes, but I believe that if you can save only a 5% deposit … then you really can’t afford a house.
 
Yet in 2021, then-Treasurer Josh Frydenberg basically said “hold my beer”.
 
He expanded the First Home Loan Deposit Scheme (FHLDS) to ‘help’ low-income single parents, and lowered the deposit required to just 2%!
 
Then came Labor.
 
Now Albo was famously raised by a single mum in public housing. So he must have known in his bones that this was a very dangerous policy. And that it would not just legitimise but actually incentivise vulnerable people to make a highly risky financial decision … at a time when interest rates were at record lows and house prices were at record highs. However, in the heat of the election he too joined the 2% down party with his shared equity ‘Help to Buy’ scheme.
 
What could possibly go wrong?
 
Well, let’s fast-forward a few years and hear from Jane, who wrote to me a few weeks ago.
 
“Scott, I went against what you recommended, but the government said they were helping me buy a unit with a 2% deposit for my child and me. I’m a low income earner and also an immigrant with a parent overseas who I’m providing for. I’ve made it work so far by taking on extra work on the weekends. But the fixed rate with my bank changes over (higher!) in a few months and I’m terrified. Do you think moving banks will help keep the variable rate manageable when it’s my turn at the cliff?
 
The fact is, Jane has about as much chance of moving banks as Peter Dutton has of being Prime Minister.
 
For the record, I called Jane and put her in contact with a financial counsellor in her area who will work with her – and her bank – to try and find a way forward.
 
But it won’t be easy.
 
She pretty much had zero equity in the joint to begin with, and it went down from there. So not only is she deeply in the red but, more importantly, her interest rate is about to triple, and her repayments could take food off her table.
 
I don’t blame her for wanting to buy her home, and provide financial security for her kids.  The problem is she trusted that the politicians were acting in her best interest … not theirs.
 
Now let me get off my soapbox and introduce you to someone who not only thinks I’m dead wrong … but can prove it.

Tread Your Own Path!

Small House, No Worries

Hi Scott,
 
Coming on the back of the abusive emails you’ve been copping lately, I just wanted to say thanks! Following your advice led us to save for over 10 years for a deposit to purchase our modest two-bedroom house, in which our family of four lives, sleeps, studies and works. Since purchasing it five years ago we have been paying it off at a rate of 8% regardless of interest rates (currently the majority of our loan is locked in at 1.99%). This has set us up to either pay it off early or have a nice buffer in times of uncertainty, like now.
 
One day we dream of putting in a new kitchen to replace the $100 Gumtree kitchen we installed ourselves. However, what our daughters need more than extra space is certainty, security and chilled parents who don’t have to pay off a massive mortgage. So for now we are happy to wait and make do while we enjoy our children and our little home. Thank you!
 
Sarah

Hi Sarah
 
Amen to that, Sarah.
 
And let me confess: you guys are smarter than me.  
 
When we rebuilt our home after the fires, we built it too big.
 
If I had my time over, I’d have preferred to build a smaller home. And not just because it would have been cheaper to build. A smaller house requires less stuff to fill it, and saves time, money and stress in terms of cleaning, maintenance, heating and cooling. And, importantly, there are fewer rooms for our kids to hide away from us in!
 
Television shows like The Block (and all the home builder ads that run through it) have convinced us that even first homes need a media room, an alfresco dining area and a butler’s pantry.
 
That stuff doesn’t make you happy.  
 
However, that being said, when your daughters get to ‘slamming door’ age, they’ll probably want their own space, so a renovation will be needed. Yet something tells me you’ll do it with cash, and a lot less stress than they do on The Block.
 
You Got This!

Scott.

Tiny House, Big Dreams

Hi Barefoot,

In light of the current housing crisis, my partner and I are looking into buying a ‘tiny house’ to live in. We believe this will allow us to live without the stress of a huge mortgage or crazy high rent. We would initially look at renting land from someone while paying the tiny house off, and then eventually sell the tiny house and buy our own land when our needs change. What do you think about tiny house living?

