Welcome to the first day of your pay cut.
From today, if you earn more than $50,000 a year, you’ll get less in your pay packet than you did last week… thanks to the Federal Government’s Flood Levy.
Of course, you know our opinion on that. The Flood Levy is merely a warm up to get you used to the Carbon Tax that will start next year. But we won’t bang on about that. We’ll leave that to our resident Carbon critic, Aaron Tyrrell – see below.
Yesterday one of our old broking pals asked why we hadn’t much to say on the Aussie housing market recently:
“Why haven’t you said much on the housing market recently”, he asked!
The simple answer is this: we’d become bored with it.
There’s only so much you can blow a trumpet before you get out of puff. We’ve been proved right, so enough said.
We warned the Aussie housing market was poised to crash…
We advised if you were thinking of buying a house with a big mortgage you should hold off.
And we advised if you already had a big mortgage and were worried about keeping up repayments you should seriously consider selling.
All up, it was sound advice…
House prices keep falling
Because as our pals at RPData show, house prices keep taking a beating:
Source RPData
Not surprisingly, the two best performing Aussie cities are the home of the parasitic federal public service, and the home of the parasitic finance industry.
But here’s one word of warning. You should take all housing indices with a grain of salt.
For instance, Melbourne shows a 2.9% price drop. The fact is individual house prices have dropped much further. Anyone who thinks they’ll sell their home for 2.9% less than they could have a year ago is kidding themselves.
That works out as just a $15,000 discount on a $500,000 house.
In reality, if you want to sell now you’ve got to cut 10% – or $50,000 – off last year’s prices. Even then you’ll be lucky to get an offer.
And that price discount is only likely to grow.
For those in Perth, try taking 20-30% off last year’s prices and you’re closer to the mark.
Rental yields are gross
And as for the idea that rental yields are soaring. Take this quote from today’s The Age:
“While investors nationally have seen strong growth in rental yields, in Melbourne they declined to 3.8 per cent from a previous high in early 2009 of 4.5 per cent.”
Here’s how bad the yields are on housing:
Source RPData
Note these are gross yields. And we mean that in two ways: it’s before costs… and it’s horrible.
We have no idea why anyone on the face of the Earth would take a 3.6% gross yield on a supposed asset. After all, it costs an arm and a leg to maintain and service, and you can get almost double that by sticking cash in the bank.
And forget about growth… you won’t get any in the housing market.
Let’s be honest, housing investment is as big a joke today as it was last year and the year before. If you’re thinking of buying an investment property today because you think it’ll double then let us be blunt…
After all the warnings we’ve given, you must be a mug.
We can’t put it any plainer than that. It’s not meant to offend, but there’s no point beating about the bush.
However, not all property investment is bad…
The only way to buy investment property
If you’re after a cheap deal because you want to buy a holiday home to use now or you want an investment property because you plan on living in it in the future (but you’ll rent it out in the meantime) – then sure that could work.
But only if you do it with no or low debt.
If you can pay cash, then we’ll say this: if you can find a bargain, go for it.
You’ll probably come out ahead on the deal. And even if you don’t, who cares? You’ll have gotten some enjoyment from it as either a holiday home or a future home. And you’ll have a positive cash flow if you rent it out.
And if you need to borrow for the same purpose, we’d say don’t take out a loan for more than 50%…
Plus, you should plan on paying the loan out within five years. That way you’ve kept the interest costs to an absolute minimum.
The key to property investing today is to forget everything the spruikers have told you.
They talk about taking out big loans and using equity (debt) in one home to buy another… being blunt again, that’s the road to financial poverty… don’t do it.
But if you treat housing as a consumption item, and you don’t care if you make a penny from it or not… amazing as it sounds, you’ll actually do well.
Simply because you won’t spend too much buying the property – you know it won’t double in price, therefore you won’t pay over the odds. You won’t take out a big mortgage. And because you know your return will be low you’ll be keen to pay off the mortgage quick to cut down on financing costs.
We’ve said it all along and we’ll say it again: housing is a bad investment, so don’t expect to make money from it.
Ignore the baby-boomers who think they’re geniuses for having the good fortune to buy property just as the biggest credit boom in living memory took hold.
What worked for them in the 1980s through to the early 2000s won’t work for you now.
The strategy of investing in property using excessive credit and equity (debt) from other properties is dead. The only way to invest in property today is with cash, or with as small a loan as possible.
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