If you’re an ‘average’ Aussie in your 30-somethings, then listen up. Here’s the best piece of advice you might get this year.
Don’t buy a house in Australia. Not now. Not until the market crashes.
In my view buying a house in Melbourne or Sydney right now is the worst financial decision you might ever make. I should probably expect the hate mail to flood in at this point.
I can picture what my inbox will look like tomorrow…
‘Sam how irresponsible of you. Property prices always go up. It’s the best asset anyone will ever have.’
‘Sam, your ignorance to the benefits of property astound me. How can you put a price on security and comfort?’
You’re a buffoon.’
There’s reason behind my view. And while many people are blinded by the gravy train of Australian property prices, there are many who get burned by it on a daily basis.
What I’d love to see in my inbox tomorrow is someone saying, ‘thanks’. Thanks, because I’ve helped them avoid the most debilitating pitfall that will affect young Australians today; property ownership.
There’s plenty else to do with your money instead of banging it into an overpriced and illiquid asset. Jam some of it in cash. Invest some of it in long-term stocks for the next 30 years. Heck, spend some of it to travel and see that there’s more to the world than any one country.
But if you’re looking for a sure-fire way to ruin your financial future, then buy a property today.
Money, money, money, or lack thereof
A crash is coming. But how? Why? And what’s going to cause it? Well in short, income.
Just look at the recent cuts to penalty wages for people in the hospitality industry. Good luck saving up for that deposit now.
But it’s not just penalty rates that are crippling Australia’s income. Wages growth has been weak, and doesn’t show any signs of getting stronger. The ABS Wage Price Index was up just 1.9% over the past year.
Inflation was 1.5%. That means your wages are 0.4% stronger. Just 0.4% more to help afford your overpriced, over-mortgaged property.
I wonder how things will go when inflation turns up to 1.9% in the next year. How will homebuyers keep the heating on? How will they feed the family? Especially when wages growth is likely to remain the same or get weaker. Put simply, wages aren’t growing anywhere near the pace to make property affordable.
That’s a problem, because it will mean first homebuyers still can’t afford a home. But if they hold off long enough, the tide will turn in their favour.
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If you’re a 60-something person, you probably aren’t worried about buying a house. It’s very likely you already have one. Maybe even two or three.
You have already probably either paid off your mortgage, are close to it, or don’t have a very big one anyway.
You’ve been the beneficiary of an incredible surge in prices over the last two decades. Well played. I’ve got no problems with that.
The problem I have, is how you’re going to fund your old age?
The reality is that many baby-boomers are asset rich and cash poor. You might be sitting on a $1 million home. But how much cash have you got? What about retirement savings? Or is your equity all tied up in property?
When you retire how will you pay the heating, cooling, electricity and gas bills? Remember these are expensive already. If inflation heads north, they’ll get even more expensive.
How will you also be able to pay for health insurance, put food on the table, run two cars, and enjoy life? Without cash flow you’re effectively broke.
Ah, the superannuation argument. Well hopefully you’re OK and have more than seven figures locked away for tax-free access. Good on you if you do. But you’re a minority.
According to the most recent information from the Australian Bureau of Statistics,
‘In 2013–14, for people aged 65 years and over who were not in the labour force, a superannuation pension or annuity was the main source of income for 10.9% of women and 17.7% of men. Government pensions and allowances were the main source of income for 77.8% of women and 72.4% of men’
It’s a fair assumption to say those figures won’t have changed much since then. The ABS also highlights the average superannuation balance for men aged 55–64 was $321,993 and for women $180,013. That’s just over $500,000 for a couple to live on for a good 20 years or more.
ASIC estimates people who retire at 65 will need annual living costs of $34,560 per year to live ‘modestly’. That jumps to $59,619 if you want to live ‘comfortably’.
Even with $500,000 in super, you will run out of money in retirement. You’ll need access to the age pension. However, there’s a bit of a problem.
If you own another property you probably won’t get it. You see, the aged pension uses an assets test to determine if you can get it or not.
They don’t count your home. No worries there. But anything else they do count. If you’ve got an investment property, you might be in bother.
If that investment property is worth more than $375,000, then your age pension access will be reduced. If it’s worth $816,000 or more, kiss the age pension goodbye. Remember the median price in Sydney is over $1.1 million, and in Melbourne over $770,000.
Be patient, your time will come
Here how it plays out. Baby boomers retire. They don’t have enough superannuation. They rely on a combination of what super they have, plus the aged pension. Investment properties will mean a reduced amount of aged pension, or none at all. The only way to get more money just to live in an expensive country is to sell the property.
Then the supply of properties to market increases, and sellers have to compete on price to sell. This put market pressures on prices — downward pressures. Soon enough you find other people rushing to sell to ‘cash in’ while they can. Then there’s even more supply to market. Soon enough supply outstrips demand and 15–20% falls creep up out of nowhere.
Then you find anyone who’s bought in to the overheated market in the last three years is in negative equity. And banks don’t like negative equity on their books.
This all builds to a property crisis the likes of what the US and the UK had to deal with. And that’s when young people should be looking to buy.
This is all against a backdrop of banks increasing rates, the economy struggling along, and full time jobs becoming harder to find.
There’s a crisis coming. It’s coming soon. Property prices don’t always go up, and soon they’ll be coming down. It will be a crisis of income that pushes it over the edge. And it will be a whole bunch of overexcited young people left holding the can as they lose their wealth.
Don’t buy into the hype. Put your money somewhere other than property, and be patient. Your time will come. And if you’ve played the long game, you’ll have a truckload of money ready to buy up any house you like as the prices plummet and the stupid money washes down the drain.
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