Lucy

Hi Lucy,

I’ve changed my mind on tiny house living. My wife and I lived in a Winnebego with four kids for five months and we loved it. However, if we were still living tiny today I’m quite sure I’d be in a mental asylum right now. In other words, what made it fun was that it had a time limit. I don’t know many people who live their entire life in a tiny house … and very few families could do it long term.

So what do I think?

I think you need to work out where you want to be eventually. Is it in a home on land? If that’s the case, the only reason you’d buy a tiny house is if it were dramatically cheaper than renting. After all, your house is on wheeIs so it’s going to lose money over the long term.

Scott

The email came through with the subject line ‘REGRET’

The email came through with the subject line ‘REGRET’.

Scott,

My partner and I are both professionals in our early thirties. We bought a house last year and we hate it. We are struggling to adapt to a slower pace of life in the suburbs and have learnt we don’t need as much space as we thought we did. We feel stupid for spending a ton of money on something we can’t stand.

What are our options?”

Erica

Strewth!

There’s more emotion in Erica’s email than a midnight meltdown from my 18-month old:

They hate their new home … they feel stupid … they can’t stand it.

Well, the dream of owning your first home is a lot like parenting a newborn … the thrill rubs off disturbingly quickly … and then the reality of the responsibility sets in:

I’ve signed up for a lifetime of this?!

It’s not hard to understand why Erica is spitting the dummy.

This time last year everyone was FOMO-ing off their face. Interest rates were at all-time lows. The Reserve Bank had committed to no rate rises till 2024. Property prices had risen 30% since COVID. And that’s when Erica and her partner got property-pregnant. And that’s also when everything changed.

Today, the value of her property is going down, and the cost of her mortgage is going up. Way up. In the last three months her repayments have shot up by an extra $565 a month (based on a $600,000 loan).

And some experts are warning that house prices could drop by as much as 25%, leaving people like Erica who bought at the top in a ‘Mortgage Prison’ and unable to refinance their loan in a few years.

So what should Erica do?

Well, my advice would be to stop listening to experts about the economy. As a new property-parent you have zero fluffs to give. All it will do is freak you out and psyche you out.

I know you think you’ll never make it. But you will. You’ll grind it out, meet your mortgage repayments, and eventually get ahead. And then, in a few years, you’ll have forgotten about all the pain you went through, and you’ll trade up your family and do it all over again!

Tread your own path!

Help, My Daughter Is Blackmailing Me

Dear Scott,

My adult daughter, her partner and one-year-old son are renting in a regional area and cannot afford a home loan deposit. I have offered to have them live with me rent free for six months while they save. But they want me to take it a step further and go guarantor for them. I did consider it, but as a single parent with three teens at home and a mortgage already I’m not comfortable with the risk. The problem is they are insistent that it is their only way of owning a home and that I am the only person who can help them. They have told me it will be my fault if they are homeless. I feel like they are blackmailing me. What would you do, Barefoot?

Valerie

Hi Valerie,

I’m with you.

Know this: parents all over the country are having this conversation with their kids.

It’s frustrating, because you might really want to do it. However, as they say on the plane, you need to fit your own oxygen mask before helping others. Besides, six months free rent is a bloody generous offer already!

If you feel your daughter is emotionally blackmailing you now, can you imagine what she’d do if prices continue to fall and she finds herself in a financial pickle?

Remember, as a single woman with three kids, statistically you are at the highest risk of being homeless.

Scott.

30-year-old Girl has No Interest

Hi Scott,

I’m a 30-year-old married Muslim woman living in Sydney. Being Muslim makes it very challenging to buy a first home. I am sure you are aware that Muslims are prohibited from dealing with interest. I am ready to take all the Barefoot Steps but I don’t know how I can do so without dealing with interest. My family came to Australia in 1991 – and 31 years on they are still renting because they haven’t been able to save $1 million in cash. Many Australian Muslims are in the same boat. I want to be able to own a home and provide safety for my children and not be in the same situation that my parents are in 30 years from now. What can I do?

Rina

Hi Rina,

What an interesting question!

There are a number of institutions that do Islamic finance.

