When you go to the kitchen to make a coffee it’s not really something you think about. You grab the coffee, some milk, maybe sugar (I don’t know I never really drink the stuff) and you go about your business. But it’s only because you learnt how to do this that you know what to do and quite often I wonder what people know how to do what things. For instance does “everyone” know how to change a flat tyre? Does “everyone” know how compound interest works? And lately I’ve been wondering if “everyone”, particularly the Gen Y’s, know about how pervasive and propaganda like the property market advertising is.
You see most ads are pretty easy to spot and analyse. There’s the ad on TV trying to sell you a new Holden V12 petrol guzzler. There’s those annoying people in the middle of shopping centre that constantly ask you stupid questions in order to engage you in conversation where they try and sell you their product. But did you know that there’s a whole different level of “ads” out there too? One you quite possibly aren’t even aware of?
I’m referring to the way in which ideas and opinions are spread. Now, these types of high level ads aren’t trying to sell you a particular product (such as the new Holden Astra) what they are instead trying to do is alter your perception of the world. For instance, prior to the famous De Beers diamond companies huge ad campaign diamonds where really not that prized at all, especially in love, marriage and demonstrations of affection. Now however 100 years later it is almost considered insulting to not buy your fiancé a diamond ring. That is the power of these high level perception changing techniques. (Fun fact, ask most people what the rarest gem in the world is and most will say diamond however it’s actually the ruby!)
At a very rough guess I’d say very few people are aware of this ability and even fewer are aware of how often they come into contact with it. One very specific example I’d like to talk about today though is the high level perception altering ability of the property sector. You see, once again we have the obvious ads for “domain.com.au” or for a particular house that’s gone up for sale near you but there is also the higher level ads constantly being pumped out over and over again that you likely read on a weekly basis.
This “news piece” is one of the more obvious examples, flat out telling you that it’s all about the Australian Finance Group (AFG) who “has roughly 10 per cent of the mortgage market”. They take quotes from them like this one:
“With interest rates being so low, affordability is better and with rents being quite strong, they can probably afford to borrow for a better type of property or more expensive property.”
It’s not hard to see that AFG has a BIG vested interest in keeping the property market going as much as possible. They already have 10% of it! Obviously they’re going to suggest you should borrow more “for a better type of property”. Here we see a very obvious example of what I’m talking about above. Whilst they are not outright selling you a product, they are instilling the notion in your mind that hey, you know what? Interest rates are quite low… so you should borrow more money. You should buy that more expensive house.
Is this the best financial advice for you? They have no idea, but they’ll run this “news” piece and let that little opinion sink in. Then they’ll run another one.
This time around we hear that my God! There’s “hot demand” going on out there! There’s big numbers like “700 registrations of interest” and examples of how quickly things sold. It almost sounds like they want you to believe that you should buy a property REALLY fast as otherwise you’ll miss out on this limited supply (another old sales tactic I might add).
Now to top that exceedingly obvious sales pitch off you also don’t have to look too far to discover who the likely company is behind this promotion.
“Jones Lang LaSalle is a global real estate services firm specializing in commercial property management, leasing, and investment management”
What a shocker.
These two examples were NOT hard to find I might add. It’s not like they’re rare gems that I’ve plucked from an otherwise sea of shining examples. All you have to do is view the property section of The Age and they are everywhere, every day, every week and year round this is what helps develop slowly over time people’s opinions of the property market. Reading this junk day after day after day it becomes engrained in their mind that property is ALWAYS “booming” or ALWAYS in hot demand everywhere and that this will never end. Hell, how about ANOTHER two examples??
In a way it’s almost like their own form of propaganda. Slowly, methodically repeating the same message to you over and over and over again until it insidiously creeps into your brain and becomes the default standard. You know what they say, if you repeat something enough times it MUST be true! And it appears that their message has gotten in very effectively and that message is to BUY.
The current talk of almost every person I’ve discussed property with seems to be the same. Property will ALWAYS go up, you can’t get anything safer than property, there never will be a crash and you should definitely Buy Now! ™.
