Why we need to be teaching the basics of property acquisition in schools: Catherine Cashmore
Australia doesn’t rank badly on a global scale when it comes to market transparency. In detailed surveys conducted by Jones Lang LaSalle, we consistently rank in the top three from 81 assessed markets across America, Europe, Asia Pacific, the Middle East and North Africa.
For those interested, the survey covers performance measurement, market fundamentals, listed vehicles, regulatory and legal environments and most importantly, ethical standards among professionals hired to transact business. As Jones Lang LaSalle correctly stress on their website, rising levels of transparency are essential in terms of attracting both local and foreign investment.
As stated in their report, they “take the view that a highly transparent market is not only fairly free from corruption, it also has readily available information and operates in a fair and consistent manner”.
However, if you took this on face value without further investigation, you could have been fooled – along with many others – that pre-GFC America contained a healthy real estate environment. In 2006 for example (at the sparky end of the boom) the US ranked only second in their index – one step behind Australia. It clearly shows that “transparency” is not the sole answer to stability, nor is it an adequate measure of a “fair and consistent” atmosphere.
Despite Australia’s high ranking, there’s ample room for improvement. Our property market’s estimated value is in excess of $4.5 trillion, with the measure of household debt to disposable income sitting around 150%. In light of this, there have been calls for an increased level of “independent” government administered regulation over the whole industry. However, it’s important to understand it’s not a lack of regulation that has locked increasing numbers out of home ownership; rather it can be directly attributed to bad regulation and poor government policy (FHOG, negative gearing and so forth).
For the average Joe on the street, sourcing accurate sales data is generally only available at a cost. Statistics can only give broad indications of market sentiment providing you also take into account various external factors which can distort the data. Market research is important, however it never accounts for individual circumstance and neither is it sight for the blind. There are always risks associated with any investment; however property isn’t an item just to be traded like stocks and shares. It’s a vital commodity essential for our very survival – something that’s often forgotten by the broader offshoots of the industry – and with this in mind, we need to keep a “moral” head when discussing an “amoral” property market.
Attributed to the increasing costs of home ownership, there’s been a need to create a kind of property welfare system for those who are unable to afford the luxury. Governments have historically grappled with the question of providing safe and secure shelter for their rising populous – the answer unfortunately has too often resided in the provision of easier access to debt. The latest scheme comes from the NT Government who have devised a plan for first home buyers to borrow up to $750,000 with no deposit or mortgage insurance applicable. Even Santa can’t offer such a deal. Once again, we’re enticing vunerable prospective first time buyers to overpay and over extend their borrowing capacity.
In Australia, the limited areas of habitable land have ensured most are forced to situate close to the major capitals. In essence, Australia’s population are trying to squeeze into cities on the same par as London with prices to match – it’s unsustainable – (hence why levels of ownership are now falling).
In the UK and Europe, the emergence of satellite towns linked by rail networks and major transport routes has dispersed the population over the available regional land mass. Schools, town centres, factories, small businesses followed and, for a time comparatively affordable options shone a light for the urban sprawl. I’ve written previously regarding Australia’s determination (intentional or otherwise) to keep its population contained in tight donut circles surrounding the major capitals and failing to invest in the necessary infrastructure to provide alternative regional options. The success – or rather lack thereof – has in part lead to our so-called “housing shortage” and stubborn 5% national vacancy rates. In short, we have plenty of “roof space”, but a severe lack of “affordable” roof space.
This has resulted in an intense squeeze around existing transport arterials and ageing rail networks, along with accusations of “NIMMYism” for owners who entered the market early, and are vainly trying to protect their assets and neighbourhood landscapes, which inspired them to take out their large mortgages initially.
There’s no balance to the question of affordability, however one thing is evident – the tremendous cost of accommodation (rental or otherwise) is an impending tower of doom for future home owners and renters alike. Unless we address it from the ground up, bandaged systems made up of incentives and grants – which inflate, rather than stabilise the market – along with poor modes of development, simply sets a proportion of Australia’s population up for an almighty fall, when our “luck” runs out.