NAB, for instance, has a product that they claim meets Islamic law requirements by structuring the loan as a lease and charging ‘rent’ instead of interest. (It’s a bit like my kids telling me they’re eating fruit … while digging into a bowl of Froot Loops).

Anyway, I asked my favourite Muslim, Nazeem Hussain, about Islamic finance, and he gave me the following fatwa:

“I think it’s like halal meat. The animal is the same but it’s how it’s slaughtered that matters.”

Touché!

When you’re dealing with any banker, the trick is making sure you’re not the one getting skinned.

I reviewed some rates of Sharia-compliant home loans and they tended to be quite a bit more expensive than the cheapest standard variable loans. However, I still think it might be a good deal for you. Reason being, Rina, it’s almost impossible for a working-class couple to save up cash and buy a house in Sydney. It’s like chasing a moving train.

Toot! Toot!

Scott.

Barefoot Blows Renters an Air Kiss

Hi Scott,

I’ve read your newsletters religiously over the past few years (and generally loved them), but this is the first time I’ve been compelled to write back. I am frustrated with your take on OwnHome last week — not because what you said is untrue but because you basically did not offer an alternative option to people in this sad situation. You started off your piece talking about how people trying to save a deposit are going backwards due to how much house prices are going up (so far I was nodding in violent agreement as I was reading), but then you ended the piece by telling them to basically keep doing that same thing!

Peter

Hi Peter,

Fair point.

That being said, I don’t offer magic wands, and I tell it like I see it.

Still, it feels a little like getting angry at your personal trainer when she pooh-poohs your idea of getting lipo to lose your belly. You need to do some crunches, tubby!

That’s also why I’m wary of any company – or any government policy – that ‘helps’ people to sidestep saving up much of a deposit. Given the sums people are having to borrow in a rising interest rate environment, I think it’s irresponsible.

Look, it’s not a sexy position, but I believe that spending a few years saving prepares you for the tough times that will come. And when they do, you’ll need some (firm) skin in the game.

Scott.

How you can move into a million dollar dream home, today

He doesn’t buy craft beers. She sips Nescafé Blend 43 from a tin.

They live in a feral sharehouse, all so they can save $623 a week to put towards their house deposit.

And here’s the kicker:

While they scrimp and save … the prices of properties around them are going up $1,990 a week.

Do you see what’s happening?

Despite all their hard work and sacrifice … they’re going backwards.

There’s no celebratory champagne after winning the auction … just second-rate slurps from a dirty teacup in a sharehouse … and the sinking feeling they’ll NEVER crack the market.

And then, in their darkest hour, there is hope:

A few weeks ago there was a spot on the nightly news that talked about a brand new product called OwnHome (backed by CommBank), which promises to “save for your dream home, while you live in it, meaning you can kiss the renter’s life goodbye”.

Understandably, it caused my inbox to light up like a kid on Coco Pops.

Here’s the guts of how OwnHome works:

OwnHome buys your dream home and rents it to you for three to seven years.

The rent is expensive. On a $1 million home, you’d pay $70,500 a year. A large part of that rent goes to OwnHome, while a smaller part goes to building up equity in the property.

You agree to buy the property from OwnHome in, say, five years for $1.2 million. (Because OneHome sets the price, you’ll pay for the home at the start of the contract; currently they increase it by 3.8% a year).

And, if you’d done this deal five years ago, you’d be well ahead.

So is this really a breakthrough product?

Not really.

Despite OwnHome’s fintech vibes, and the fact it was on the news, this is not a new strategy. It’s called ‘rent to buy’ and it’s been around long before Billy Ray had an achy breaky heart.

Straight up: I’m not a fan (of Billy Ray, or rent to buy).

Why?

Let me count the reasons:

First, because there’s a power imbalance

The sellers (like OwnHome) are generally savvy investors who set the terms of the deal in their favour. Whereas the renters are making an emotional decision which is often driven by FOMO (Fear Of Missing Out).

Second, because there’s a chance the renters could lose everything

Over the years I (like many other financial counsellors) have helped renters who got an achy breaky heart on these deals. How does that happen, Billy Ray?

