It’s time to unlock the closet and let out all of the secrets.
The fact that wealth building by and large occurs through property.
The biggest companies in the world may sell products of great value but
it is their ability to invest in the profits that helps
them grow. And what do they invest in more
than any other commodity?
Answer: Property
Why?
Answer: Because property is the safest way
of accruing wealth with the smallest amount of
risk.
Ever heard of the saying “Safe as Houses”?
There’s a message in there!
So why does it seem so hard to get into a home right now?
It seems that housing affordability, first home ownership and even
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keeping a home might seems difficult in many parts of the western
world.
At the time I write this book the US is suffering a considerable
downturn in the property market with masses of people trying to sell up
and consequently losing sizable amounts of money as prices continue to
fall. But in the year 2000, homes in the US were considered to be the
best performing asset.
I regularly receive emails from people in New Zealand asking how
they will ever be able to afford to buy into their own homes with the
prices so high!
In Perth, Western Australia, there has been a major mining boom in
the past couple of years and the housing market has surged into frenzy.
This is as a result of much needed labour coming from around the
country and around the world in order to fulfil the high demand for
mineral resources. The mining boom has also provided high salaries
which has allowed many more people to buy into investment properties
(in order to reduce tax), further pushing the prices up. Therefore, the
average first home owner with an average income is competing in a
challenging market already. But that’s not to say that all is lost. There
are other ways and means of getting into your first home that require a
change of approach and might mean buying in another place first… read
on.
Now I must make mention here that this is not about giving false
hope. In actual fact I would like to do the reverse. It is my aim to provide
hope where there is a definite shortage of supply but a large demand. To
me, hope is something to hang onto while you’re working your way to
getting where you want to go because without the hope factor there is no
drive and without the drive there is no progression.
But… while you do need a big dose of hope you cannot just live in
hope. You still have to make it happen!
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Overcoming the doom and
gloom associated with home
ownership
We need to look past the doom and gloom constantly being forecast
by the media. It is the pessimism behind the news that can deter people
from ever making an attempt into getting a home of their own.
I frequently read captions similar to the following newspaper articles.
These headings were featured in news articles from 1965 through to 2007.
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When I began researching for this book I spent days, even weeks in
the State Library archives looking at the history of house ownership and
was amazed at the number of times these concerns were raised
throughout the past forty years. News relating to housing affordability
was raid time and time again with the same underlining reasons. They
include low wages, poor productivity, high interest rates and most often
the cost of housing.
I began to question if it had ever been any other way.
Are the current times tough or prosperous? Two articles in the
Courier Mail highlight the problem.1
One article says that housing affordability is a national issue while the
other is telling us that the property market has never looked better… and
the stories were on the same page.
So you think that it is much harder to get into your first home now
than it was when your parents started out?
Well, for some reason that’s what we are being conditioned to
believe. I want to show you the pattern of change that has taken place
over the past 40 years. I use the 40-year timeframe because it is the
length of time I have been around, but in actual fact we could go back
even further.
To provide some concrete evidence of how the housing market works
and in conjunction with the market the media’s take on it, I’ve
researched news article of the past 40 years, about the housing market.
On August 1, 1984, Australian banks and financial institution entered
an entirely new era for lending and competition. This was the time of
deregulation of the banks, which meant that the flood gates literally
opened to prospective home owners and investors.
The changing times provided some options many of us had never
seen in the past. The deregulation of the banks opened a ‘Pandora’s
Box’. The strict often unrealistic expectations that a bank placed on
people in order to get a loan were now being challenged and for the first
time in history there was some genuine competition. Banks were then
forced to change their criteria and profile to compete. The new wave of
overseas financiers provided more options and leniency, but what was
the most radical change for home owners was the way a loan could be
structured.
