For the unfamiliar: “negative equity” is a situation where people owe more on their mortgages than their property is worth. Those in the USA, UK and Japan are quite familiar with the term with over one-fifth of US mortgages in negative equity since their real estate market went kaput.

Pro property gambling media

The Sydney Morning Herald (and other Australian media) is very pro-property. Unsurprising really as they rake in a lot of cash from glossy real estate advertising. An article “Bubble-burst fears rise” is somewhat strange in amongst the business-as-usual real estate spruiking. There have, in the past, been articles proclaiming half of sydney siders would be millionaires thanks to property doubling though as one blogger points out the absurdity:

Maybe the illusive dream of six zeros is within reach for all people around the world. All you have to do is borrow a million dollars. The fact that you owe the money to the bank isn’t relevant. According to news.com, you are still a millionaire!

I know the trick to becoming rich that none of these people do: real estate!

Another guy lost a bet to walk to the snowy mountains because the Government whipped out the best of all artificial price inflationary devices: the new home-owner’s grant. Basically this was a tax payer funded leap of people who hadn’t been able to save for a house or pass the necessary financial criteria into the real estate speculation game. Was it designed to increase the supply of new houses, new developments etc? Nope, not really. It was a chunk of money that went straight to banks, real estate agents and lawyers for the exchange of existing property (it did give more to new property, but let’s face it: in urban areas there’s not many spare blocks awaiting a new house). Additionally we had reductions in state revenue via stamp duty concessions and a bunch of people scamming the system for an investment property (“Oh, of course I live there..”). That decision to inflate the cost of existing houses was money that we as society were taking away from hospitals, schools, police, fire, universities etc in order to fuel a real estate boom.

Some unofficial free (non-financial adviser) financial advice*

Call me crazy, but I still cling to the idea that you shouldn’t buy shit you can’t afford. If you can’t afford it then.. wait for it.. Don’t fucking buy it! If you need to get a loan make sure you look at the historical rates and factor in some slack and money to still eat.

If you can’t afford it then at least do the political process a fair deal and not whinge when your foray into the world of debt fuelled real estate gambling doesn’t pay off.

If you are only able to get into real estate at the lowest interest rates in 20 something years and rates typically sit at double that (and have gone as high as 18-19%) then perhaps you should just save for a while longer or go with another plan. Asking a bank or someone making a commission from a bank as to whether you can afford a particular loan and them saying “yes, of course” is like asking the wolf whether he can mind the chicken coop.

* should not be taken as actual financial advice. I may work for a bank, but I have no formal credentials in this space whatsoever.. Purely interested in the topic from a rant point of view.

The spin can spin
It’s ok, the Sydney Morning Herald and other newspapers can go from inflating the bubble via puff piece real estate hype to handy guides on “dealing with negative equity” and “cooking gruel for the mortgage stressed”.
Perhaps “The reality of debt obsessed society” or “see, real estate prices DO go down”?
Either way I’d lay money we will we keep getting terms like “hardship” and “endure” used to describe people’s voluntary debt-to-the-eyeballs situation. I even had a religious workmate compare mortgages to slavery from biblical time. Such is the horrendous injustice foisted upon the public by evil banks dangling mortgages in front of people with future millionaire property mogul aspirations.

But Australia’s situation is special
Oh we’re special alright, just “needs to be told not to hit self in head with a brick daily” special. We’ve got the world’s most overpriced property, but that doesn’t mean a thing apparently.

Fight club quote on the matter.

We’ll continue to hear that unlike every other real estate bubble (US, UK, Japan etc) Australia is DIFFERENT, we’re UNIQUE. We’ll hear how it’s not crazy that people are paying a million bucks for a junkie infested rats’ nest, or an $800K “bargain” for living next to a toxic waste dump. Don’t worry about the toxic waste dump because soon you’ll just get another mortgage on a slightly better place once you’ve built up enough equity in your current place. *slaps head* Of course! Two mortgages on this notion of price increase gambling must be twice as safe as having just one.