Well, if interest rates go up and house prices go down:

You risk not being able to afford (or being able to qualify for) a home loan to buy it (OwnHome is not a lender). You also risk overpaying for a home that’s dropped in value since you agreed to buy it.

And here’s the stinger: if you walk away from the house, you also walk away from all the dough you’ve put towards it. In the example I used above, that would translate to around $165,000.

In other words, the $165,000 you’ve put towards the home would be goneski, and you wouldn’t be able to use it to purchase another, cheaper home.

Third, because you’re probably better off renting and saving

Get this: OwnHome itself admits that “in many situations using OwnHome is slightly more expensive on a monthly basis than renting and saving”.

Or, in other words, don’t believe everything you see on the nightly news!

Tread Your Own Path!

This is How a Heart Breaks

Dear Scott,

We can’t buy a home. My fiancé and I both earn good money. We have a healthy deposit and budget and want to buy so we can start a family. We’ve offered more than they were asking and been told no — the vendor took a cash offer instead. We told agents we are pre-approved first home-buyers, yet they just don’t call us back. I obsess over realestate.com, ringing as soon as something comes up, only to find it was sold while waiting to be uploaded to the site. The constant rejection hurts when it’s holding us up from doing what we so desperately want to do — have a baby. Will it end? My heart breaks for anybody earning the average wage or below it. The dream of owning your own home must be feeling like a heart crushing unlikelihood.
Just another beaten-down first homebuyer

Hi-ya

I have a few thoughts.

First, as a property investor myself, I get no joy from surging house prices, which have increased a staggering 21% over the past 12 months. This isn’t healthy for the stability of our country.

Second, I believe interest rates will rise, and when they do they’ll burst the housing market bubble.

Let me be clear: I have no crystal ball, and picking short-term economic moves is a mug’s game — just ask the Reserve Bank, which has been consistently wrong on all manner of economic forecasts.

Yet it gets clearer when you zoom out:

In 1990 official interest rates were 17.5% … today they are 0.1%.

Question: where do you think they’ll go over the next five to ten years?

I asked my eight-year-old this question, and he said “Up!”

“After all, they can’t get that much lower, Dad.” (Get this kid a seat on the RBA board!)

So when interest rates rise — and they surely will — it’ll be brutal for many people who’ve borrowed too much. I can’t tell you when that will be … the only thing I can say with great certainty is that you don’t want to be up to your eyeballs in debt when they do.

Finally, who says you need to own a home to have a baby?

Be a smart, savvy, cashed-up renter … rather than a postcode povvo.

Scott.

An Open Letter to Parents

This is an open letter to parents who are thinking about helping their kids buy their first home.

In my book I was pretty blunt (and a tad dismissive) about hitting up the parentals:

“Should I get my parents to go guarantor? No way, Jose.”

And … no one listened.

In fact, Digital Finance Analytics (DFA) has found that the ‘Bank of Mum and Dad’ has around $34 billion in loans, with parents forking out on average $90,000 to their kids.

So let’s look at it from the parents’ perspective.

It’s natural to want to help your kids. They’re your flesh and blood … and the very people you’re counting on to change your incontinence pads in a few years’ time.

Besides, if you’ve done well, you should help them out, right?

My parents-in-law offer a good working example: they bought their inner city Melbourne family home in the eighties for less than a hundred grand. It’s now worth close to two-and-a-half million bucks.

Yet a decade ago their (then single) daughter would schlep over to “millionaires’ row” for dinner, and complain that she couldn’t afford even a two-bedroom flat this side of Bendigo.

Come on, help out the kid!

Well, here are three things to keep in mind before you sign on the dotted line.

First, if you’re struggling or still have outstanding debt yourself, you’d be mad to go guarantor for anyone. As they say in the airline safety demonstration, always fit your own oxygen mask first.

Second, consider what could go wrong.

The most important one being that it can cause a rift in the family. I know you think that’ll never happen, but what if your princess’s prince turns into a frog and leaps off with half your deposit? Ribbit!

Or rates could rise, the market could cool, and your kids could be left really struggling. In fact, DFA suggests that kids getting a handout from their parents are three times more likely to default on their loan in the first five years.

