How to build a house of cards

How to build a house of cards in 8 easy steps.

Step 1: Tell people property only increases in value

Allow this belief to be propagated unabated.

(Note: property does not always increase in value)

Step 2: Create tax incentives to invest in property

These consist of negative gearing and depreciation benefits for investment properties, and the tax free status for your home. Oh, don’t forget Super Scheme Saver and First Home Owner Concessions too.

This sees Australians take on some of the biggest mortgages in the world, in one of the most land rich countries in the world.

Step 3: Allow borrowers to take out a loan for 100% of the purchase price of the property

Don’t allow the same for other investments, making those investments somewhat more unattractive.

Step 4: Create a culture centred around property

This includes property renovation shows, property flipping shows, and build this culture up to the point that at every BBQ, everyone is talking about property.

Step 5: Allow foreign investment in Australian property

Houses are there to provide shelter to Australian residents, right?

So why then allow foreign owners to invest in property they will never live in?

I hope someday soon there will be a much deeper discussion at a political level about the social policy aspect of housing versus the current investment focus.

Step 5: Decrease interest rates to the lowest point they have even been

Housing affordability is directly linked to interest rates.

As interest rates go down, house prices go up.

Step 6: Keep reducing interest rates, and then relax the responsible lending rules

Just when you thought interest rates could only go up, interest rates reduced even further.

If the responsible lending rules that were the outcome of the Royal Commission were so important, why reverse the regulations so quickly?

By this stage, a self-fulfilling prophecy is in place.

Prices HAVE only increased!

(Not really for every property, but you get the point I am trying to make).

Step 7: Release an internal document that predicted price growth

The release of an internal document by the RBA, which predicted a 30% increase in house prices over three years, was everything we needed for pandemonium to start.

The media push of said report didn’t help either.

People literally couldn’t control themselves.

“If the RBA says prices will increase by 30%, we must buy property now!”

And buy property they did.

Some of those buyers even paid 30% above market value, thinking they would get another 30% growth over the next three years, just like the RBA said they would…

People have never been good at the detail, and potentially even worse at long-term thinking.

Step 8: Provide $1trillion in Government assistance

When free money is given to businesses, especially those that don't need it, the money has to go somewhere.

When money is able to be released from super, many saw this as an opportunity to finally build up their home deposit.

All the extra cash that was circulated into the economy during Covid had to go somewhere, and into property it went. At a time when interest rates were the lowest they had ever been.

By this stage, a house of cards was officially built.

When it comes to Australian property, there are some seriously sobering facts:

• We have the second most expensive housing in the world, only behind Hong Kong;
  

• We hold the record for the biggest mortgages in the world, not exactly something to be proud of; and
  

• Research indicates that most Australians can’t afford an unexpected bill totalling more than $1,500. This does not bode well for when interest rates increase or when that expensive house they just bought needs a repaint, a new kitchen, or repairs and maintenance.

So I’m bearish on Australian property.

It’s hard for me to see the property price growth as being driven by anything other than Australian’s obsession with property, low interest rates and a healthy dose of FOMO.

Logic shows that property is actually a pretty bad investment:

• High buying costs

• High selling costs

• Difficult to buy and sell

• Illiquid

• Low income yield

• Expensive upkeep

• The building component of the asset deteriorates in quality every year

Most likely I am wrong to apply logic to a market driven by sentiment.

So what will happen next?

Logic should show that once interest rates start to increase, a lot of people will be in a world of pain, especially those that recently purchased property at all time highs.

But if I can recognise that risk, surely the government can too, and so far they have done absolutely everything they can to not only prop up the property market, but to keep the capital growth coming too.

This house of cards is not one person's doing, nor solely the fault of the Government or regulators. We allowed ourselves to be caught up in the FOMO, to spend at a time when we should be saving.

Only time will tell whether or not this house of cards will fall down.