Oh, of course we’ve got immigration.

The redneck approach to immigration control. Also funnily enough what the real estate industry is saying effectively with their "shortage of 200-300,000 houses" garbage.

That whole “big Australia” concept and some very dubious sounding “Shortage of 200,000 houses” (now 300K I saw somewhere, or just rounding up?) that keeps getting thrown into articles. Where did that number come from? If this was the homeless figure: perhaps. If it’s the number of people thinking of buying or who would like to buy: that’s a bullshit figure. Outside the unfortunate Asian students getting rorted by dodgy landlords stuffing them 3 or 4 to a room in the high-rises around Chinatown in Sydney I think density of living is pretty low in Sydney at least. I know of lots of people with spare rooms or a couple in a 2 or 3 bedroom flat that could quite easily move someone in if rental prices rose too much.

Never mind Sydney (and other places) have got a tonne of “kidults” (adult age, but never left home and don’t tend to pay bills, proper rent etc) perpetually living at home because they think that to move out of home they MUST buy a property (in amongst their instant CEO position at their first job). That’ll somewhat dent any future profits having to pay food, electricity etc for your useless 35 year old kidult sponging off you until you die.

The future?

Well, the USA has pioneered the concept of a “strategic default on mortgage“, I’m not sure that’s as much of an option in Australia because you can’t just put the keys in the mail (“jingle mail”) to the bank and walk away.

If we get higher interest rates perhaps that will make saving more attractive.  Those of us with savings currently are enjoying our 6 something percent returns on savings accounts that we can withdraw in a day or two (versus 6 months +) when needed or investing in the stock market (which at least has the honesty of an investment choice able to acknowledge it goes down on occasion). The sooner we start affording people the same tax advantages as negative gearing the better: we might get away from burying ourselves in debt.

As a thought for the future: it’d be nice if people were pouring money into research/development rather than property. Or banks devoting more time to business loans instead of housing mortgages (as one NAB banker said recently).

If ever there was “dead money” as far as the history of mankind is concerned it’s buying and selling land to keep up with the Joneses. Inventing things, solving the problems of the world: now there’s money that’s doing something.

A news.com.au article is for once apparently not pushing the myth that “housing prices always go up” (well, kinda):

A QUARTER of Sydney homeowners who bought and sold their properties during the past five years lost money.

Despite a broadly rising market, property analyst Residex has revealed 24 per cent of properties bought and sold between January 2005 and January 2010 fetched less than the vendors had paid.

The average shortfall was more than $54,000 but varied between suburbs.

Ok, so that’s about the first time I’ve read a newspaper report that has pointed out that “house prices always go up, except when they don’t”. Must be time for one of those Hitler parodies that humourless political killjoys get so upset about:

The trouble with real estate is that it’s very much like a religion at times: everyone wants to believe a bunch of myths and bullshit stories passed on down through the age. Just like the religious: they don’t like having the harsh reality pointed out to them lest it offend the carefully arranged justifications and half truths that belief is based on. Every single bubble then crash seems to have the same core of delusion oblivious to the lessons elsewhere in the world.

We’re told that the average shortfall was more than a year’s average wages, so that much we know went straight to the bank. An extraordinary amount of money to just blow away in the breeze. In other words: people bought a house and ended up paying on average “more than $54,000″ bank fee essentially (that’s on top of whatever else they paid them.. see below). I bitch and moan about copping a late fee on a credit card, let alone having to work for some number of months just to make up the difference that flows straight to bank CEO bonuses.

So I’d go further if I was in charge of doing the actual journalism for this story because even this apparently negative story is hiding some pretty big problems with their analysis of who lost money. We can most certainly NOT assume that the 3/4 made any money with the metric chosen.

No bullshit sugar coating please.

Let’s look at why the first paragraph isn’t at all accurate and hides the true number of people that lose in the property game.