Finally, and crucially, you may be inadvertently robbing your kids of one of life’s great financial achievements.

Case in point: all my wife could afford was a tiny studio apartment. She painted it herself and even got her brother to install a discarded oven she found on the side of the road. It wasn’t much, but it was all hers.

Whatever you do, I’m sure it’ll be the right thing for your kids. Just go into it with your eyes wide open.

Tread Your Own Path!

Should I Tell My Boyfriend to Shut Up?

Hello!

My husband and I are so close to having a 20% deposit for our family home. However, with the prices of houses being so ridiculously high right now, he wants to wait and meanwhile put our house deposit into shares in the hope that we will have more than enough money in a couple of years. Should I listen to my husband or tell him to shut up?

Willa

Hi Willa,

My first thought is to tell him to shut up.

My second thought is to get him talking. Here are some clarifying questions you might want to ask:

“You reckon the property market is too high and due for a fall. Why wouldn’t that be the same situation for the share market? They’re both just assets, right?”

Whatever he answers, follow up with this:

“No one can predict what’s going to happen in the share market, or the property market, in the next few years. It could go up, down, or sideways. That being the case, let’s run some scenarios now and see how we’d deal with them:

“What would we do if our shares tank 50%?”

(Wait to get his response. “It won’t happen” is not the right answer. Ask him how he’d feel watching your deposit cut in half. Would he hold his nerve?)

“What would we do if the property market increases while we’re risking our savings in the share market?”

(Again, wait to get his response.)

And, finally, hit him with this: “Are you unsatisfied with what we can currently afford?”

It sounds like that is the root of the problem … and there’s no shame in that at all. In a rampant debt bubble, young people starting out have to make trade-offs. Just make sure you’ve thought them through.

And that’s going to require a lot of talking, and thinking!

Scott.

First Home Hell

Barefoot,

I have been saving as much as I can. By mid-year we should have a deposit and could start looking at buying rather than renting. I know your normal advice is to buy a house when you can afford it. But does that still apply when these inflated house prices seem like a bit of a false economy?

Doug

Hi Doug,

I feel for you.

Property prices are getting juiced because of low interest rates.

And the Reserve Bank has said they’ll keep rates at (basically) zero for at least the next three years.

Here’s how this is playing out in the real world.

Greater Bank has a one-year fixed home loan rate of just 1.69%!

The lowest on record.

At the same time, the average rate on a bank savings account, according to Mozo is just 0.18%!

Also the lowest on record.

In other words, right now property prices are at record highs and are rising faster than most people can save. Which is great for people like me who own property, shares or other assets. Yet it’s absolutely horrific for anyone starting from scratch, trying to save and scrounge up a first home deposit.

So, what to do?

Well, there’s all kinds of advice people will try to give you:

Ranging from the practical (save a 20% deposit, take a long view) ...

To the patronising (buy out in Woop Woop and sit on milk crates for a few years) ...

To the pathetic (“I’m 23 and own 75 rental properties, it ain’t that hard if you have a system”).

Yet there are no easy answers.

So instead I want to leave you with this thought:

Interest rates are only going one way from here … up.

I don’t know when. But if you’re taking out a 25-year mortgage, well, chances are you’ll see hikes.

And that’s why I’ve consistently advised people to stick with what works …

Save up a 20% deposit, find a home you’re happy to live in for 10 years, buy it.

Forget about what the market is doing.

Scott.

We Bought a $3,000 House

Hi Scott,

My wife and I are some of the many victims of first homebuyer advertising.You know the ads — “If you have $3,000, you can buy a home!” And as a young couple we did not fully understand the impact of getting a loan to get a loan. We bought our home in 2014, at the top of the Perth market. Five years on and our house is valued at $70,000 less than what we owe. I have a well-paying long-term job ($200,000+) and my wife stays home and looks after our four wonderful children, but we are depressed.What options are available to resolve this?

Jarrod

Hi Jarrod,

For those of you playing along at home, you may wonder how Jarrod could buy a home for $3,000.The answer lays in his statement, “we did not fully understand the impact of getting a loan to get a loan”.

