Send in the Clowns

What the hell is going on?

Our normally very reserved Reserve Bank chief, Glenn Stevens, this week broke ranks and said that Sydney property prices were “cray-cray and not in a good way”.

Okay, so what he actually said was that Sydney property prices were “crazy”, but make no mistake: this is coming from a man whose words ricochet around the world, often wiping billions of dollars from global currency trades. So them’s fighting words.

Meanwhile, our two most powerful political leaders don’t want a bar of it. Last week the Treasurer even went as far as to say that those who questioned the underlying strength of our economy and housing market were “complete fools” and “clowns”.

Well, get out the face paint and hand me my red bowtie.

You see, over the past decade I’ve bought and sold a number of houses, but I’ve never fooled myself that I did anything brilliant. Really, it was just dumb luck: I bought a couple of overvalued properties (by international standards) and sat back and watched them become even more overvalued, spurred on by interest rates hitting all-time lows.

Anyone could have done it. Even Joe Hockey.

So with all this bubble talk being blown about, it’s no wonder that people are confused. Each week I receive hundreds of questions from readers — and I’ve found there’s a direct correlation between Joe opening his mouth and the number of emails I get about property. Here are three I received this week:

The Single Woman

Hi Scott,

I’ve given up. I’m single and earn $75,000 a year. I’ve decided that the only way I will break into the market is to buy a small investment property. I have saved up a $30,000 deposit. My broker says that it will be easier to get an investment loan (rather than a home loan), I’ll have the tenant helping me pay it off, and I’ll get the tax breaks. In a few years I’ll be able to use the equity to put a deposit down on a place I really want. What do you think?

Tammy

Hi Tammy,

I think it’s a terrible idea.

(Though, to be fair, thousands of young first home buyers are doing exactly same thing.)

Yes, the banks will lend you more for an investment property because it’s secured against rental income. Yes, you’ll be able to claim deductions against your tax. But no, there is absolutely no guarantee that your investment property will increase enough in the next few years to get you a deposit to buy the home you really want.

I don’t want to be accused of stinkin’ thinkin’, but let’s look at what happens if the housing market slows, skids sideways, or even falls.

There’s no glamour in being a landlord. Mostly it’s just an expensive pain in the rump. Yet after you buy, you’re committed to holding for at least five years, possibly ten. Otherwise the significant upfront costs of stamp duty, and the long, drawn-out and expensive process of selling will likely eat any equity you have.

However, it’s a totally different situation if you’re buying a place that you actually want to (eventually) live in — and the truth is that these are often the best ‘investment’ properties anyway. My advice is, don’t overcomplicate it. If you want to buy a home to live in, and you can afford it, do that. Don’t stuff around.

The Worried Parents

Hi Scott,

My daughter and son-in-law are struggling to buy their first home. They applied for a $525,000 loan with the CBA but were knocked back. It wasn’t because of their incomes (they both work, combined $115,000 per annum) but because of a black mark on her credit file, and that they don’t have a deposit. Their lender suggested I go guarantor for them. We own our home outright, and we are five years off retirement. I really want to see them in their home. Is there any other way?

Wayne

Hi Wayne,

Yes, there is another way — it’s called saving. Your daughter and son-in-law are broke, and broke people shouldn’t borrow half a million bucks. The bank understands this, which is why they won’t lend them the money. They’re not willing to take the risk — so they want to lump you with it. Don’t do it.

The Cautious Couple

Hi Scott,

We’ve been saving up for a home for the past six years. We have $180,000, thanks largely to my husband’s FIFO work over the past few years. We moved to Melbourne a year ago and started a new life. My husband earns $140k, and I earn $80k. We don’t have kids yet, but will try in a few years. We are looking at homes around $600k, which won’t get us much, but it’s a start. Should we buy now or keep saving and hope the bubble pops?

Greg and Melissa

Hi guys,

If you find a property that you love, and that you can afford, you should definitely buy it.

People ask me this question all the time: they’re effectively waiting for prices to fall so they can buy something nicer with their money. However, if you play this game, you’re effectively putting your life on hold, waiting for something to happen that you have no control over. Or, as Warren Buffett explains, “It’s a bit like saving up sex for your old age”. My view is that life’s for living, and buying your own family home is one of life’s financial milestones (perhaps second only to paying it off).

Besides, no one knows how this will end, though smart, influential people like Glenn Stevens are, to use his words, “acutely concerned” about what happens when he cuts interest rates again.

Tread Your Own Path!