Once again, just like a diamond engagement ring, it is almost considered insulting for someone to NOT buy a property of some sort. Try telling someone (anyone!) that you plan on NEVER buying any type of property for the rest of your life and see what happens. You’ll be ridiculed, berated and called crazy and why? Do they ask you what analysis you’ve done to come to this conclusion? Do they enquire what research you’ve come up with to back up your decision? Nope, it’s because you’re going against the (now) common trend, a trend that has been very heavily influenced by the property industry. There is no consideration to whether or not the current economic situation makes buying or renting a good or bad decision… it’s just Buy Now! ™. Fortunately though it seems that Gen Y seems to be resisting this trend, albeit this is more than likely due to their inability financially to follow it rather than them choosing not to.
You see it’s still apparent that Gen Y is continuing to hold off on buying properties. More of them are staying at home with their parents longer, more of them are renting for longer and more of them are becoming aware that maybe, just maybe this whole “property thing” might not add up as nicely as everyone around them keeps telling them it does and that’s not necessarily a bad thing either.
Now I have a feeling that the reason many Gen Y’s aren’t buying into the whole property thing (no pun intended) is not because they know about all of the above constant propaganda but instead because they just simply can’t afford to. They have quite literally been priced out of the market! They still WANT to buy a house and move out but they just can’t, the figures don’t add up and the lending rules that are in place simply don’t allow it.
They in turn have a few different choices:
Buy a house within an existing suburb near a CBD. This one is the most desired and costs the most too. You’re hit with a mortgage of quite likely >$400,000, maybe even >$600,000 if you’re in Sydney and given that you’re quite young and even possibly single that’s a HELL of a debt to pay off. Even with this heavy, heavy load the houses we’re talking about here aren’t anything spectacular either. Half a million doesn’t buy what it used to and the vast majority of people (the ones that don’t read MTM) will be paying that off, likely for the rest of their working lives. This makes them the modern day equivalent of indentured slaves. You might not be in chains but you have to go to work between these hours at this place and do as they say or you’re stuffed.
Rent a house within an existing suburb near a CBD. This option can be quite similar in that rents and mortgage payments in many parts are the same. However this option can also have its advantages just as buying can. The old rent vs buy debate continues to rage on however it isn’t really a debate. It’s quite straight forward to discover whether or not renting or buying is best for you but it all depends on a few different variations such as house size, current market conditions, your personality etc.
Buy a house that is smaller, further away or both than what you want. This is what most Gen Y’s have the ability to achieve at the moment but few want to accept it (hence the reluctance to do anything).
Now when deciding which of these options is the right one it often involves deciding on what state the property market is in. This is where the above propaganda comes in. Now if you are a Gen Y and you’re reading this (or even if you’re not) I want to make one thing very clear.
Virtually ALL “news” related to property is actually high level advertising.
You’ve seen the four examples above, they were pulled straight from The Age and it took me less than 5 minutes to get all of them. You think Real Estate Agents are bad? THIS is the real problem. If these news pieces were ACTUAL news, why do they constantly ask people with highly biased opinions “what the state of the market is”? Why do they keep running over and over and over again that property is selling “hot” and “fast” everywhere? It’s obvious that property can’t be selling fast EVERYWHERE so where is the news that shows us the cities and suburbs that have 0% auction rates? Further on that, why do they seem to judge the entire property market on how well auctions turn out? What about houses that sold through private sales? How well have they been going? Where is the data from non-biased sources? It’s the equivalent of the press interviewing a coffee shop owner and asking him “should people buy more coffee?”.
So if we need to know the REAL state of the property market before we help Gen Y decide whether to buy a house or not and the current media is of no use due to their obvious corruption… what should we do? Well no one can really predict what will happen to an asset class such as real estate regardless of spruiking sales pieces or not. So let’s take a tally of what CAN happen.
What Will Happen In Reality?
Now whilst I don’t have decades of real life experience in property markets I have read extensively about the history of them, including Australia’s. In the vast majority of cases all asset classes go up and down periodically as the “latest thing” comes and goes. This can be in short time frames such as 2-3 years or very long ones spanning decades. The basic principle though is that more often than not, when an individual company or even an entire asset class (such as property) experiences a “boom” period there is very little chance that it will then experience a SECOND one.
Over the last decade the Australian property market has gone up remarkably making many baby boomers very rich (at least when they count their PPoR that is). House prices have gone from costing 3-4 times your average wage to now costing 8+ times your average wage. This has led many to assume that a crash is imminent so as to correct the prices back down to historic levels. If this were to happen you’d likely see your “average” $500,000 3 bedroom dwelling get axed to around $250,000 – $300,000. The trouble with this scenario though is that it seems (from what investigation I’ve done) very unlikely to happen.