The $3,000 claim is just advertising spin to get potential postcode povvos through the door.

Then they’re hit with the reality stick:

You still need to come up with the deposit, so the developer’s finance arm will often arrange a high-interest unsecured personal loan to cover the deposit, on top of the mortgage (which is also much more expensive than what most people pay, because you have no history of savings plus an expensive personal loan to repay!).

But it gets worse.

These cheap starter homes are built in cheap starter suburbs, and they’re generally the first to drop in value when there’s a downturn. And that effectively locks buyers in: they can’t get the capital growth to refinance, and so they’re forced to continue struggling to pay off their expensive loan. It’s a vicious circle. Three grand to be in the doghouse!

So, given it’s a stinky sandwich, what would I do in your situation?

Well, if you’re content to stay in the home long term, it doesn’t really matter what the value is in the short term.What matters is clearing your debts. And in that regard you’re more fortunate than many postcode povvos — you’re earning good dough, so focus on knocking off the personal loan you took out for the deposit. Pronto.

Scott

Student Digs

Hi Scott,

You generally advise your readers to buy a house first and invest later, but I am wondering if this is always the best approach. I am currently trying to decide whether to invest in a student accommodation apartment. It costs only $150,000 and I have enough for a 20% deposit. I am thinking the rental income will pay itself off and I can make extra repayments as well. Meanwhile, I will continue to save up for my house deposit. What would be the risks?

Leonard, Your #1 Fan

Leonard,

Be honest: you don’t really want to buy a dog-box in the sky.

What you really want to do is speed up the time it takes to save a house deposit. Other people try doing it with shares, thinking it’s better to own shares in, say, a bank (and be paid a dividend) than to have money in their miserly savings accounts.

Compared to saving up money in the bank, you can currently earn a higher income from property or shares, but your capital will not be secure. And that’s the biggest risk you face: a few years down the track you may find a home you really want to buy ... but the banks will knock you back because you own a ‘same-same’ student apartment that’s worth less than you paid for it.

Scott

The Great Australian Finance Experiment

My five-year-old son is obsessed with maths.

The other night he worked out that the maths app game we play each night is charging us a recurring fee.

He was ropeable: “You need to delete this game off the iPad, or we’ll keep getting billed. Do you understand, Dad?”

I nodded.

Chip off the old block.

Anyway, it wouldn’t surprise me if he eventually studies finance at university.

And if he does, he’ll almost certainly (as part of his ‘financial history’ class) look back at this monetary madness we’re living through in 2019.

I picture him coming back to the farm, scratching his head:

“Dad, what the hell were you guys thinking?

“The housing market was slowly deflating after the mother of all housing booms … but then you started cutting interest rates to almost zero?

“And at the same time you loosened lending criteria and encouraged young people to buy a home with just a 5% deposit?

“How did you think it would end?!”

Okay, so I’m putting it on record that I don’t think any of this is a good idea.

Yet I’m clearly in the minority: this week the media predictably cheered that the average homeowner would be $58 a month better off with the latest rate cut.

They’re missing the point.

Having to cut rates to the lowest levels in history ‒ with the promise of even more to come ‒ is a sign that we’re in deep trouble.

Rate cuts are supposed to act like cocaine … yet after this many hits, their effectiveness is wearing off. (The Verve sang it best: “Now the drugs don’t work, they just make you worse.”)

Just like I can’t fathom my father paying 20% on his home loan in the early nineties, I’m sure my son will be baffled by our rock bottom rates today. Either way, this is a massive financial experiment that we’ve all signed up to … and the effect could be felt for generations.

Tread Your Own Path!

First Home Loan Deposit Scheme

Hi Scott,

After years of saving up for a deposit and getting nowhere (I live in Sydney, and I work in hospo!), I was slightly stoked to hear about the new policy that helps first home buyers get a house with just a 5% deposit. You always say “if it sounds too good to be true, it probably is”. So what’s the catch?

Chris

Hi Chris,

When I turned 18, my teetotaling mother gave me possibly the wisest piece of advice I’ve ever received:“Nothing good happens after midnight.”