In years gone by, many people paid their mortgages off over the 30
1. The Courier Mail, July 14-15, 2007
Article 1 — First Loans ‘pave way to ruin’ p 13
Article 2 — It’s back to the ‘80s boom times — ‘Heady Days’ p 14
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year timeframe proffered by the banks. I use the term ‘proffered’
because it was indeed the banks that profited. Apart from the fact that
most people weren’t informed of the value of paying off the mortgage
weekly, fortnightly or with extra payments, most people weren’t given
the option as the bank would accept only monthly home loan
repayments. In most cases people were paying many years worth of
interest before they even got close to actually paying off the capital (I.e.
the amount they had initially borrowed).
From 1984 through to 2007, the changes within the banking industry
progressively became more sophisticated, until the options for lending
and the type of home loans available were many and varied. Now you
can choose how to make the loan work for you in the short and long-
term. For instance, you may have the option to fix the interest rate or
have a loan over a shorter or -longer time; or pay a small deposit or no
deposit at all. These options weren’t available in the 1950s, ‘60s, ‘70s
and ‘80s. The 1990s helped bring about the further change but nothing
like what is available to the housing consumer now.
What I am trying to illustrate here is that while you may think that
getting into your first home is too hard now, the fact remains that the
services and options to help you into home ownership are much more
attainable than in the past.
Yes! I know that property values never excee
ded hundreds of
thousands dollars in the past and that the demand on housing may never
have been so intense.
Or has it?
This is a time to recognise that everything is
relative. Our grandparents may recall a time in
history when in fact the demand on housing was
just as high and people were just as desperate,
such as during the Depression or living through
the First and Second World Wars. The
unyielding, rigid banks then made accessibility
into home ownership extremely difficult. Strict,
inflexible guidelines during harsh conditions
made it very hard for people of that time to get into homes of their own,
and yet people seemed to do it nonetheless.
Okay, so the argument is that most people cannot afford the
repayments on a home loan for such an astronomical amount of money
now. But I have to tell you that this is one argument that has been played
out through the decades. Current incomes do have the ability to pay off
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the loan repayments if they are structured correctly but more
importantly, if changes are made to the way in which we view our
current expenditure.
The Australian
‘Rental Shortage Effects Sydney’
This article stated that the number of residential properties available
for rent has fallen to dangerous low levels in Sydney. The reporter added
that a survey by the Real Estate Institute of NSW said that it was less
than 1 percent availability in some districts.
Sounds familiar doesn’t it? But I have used this as an example for two
reasons.
1. The extract is from The Australian, 30 July 1984. It is well over
20 years old and yet we still hear the same thing being said in
our daily news.
2. Rental accommodation is very unpredictable. The economy,
new legislation and new governments can have a huge bearing
on what is available for rent and whether rental accommodation
will be an easy process or a hard one. The western world is
currently experiencing grave rental shortage so has anything
really changed?
I guess the message I am trying to give to anyone considering home
ownership right now is that you needn’t be put off by what is being said
in the media. Instead, use that information as a guide of what you may
need to be aware of but should not necessarily be perturbed by.
Whatever you do, please don’t allow it to be the motivating factor for
not trying to get into your first home.
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The dreaded interest rate rise
This is an area of concern that scares people off. Having to pay an
extra $30, $40 or $100 on top of an already high mortgage repayment
can be too much to bear for some people, especially when they know
they aren’t going to earn more each month.
This is the rule of thumb: when you go to purchase a property at
whatever the cost might be, always allow an extra 40% in costs to cover
insurance, maintenance, rates, water and for the unexpected such as
interest rate rises.
If you honestly believe you can cover the mortgage and those other
costs with the interest rate given at that time, but don’t think you could
cope if the interest was to continually go up, then - fix the loan!
Take into account that when you do fix a loan, it won’t be as flexible
as a variable loan if you do want to make changes later on.
Nevertheless, I’m all for you keeping your roof over your head and
therefore you need to be prepared for that ‘just in case’ scenario. If
fixing the loan gives you some peace of mind because you know you can
pay the set amount - then fix it!
If the interest rates were to come down you may lose out slightly, but
it is better to wear that small loss than lose your whole investment. You
can always renegotiate the terms when the fixed term is over.
If you choose to remain a tenant because interest rates are climbing,
don’t think you will come out financially unscathed either, because the
landlord will need to increase rents to stay financially buoyant. So
wouldn’t it be better to wear the cost of your own mortgage than
somebody else’s?