Inflation

Firstly there’s inflation, if you sell a house for exactly what you paid for it a year or two later then you’ve lost money because your dollar amount doesn’t purchase as much as it used to. So for each year you keep the house you have to make (currently) around 2 and 3 percent in order to not lose money. If you don’t, you lose money. So at very least the calculations should have been based around beating inflation which would have increased that quarter by a little bit. Not huge amounts, but still.

Loan expenses/Interest

Now I don’t have a mortgage, but I’ve heard what’s involved with getting one (and understand the basic concept). There’s loan application fees, insurance (if you don’t have enough of a deposit), interest charges on a rather massive amount of money.. So unless you pay for the house with a suitcase of cash: you have to have the house price go up by whatever amount that all is. Then you most likely will have early exit fees if you sell the house before paying the loan off. So assuming even the nice low rates we have currently house price needs to rise by at least that plus a the other loan entry/exit fees.

I think it is a fairly safe bet that as we now owe our GDP (thanks largely to mortgages) for the first time ever: people are using loans to get into the real estate concept. The trouble that follows is that people become mortgage rate obsessed and vote against anyone who appears to threaten their fragile maxed out finances.

Taxes/stamp duty etc

Unlike the “house prices always go up” myth, there is certainty in two things in life: death and taxes. Assuming you don’t die first government will either take a chunk at the start, during, at the end or at all times.

Kittens.. A more enjoyable alternative to tax.

Sure the govt has been waiving/reducing some of their fees, but somewhere in there there’s some tax being collected. If it isn’t from the housing industry then the rest of us are copping it elsewhere. Again, this wouldn’t be too much of a stretch to factor in a rough amount to work out whether certain house sales were profitable or not.

Real estate fees

Marcus Brigstocke once said “Have you ever noticed that you never see an old real estate agent? Surely proof that you CAN die from shame!”.

Going off my experiences with real estate agents: I know those smarmy bastards aren’t in it for the love.. One day I’ll come across one that’s even remotely professional, but til then I’ll keep the insults flowing. They’re lurking around like a bad smell when you buy and pop up again when you want to sell. There’s really no way to avoid them digging out a kidney’s worth of cash, taking it off to their little real estate lairs and doing whatever they do with their money when they aren’t biting the heads off puppies and kittens for kicks.

Feeding time for your contract waving estate agent.

So whatever the privilege of the company of real estate agents costs you: the house has to rise at least that amount times two. More if you attach a cost to putting up with the crap.

Strata fees, council rates, repairs, etc etc

Unlike moving into a dodgy rental property that has rising damp or light fittings falling from the ceiling (I lived in one of those back in uni): you can’t just decide to escape the dive and leave it to the cockroaches.

Nope, you bought the thing. That means instead of calling up a landlord and sticking them with the thousand buck repair bill unexpectedly: you have to pay it. If you have tenants: they can do it to you at any time.

Then there’s strata fees: perhaps the most inefficient, pointless waste of space organisational structures on the planet. Their sole purpose seems to be to funnel massive amounts of money out of owners and throw it into an incredibly deep dark pit with vampire like lawyers/accountants feasting off a large percentage of the money as it falls past them down into the darkness. When enough money collects at the bottom of the pit a big money intensive scoop in the form of “essential building maintenance” or the generic “improvements” will ensure the money pit remains a money pit.

Opportunity costs/passing up earning interest to pay interest

I currently earn on my “easy to get to” money just below 6 percent mark. If I had a loan I would be paying interest rather than earning interest. I would also not have money to spend on various things, experiences, nice food/booze etc. While I’m opposed to rampant consumerism as a measure of society: the way things are structured now is that consumption equals jobs equals economy continues to go around. If people are spending all of their available income on mortgage payments (e.g. bank profits.. which do generate some small number of jobs and pay a small number of people large salaries) then surely they’ll have to spend less on other things. Restaurants will be shunned in favour of eating at home. Clothes won’t be bought. Night outs will be replaced with tv nights. Weekends away will be weekends at home.