Too true, Joan. Too true.And way past midnight (in an election sense), ScoMo burped out the First Home Loan Deposit Scheme.

Here’s ... err … the guts of it:

The Government (read: taxpayer) will ‘help’ singles earning up to $125,000 (and couples earning up to $200,000) to buy a house with a 5% deposit, instead of a 20% deposit, by covering their Lenders Mortgage Insurance (LMI) bill.

On a $400,000 home loan with a 5% deposit, the LMI would cost a young couple $13,406, so it’s a huge saving.

Yet it’s also drunk policy ‒ and it has bipartisan support (Bill was quick to say he’d do it too if elected).

It’s a bit like ScoMo (or Bill) is giving you a sleazy pickup line ‒ one that sets you up for a one-night stand that leaves you with itchies and scratchies.

Look, there’s a reason banks require first home buyers, like you, to save up a 20% deposit. You’re entering into a 30-year contract, and they want to make sure you have staying power.

And if a bank that earns $10 billion a year in profits won’t lend to a first home buyer without them taking out expensive ‘default insurance’ ... why should the taxpayer foot the bill?

My view?

If you buy a home with a 5% deposit, you’re setting yourself up for a potential killer hangover … by buying a home you probably can’t afford.

Picture yourself waking up the next morning next to ScoMo (or Bill). He rolls over and whispers, “Was it as good for you as it was for me, baby?”

Don’t do it.

Scott

Are We Stupid?

Hey Barefoot,

My wise old man got me and my boyfriend onto your book, and since September we've put $35,000 into an account for a house deposit! We have a combined annual income of $140,000 pre-tax. The problem is, we have our hearts set on an expensive suburb in Melbourne where prices currently range from $750,000 to $900,000. All our friends are saying we're stupid for spending so much on a first home. Are we stupid?

Nic and Pete

Hi guys,

Yes, you are.Just for kicks I went to a bunch of banks’ ‘how much can I borrow?’ calculators and put in your digits (as you have probably already done). And hot diggity dang, each one calculated that you could borrow $850,000 (or more!), despite the fact it would chew up over half of your combined income after tax.

Problem is, these are marketing tools designed to get you in the door, not lending approvals. On your current numbers, I think you have as much chance of getting a loan as I have of getting my kids to eat all their veggies tonight.

Scott

Shaken, Not Stirred

Hi Barefoot,

I just wanted to drop you a line from the comfy living room of my first property. If you’d told me two-and-a-half years ago that I’d own this place today, I would have dropped the dirty martini in my hand! At $25 a pop, those drinks (which I had regularly) didn’t come cheap, but they sure numbed the fact that as a single, 35-year-old woman I would never own my own home! Or so I thought.My father got fed up with my bleak outlook, so he gifted me your book for Christmas 2016. To say it changed my life is an understatement. The best thing about the book is its foolproof nature ‒ no knowledge of money required. All I had to do was follow a few simple instructions, check in on my savings from time to time, and eventually I had a property deposit!Not only this, your book has taught me to be self-reliant, to take responsibility for my life, and has given me confidence about my future. I even gave up booze along the way ‒ a great move if you ever want to see money pile up at warp speed. If you’d met me in 2016, I’d have told you (probably slurring) that I was terrible with money. Your book has since taught me that ANYONE can be good with money.

Thank you.

Leah

Hi Leah,

Yes, I seem to have a booze theme this week. Well bugger it, let’s run with it:

In many parts of the country, property prices are staggering around like a drunk at closing time. However, the real opportunity for first home buyers will come in the next few years when the debt hangover really kicks in. Mark my words, this is a genuine opportunity for first home buyers ... but only those who have been soberly saving.

Congratulations on your success, Leah. You should feel proud. You Got This!

Scott

Let me tell you about the smartest 23-year-old woman I know:

Her name is Samantha, and she’s worked out a way to get a private 30-minute financial strategy session with me every single month. How much does she pay me?

Nutt’n.

In fact, I pay her $40!

Then again, she does wield sharp scissors and often holds a razor to my throat (so I’m the very definition of a captive audience).

