Heidi and I are thinking about buying a house. Looking at what’s on the market is pretty depressing, and I’m reminded of why I didn’t want to participate in the housing market to begin with.
I remembered making a few notes and predictions a couple of years ago (when the Australian real estate market was climbing new heights of stupidity). So I searched through my Tomboy notes and was pretty suprised by what I found.
Here’s a summary:
There are three general groups (grossly divided by socio-ecomonic status and age):
- Homeowners (own/occupy a house; many borrow against equity)
- Property investors (also have investment properties)
- First homebuyers (own/occupy a house and have mortgages)
- Renting (do not own a house)
To these groups, the massive growth in the housing market means:
- Paper money (impression of added value, but not a liquid asset)
- Wealth (drammatic increase in value of liquid assets)
- Insecurity (potential paper returns, but assumption of large loans)
- Inflation (money devalued if housing prices unrealistically high)
Overall, the rapidly increasing overvaluation of the property market increases the division between rich and poor (and the older and younger generations). It also creates a pseudo-rich group who can borrow (unsustainably and unwisely) against their property equity.
When the housing market crashes, what will happen to each group?:
- No real effect (impression of loss) or high repayments (if “leveraging” equity)
- High losses (drammatic reduction in value of assets)
- High repayments (relative to value of home)
- Cash worth more (as housing prices are adjusted)
An overvalued housing market has an inflationary effect on the economy. Houses aren’t worth twice as much as they were a few years ago, the money used to buy them is less valuable.
How will the various groups respond? And what will they demand from the government?:
- We’ve lost equity and have repayments to make! Subsidise us!
- We’re losing money on our speculative investments! Bail us out!
- We have high repayments (relative to new buyers)! Subsidise us!
- We’re finally able to buy a house. (No demands.)
Given that a lot of people are caught up in the speculative property market, the government (and reserve bank) will respond with a number of measures to retain votes (and correct for overstimulation of the economy).
What will the government do for each group?:
- We’ll arrange for special conditions to protect your home and manage your repayments (eg. lower interest rates)
- We’ll artifically stimulate the market so you can liquidate your investments without too high losses (protecting banks).
- We’ll give you lower interest rates and various assistance handouts. This is only in the short-term mind you.
- We’ll give you grants to get into the market, so that you can give the money to group #2. Then we’ll take your money in tax hikes (or via a deficit) so that you can subsidise everyone else.
So maybe it doesn’t really pay to be conscientious when the majority of the population isn’t. Even less so when the government proactively tries to stimulate an overinflated market.
The first homebuyers grant is a prime example of irresponsible governance. It looks like the money is going to first homebuyers, but it’s really going to incumbant land-owners and banks via first homebuyer. It amounts to handouts for those who already have substantial assets. It assists in maintaining high property prices. This has an overall inflationary effect on the economy, and further increases socio-economic divides.
The government should instead consider: regulating how much banks can loan (to first homebuyers and those using their homes as equity), significantly increasing tax and duty on investment properties, and implementing some rental price controls. Unfortunately too many voters are already caught up in the property bubble for any government to do this.
I’m pretty happy to have made some predictions that I feel are holding up… but it’s all fairly depressing overall (especially for those that borrowed substantially against equity or bought their first house at the peak of inflated property prices).
All real estate agents we’ve dealt with recently have seemed pretty desperate, and I feel that prices will drop again after the first homeowners grant expires at the end of the month. So I’m hopeful that Heidi and I will be able to buy a house at a reasonable price at some point in future.