Granted, this might be a good thing for the environment cos we sure as all hell don’t need half the stuff we buy in developed nations: but hasn’t anyone in the government thought beyond the “everyone should own a house” idea and to what that means?
US president Eisenhower made a speech about the importance of the USA not falling into dependence on the Military Industrial Complex for some very good reasons.

Think we need something similar about the dangers of the Housing Speculation Dependence. Rent money is no more dead money than buying food or paying for the bus is dead money. It’s acquisition of an essential thing in life (shelter, food, water etc). Interest money is just as dead as rent money (except you pay a lot more of it and end up with a less nice/convenient place to live for far more money).
Currently we’re treating housing as some sort of vehicle to immense wealth when it should be treated as shelter, nothing more. It certainly shouldn’t be a government sanctioned tax evasion technique (investment properties allow people to claim interest payments as tax deductions for some insane reason.. which means taxes have to be higher than they should be to make up this loss.. in addition to the other subsidies).
That or maybe it just sucks to not be able to buy a beer without considering the mortgage dragging behind you.

So just how many people did lose money in real estate?

Hard to tell really as the people coming up with the “a quarter” didn’t even attempt to work it out. All I know it’s more than the quarter stated though unless there are a lot of people buying things without the need for loans/paying taxes/making repairs or who are opposed to earning interest on their money had they put it in investments. It could be as high as a half? Or maybe it wouldn’t make much difference.. But picking purchase and sale price, although easy, is a stupid measure: especially without even taking inflation and taxes into account.

So perhaps though we’ll start to see a bit of critical reporting as the moronic “appears to be the start of a bubble” realises that the bubble’s been going for ages and a pop is on the near horizon. I notice quite a lot how selective wording is used to gloss over or paint a pro-buyer picture whenever at all possible. The trouble is (and we’ve seen this) that people are rather stupid when it comes to economics, interpretation of statistics/numerical information. The baby bonus and first homeowner’s grant is proof enough of that; “bogan economics” is rather short sighted. This guy has a good idea on how mathematics has to change to give people more of a hope of understanding such concepts:

Conclusion
I wouldn’t be jumping in to buy real estate just yet until this silliness of “I’m banking on building equity” or “housing always makes money”. The UK has had a big crash with prices falling to half, the USA was even worse (still is). Absolutely nothing in the lead up to this indicates Australia is immune (and foreclosure rates would be an interesting one to watch with the rising interest rates): it’s obsessed with owning property (life worth defined by house ownership?). The papers, politicians and lots and lots of people are all drunk on selling each other the tales of an easy, risk free path to overnight wealth. No critical debate/argument appears in the papers.

Common sense says that you can’t infinitely raise the prices of houses because demand will dry up. Housing can’t get too much more unaffordable now and it’s only the greed of the banks that is allowing so many people into the market who would normally have to save for a number of years. Those people can’t really afford big loans, it’s an enormous risk when interest rates rise.

I’d urge anyone considering buying to carefully read the language and terms used and compare it to the metric/statistics in the article. For example the focus was on profitability so when sale prices were rising they used averages, then they swapped to median (a type of average.. but seems a bit pick and choose). Recently I saw an article talking about “activity” (but conspicuously avoiding mentioning whether prices at those sales were high). By that measure a firesale crash situation can be spun “housing activity rises 20%.. flurry of activity in the market.. strong auction figures” etc while completely skewing reality. Only if people take the effort to understand what the real data is will they avoid joining their voices to the unthinking frenzy of property speculation.

Or maybe I just want to make myself feel better about my financial choices or my choice to rent and live in a much nicer place/area than I could afford to buy in? Time will tell: but I think once we get some critical reporting on the situation start to appear: people will perhaps not be so keen to get into debt. I haven’t made many public predictions, but this one I’ll take the risk. After all, it’s not my house on the line, but I might pick up a bargain in the future when the insanity is over.