The Government’s Role in the Affordability Crisis
I want to address how the Australian Government has played a role in actually creating a bit of a problem around affordability.
In recent years, we’ve seen runaway capital growth in the major capital cities which has partly been influenced by international investors coming into our market and an unparalleled appetite for the average Australian and Kiwi to get into real estate investing.
There’s a fair bit of statistical evidence out there about the number of loans that have been given to investors as distinct from first owners.
The last time I checked, it was around 35%, which is not insignificant in terms of driving housing prices in addition to things like AirBnB which continues to add stress on rents.
So, all in all, it’s a real cocktail for a complex environment.
Why the Australian and New Zealand Property Market is Both the Best and Worst in the World
The Australian and New Zealand real estate market is one of the best in the world but it’s also one of the worst in the world.
It’s one of the best in the world, because as an average investor, if you’re trying to understand how to take your modest income and use it to amplify your wealth, then there is no greater vehicle than property.
This has to do with your ability to leverage and borrow money, and therefore control higher valued assets. You can continue to access profits to then leverage yourself into other deals and that’s traditionally how many investors have, on fairly average incomes, managed to develop multi-million dollar portfolios – myself included.
The Governments Support Measures
But, what I actually want to talk about today is the strong influence the government plays in terms of how it sets our policy and the dilemma that they face now, in a post-COVID-19 world, around setting the tone for what happens around affordability.
Given the current crisis, the government is making some fairly serious policy decisions around how they’re going to support businesses. And hats off to them – I think they’ve done a relatively good job considering the nature of the crisis and how sudden it was.
Where that’s left our market right is that people are still buying. Money is very cheap and there’s a general feeling that the market is going to continue to storm ahead.
The Dilemma that the Government is Facing
Initially, there was a sense that COVID-19 was going to send the economy into a tailspin. But, actually, the media coverage was that first owners were cheering because, for the first time, people who were at the start of their journey could finally compete with the more experienced investors or wealthier wage-earners.
The media was reporting that this was the first time that people could actually have a chance to get a foothold while the economy was limping.
However, while many people thought we were defying what was going on in terms of global economics because of the high capital growth; it was actually because of all the government handouts and all of the measures that the government has taken to bolster the economy.
So, I think the dilemma that the government faces is that on one hand, they need the economy to keep going up and the property market to remain stable. But on the other hand, the effect of the government propping up the property market is continued pressure on affordability.
It’s a difficult balance to strike.
What started off as a smaller affordability issue about five to ten years ago has now become a gaping canyon for first homeowners to cross.
Why Australians need to Remain Confident about the Economy
What the media says tends to become a self-fulfilling prophecy. If enough sources say that the market is going to go up and that everything’s okay; the more people want to jump in.
There’s a high degree of trust in the literature that gets pumped out by various news sources. But the truth of the matter is that people are simply jumping because the media is suddenly shining a light on it.
We’ve seen it recently in things like Bitcoin, for example. People are motivated by this idea of wanting to have a punt.
What I would say though, is that this affordability crisis in the property market is becoming worse by the day.
I definitely appreciate the benefits of being able to create wealth through property, but I also recognise and have empathy for those people who genuinely want to enter the market but are really struggling.
What is the Solution to Help First Home Owners?
So, the question I want to debate is, “well, what is the solution to all of this?”
One thing that I saw quite recently is the New Zealand government making inroads to implement policies that require a significantly larger deposit from investors than from first homeowners.
Talking to one of my New Zealand clients, it came to light that property investors have to furnish a 40% deposit for residential property.
After reflecting on this policy, I realised that it’s so simple – not only does it allow the first homeowners to get a foot in the door, but it also takes a bit of heat out of the market and keeps it fairly robust.
So, it’s not shooting the market down, but it’s certainly slowing down the runaway capital growth while trying to keep it on an even keel. I definitely think that was a very clever policy decision by the New Zealand government.
It’ll be interesting to see how the Australian government responds over the next 12 months.
I know one thing’s for certain is that there are more homeowners in distress around mortgages and I know the number of businesses going into receivership is on the rise. So, it’ll be interesting to see what happens to some of the government support as 2021 unfolds.
The key takeaway that I’m trying to put to you is that there is conflicting tension in the priorities of the government.
On the one hand, they need to keep the economy afloat. And on the other hand, they need to do it in a way that doesn’t create runaway capital growth because it hurts a large percentage of our population as well.
So, it’s good to be aware and mindful, when you’re making decisions around investing, of the fact that this tension exists and question the probability of continued double-digit capital growth in the coming years.
From a policy perspective, the government holds a lot of power right now and the decisions they make will significantly influence how our market moves.
It’s not the time to be saying, “well, this strategy has always worked, so I’m going to jump in.”
I would be mindful of the resources that you attribute to each deal as a percentage of your wealth. I wouldn’t recommend red-lining your finances to get your foot in the door in the current economic conditions.
Make sure you keep good cash reserves so that, regardless of what happens, you’ll still thrive and survive this next block of time.
I don’t want to discourage you from recognising the value of real estate and property investment strategies – just want to encourage you to tread carefully.
If you’re interested in understanding how to create wealth through alternative strategies, please check out my programs, where I help you get onto the path of generating passive income through investing or getting in touch today!
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