A crash could occur due to our entire economy taking a VERY big hit to it which isn’t unprecedented. Massive job losses could cause many to start selling off their negatively geared property “investments” on-mass creating a fire sale of sorts leading to drastic price drops. There’s many other ways this could happen too but for now let’s just say this has a low percentage chance (<5% maybe?). There are many, MANY vested interests that are constantly struggling to keep the house prices of Australia at their current levels. The four major banks have over 80% of their assets exposed to the real estate market making them very vulnerable which in turn means they’ll do whatever they can to keep the party going. The government also is on board as no politician wants to be at the helm when the countries entire economy goes off the rail so obviously they’ll do whatever they can to also keep the party going.
On the other hand it is far, far more likely to simply continue either stagnating or having prices rise. Usually what happens when prices become too high is that people stop buying and if production of the goods doesn’t adjust quickly you end up with a gross oversupply and no demand leading to big reductions in prices. Unfortunately for our Gen Y’s (who aren’t buying) it seems that there is STILL enough of a demand to keep the prices steady. This could be coming from the influx of immigrants that (according to immigration) accounted for 60% of Australia’s population growth.
“Natural increase and net overseas migration contributed 40 per cent and 60 per cent respectively to total population growth in the 12 months to 30 September 2012.”
Now I’m not saying this is the only reason (or that it is even the correct one) and that house prices will continue to rise but when you have almost 230,000 people every year coming into Australia and competing with the locals to buy property naturally it’s going to help keep demand up.
So now we’ve generally narrowed the result down to one of two likely scenarios:
- Prices will increase at their previous rates.
- Prices will stagnate (or grow very little).
For our Gen Y’s though these two possibilities generally mean the same thing. An unaffordable house that is out of their reach so I don’t think it really matters which one comes to fruition.
So What Should They Do?
Stay. You can stay, search for a home within one of the major cities capitols and buy/rent a sensible, starter home that isn’t beyond your means. We’re talking something that you can comfortably pay off in less than 10 years, preferably 7. This means for most Gen Y’s saving hard and a house that is significantly “less” than what they’re wanting. For a single person on a $60,000 income I wouldn’t be suggesting anything more than about $350,000 (and that’s with a 20% deposit too meaning a $280,000 loan).
If you’re renting, ensure that you’ve done the math and that the difference between what you’re paying in rent and what you would be paying on a mortgage (as well as rates, utilities etc) isn’t spent on crap. If you’re renting out a place for $300/week and you could buy a similar place with an interest only mortgage payment of $500/week… make sure that $200/week is saved and invested in a proper place. If you don’t know how to properly invest money, put it in an ING Saver account and start reading! Once you feel confident of your abilities to start investing do so. Rent money is never “dead money” so long as you invest the difference between the two figures. Quite often in fact renting is the smarter thing to do. Other times it’s not but as said above, this is a simple calculation that you can do and depends on a few external and internal factors.
Leave. You can leave by which I mean you can either leave Australia completely (there are other countries out there you know!) or you can leave the “expensive” areas of Australia. You can buy land four hours’ drive out of the CBD for $40,000 or less greatly reducing the need for a big loan. You can build a new house or even buy an existing one but either way the total costs will be MUCH lower, often half simply due to the more remote location. The challenge here though is often finding work close by which can be hard, but when we’re talking about a $250,000 difference many might consider this well worth the time and effort.
Moving overseas can be even harder however it also adds the benefit of you being able to experience a completely different culture and part of the world. Far beyond simply travelling there for 1-2 weeks and being mostly confined to tourist traps, actually living in another country for many years can open you up to different ways of life, new friends, new experiences and many more positive things, all whilst saving you hundreds of thousands of dollars and years off your working career.
It’s not easy for the Gen Y’s… and there’s a lot of propaganda and ignorance for them to fight through but they do still have some options, just not as many as their parents.
The benefits include: 1) How to pay off your mortgage faster than 99% of people with one hour a month of work 2) How to get rid of your debt and have the freedom to spend money on the things you love, guilt free 3) Clear outline of how to setup your expenses, mortgage and general finance 4) How offset accounts work and how to get the same result without being gouged by the big banks 5) How to cut through the crap and focus on the things that truly matter when taking down a mortgage 6) How to adjust the strategy so it works for you, even if you have kids, even if you only have one income 7) How to do all of these things and maintain a normal social life (and never be cheap).