Over the past few years I’ve heard about her on-again, off-again, on-again boyfriend (it’s my version of MAFS … each month I get a new episode). Yet over the past 12 months they’ve gotten engaged, and are now looking to buy.

She put in my lap a brochure from a new development on the ‘fringe’ of Melbourne.

“This joint looks more like the back of the mullet than the fringe”, I quipped (as she snipped dangerously close to my ear). “How much are you looking to spend?”

“We’re looking at places around $450,000, and we’ve saved up $50,000”, she said.

“That’s a great start, but not enough.”

“Well, we’ve already got pre-approval from the ANZ!” she countered.

“Did you have to submit payslips or any other documentation?” I asked.“Er … no.”

That, I explained, is the equivalent of a swipe right on Tinder: you’re not getting married, you’re simply in the ‘maybe’ pile. So I challenged her to spend the next month playing the field, and she dutifully went to two banks and a broker.

The response? “Yes ... no … and maybe."

Still, Samantha is in a rush, and she wants me to wave my magic wand and help her buy as soon as possible, “while prices are low.”

But here’s the interesting thing:

At 23, she has absolutely no concept of an economic downturn. In fact, even her parents, who are in their early forties, have never experienced a recession in their adult lives.

Let’s put that in perspective:

In the 1991 recession, Aussie property prices had their longest fall on record: 20 months of decline.

So how does that compare to today?

Well, nationally prices peaked in September 2017, which means they’ve been falling for 17 months.

However, I’d argue that this slump is only getting started, for three reasons:

First, the Reserve Bank suggests there are almost $500 billion in interest-only loans that are due to be reset to principal-and-interest in the next five years, which their analysis suggests will cost the typical borrower $7,000 more a year.

Second, interest rates are already at historical lows, so small rate cuts add up to only small repayment savings. And besides, it’s unlikely the banks will pass on the full rate cuts.

Finally, the upcoming federal election will likely bring a new government, and with it changes to negative gearing and capital gains tax (CGT).

As a result of all these factors, banks are being very cautious with their lending … and it’s the banks that ultimately control property prices, based on their willingness to lend.

Plenty of people who bought in the past two years are copping a buzzcut. That’s why my advice to Samantha -- and anyone else with less than a 20 per cent deposit -- is simple: there’s no rush!

Tread Your Own Path!

Single Mum Is a Loser

Hi Scott

I am a 32-year-old single mother trying to save for my own house. I’m working full time and completing my degree online, so I moved in with my grandparents to get some help. My daughter and I currently share a bedroom, all in the name of saving. But I feel hopeless and useless. I have recently been looking at Metricon HomeSolution as a way of getting into the housing industry. Do you recommend this?

Fiona

Hi Fiona,

I agree, your instagram feed would totally suck: all you do is work and study, and you live with your grandparents and share a room with your kid!

#Loser.

However with as little as $2,000 down, you can have lots of instagram-worthy pics of you and your daughter in your very own, brand new Metricon home.

#Winner.

Actually, last year Metricon HomeSolution was fined by the regulator for misleading advertising. It turns out that buyers actually need to come up with a 5% deposit, which is financed through an unsecured personal loan, often arranged through one of Metricon’s associated finance brokers.

#Ripoff.

My job allows me to look through people’s financial filters, and here’s what I’ve seen:

Some of the biggest financial losers are young couples with the nicest Instagram accounts; they live in Metricon house-and-land-package homes, with a leased Audi, an interest free Harvey Norman television, and Afterpay’d accessories. I even have a name for them: Postcode Povvos.

In my eyes, you’re a winner.

While other people desperately try to show strangers on social media they’re successful - you are living it.

So do me a favor: whip out your phone and record a message to give to your daughter when she’s 18. Tell her about how you’re feeling right now: the struggle and sacrifice of working and studying, and being a mum. Tell her why you’re doing it, and what your hopes and dreams are. Then show her your little shared room.

I guarantee you two things:

First, when it comes time for her to look at that video, you’ll have your own little home.

Second, she’ll realise just how brave and amazing her mother really is.And that’s the ultimate ‘like’, right?

Scott