I mentioned that I lived through the highest mortgage rate rises ever
known in Australia. Many people lost their homes during that time
through repossession, including my parents.
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I have many mortgages of my own; some with fixed rates and others
are variable. Within the past 18 months I have experienced five interest
rate rises, and people keep asking me how on earth I manage to still meet
the repayments given I am limited by the amount of money I can raise
rants by and the number of times I can do it.
I tell them I have a Line of Credit available to me which allows me to
tap into extra funds. When you accrue equity (capital growth in a
property) a new world of credit is open to you that can carry you over
(visit www.netstarter.com.au)
However, that doesn’t mean that I don’t feel the pinch.
I too have been forced to readjust my finance and ‘cut back’ in order
to stay on top of it all. The key is to stay on top of it!
The other advantage I have is that if it did get too difficult I could
always sell off one or two properties and the profit would carry me
through for another few years until the market lifted again. (But I always
keep a home for myself and my family). Having said all that, I would
only sell as an absolute final resort, I would always get rid of other
financial non-essentials first.
This is a picture of me when I did sell.
The only consolation was that it gave me the confidence to sell
property myself. I wasn’t able to get it sold through a real estate agent so
after six months I had a go myself. I not only sold it myself within two
weeks but I sold it for $25,000 more than the real estate agent had had it
on the market for.
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Picking the right property
The right property will have two things going for it: it will be in a
residential area and it will be affordable to you. You may like to break
down your own criteria such as easy access to work, schools and
transport, four bedrooms, two bathrooms, a dishwasher and a garage, but
remember that this property doesn’t need to come with all the
conveniences because it was your first entry into real estate. It is your
first home and requires nothing more than you and your family either
living in it or getting an income from it. Usually, the more the house has
going for it cosmetically the more cost there is to you. With your first
home the idea is to bring that mortgage down as much as possible so that
you can enjoy a more luxurious home later. In the meantime, enjoy the
fact that it’s yours and think of it as a future goldmine.
Start small and work your way up NOT the other way round!
It’s all about starting small and working you way
up, not starting big and ending up with nothing.
You need to look closely at the property from a
clinical viewpoint, not fall for it bec
ause it is
beautifully decorated. Don’t forget the furniture
will go with the buyer so disregard this.
It does need to be structurally sound, with no sign
of white-and damage, water leakage problems or
salt damp. Check and recheck. Really have a good
look because you need to know where and when
hidden costs may arise.
Price
IF you’re buying from a real estate agent you need to
bear in mind that they are working for the seller.. Not
you, the buyer.
Agents are going to be working to get the best
possible price not the least.
When you are hoping to purchase you need to be realistic and not
insulting. If you’ve done your homework you will be aware of what sort
of price range properties are going for within that region. Start with a
price in mind that you know you can afford then offer a few thousands
dollar less depending on the price of the property. Of course, if you
believe that the price asked for is way over the value of what it should
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be, make mention of it to the agent. He can gauge the response and feed
it back to the sellers.
The dream home
So what is your dream when it comes to your own home?
It is the cottage-type home with mud brick walls, an open fire and
exposed beams in the ceiling? Or would you prefer to own the
commonly described brick and tile with four bedroom and two
bathrooms, a two-car accommodation and a fully landscaped garden?
What about a pool with a cascading waterfall? Or maybe your taste is
something more architecturally designed something that is modern, with
angular aluminium structures and floor-to-ceiling glass. The glass takes
in the right amount of light which is cool in summer and warm in winter.
You could have a list a mile long of what you may desire. It’s what
you might consider is the perfect home.
For me, the perfect home is one that feels just like a home. It doesn’t
necessarily have all the modern conveniences, spa baths or luxury
furniture. But it does have something intrinsically special… it is ‘mine’
(with some ownership by the bank).
It may be small, even cramped, with shabby floor coverings, swollen
melamine on the kitchen cupboards and missing some of the more
comfortable accessories such as reverse cycle air-conditioning, but it is
Goodbye Renting Page 5