In the US, the key to the rising bubble of property debt was to keep interest rates low, ensure the job market remained stable and increase vehicles of lending forever buoyed on by the excitement of capital gains (dreams of future wealth)… sound familiar?
The formula was perceived “safe”, however encouragement of overinvestment in the property market (high leveraging) for a broad proportion of the population not only broke the rules of “risk management”, but failed to encourage a properly administered diversification of asset management. Property can be a great investment as part of a balanced portfolio, providing its primary purpose is never ignored and providing debt is managed.
The evolution of their poorly regulated financial system, which propped up a broken model of illusionary wealth, has resulted in meteoric demise, crashing the price of housing and plunging a large proportion of America’s population into comparative poverty.
The US may yet work its way into a new financial system based on safer and less greedy foundations, however, in the meantime, residents struggle with negative equity, thrown out of housing they can no longer afford, yet housing that no longer holds value to the financial institutions who were prepared to fund the acquisition in the first place. The housing sits empty while the homeless seek shelter – a bizarre situation.
Bob Carr may have been “untactful” in his commentary on the US, however his out of context statement was in part correct. The perception of America being in decline has been reiterated from many corners – why deny it? They’re not without hope, but as with Australia, they’re without strong leadership. There’s a long road ahead and hard lessons to learn for our friends in the US – lessons we must take heed of.
In an ideal world we could perhaps come to a new understanding of wealth – wealth not driven by greed, but rather by need. A world which does not constantly push us to buy and trade items of status; but teaches us to respect and save for items of necessity. A world that provides – or more importantly saves – for the needs of all – rather than panders to the greedy side of human nature. Most importantly, a world with a system of finance allowed to fail when greed takes hold so the hard lessons are learnt. Rather than being propped up by government policy, tax payer dollars and the never ending creation of complex financial structures which permit it to evolve to monstrous proportions, which places a broad proportion of the population with no choice but to borrow a life time’s worth of debt for the sake of shelter. We’re not winning – we’re burdening our future generations with insurmountable mountains of debt.
If we only regard property as a commodity to be bought and sold for profit, rather than taking a broader, more rational approach to the larger question of affordability, then relying on our ruling powers – whose motivations have a vested interest in maintaining the vote of some 1.1 million negatively geared property investors – to create increasing methods of regulation on the industry as a whole, we won’t solve the problem of a slow demise in ownership and increasing levels of mortgage stress.
Surveys conducted in the US at the start of the financial crisis, demonstrate the tremendous reliance the majority had in complex financial systems governing powers had not only allowed, but also regulated. Pyramids of intricate financial structures you’d need a master’s degree to understand. All were based on “assumed” prospective wealth. All claimed to act in the best interests of the client. Few people questioned the wisdom of borrowing outside of their means – refinancing every three years to keep the “honeymoon” going. Less questioned the future prospects of their investment. They were allowed to do it by way of Government policy and regulation, therefore it inspired the perceived quality of safety
There’s a kind of foolish assumption that there’s nothing safer than bricks and mortar. In the US, if the buyer defaults, they walk away, however they can’t take the house with them; in the eyes of the lender, they could simply recover any outstanding debt by selling the house and riding on a boom of ever increasing debt. Consequently, it’s now possible to purchase properties in the US which were once priced in excess of $400,000 for as little as $1000. The fall has been hard – but have we learnt?
Some have suggested labelling everything data providers publish as constituting financial advice, thereby holding them liable for the consequence of poor individual choices resulting from a narrow “uneducated” reading of the data. However, this heralds a very real risk of shutting the lips of providers and financial commentators all together, which would effectively silence a free and open flow of information. This is vital if we want to keep channels of transparency open and not locked behind closed doors. Rather we need the requirement of “fee for service” models across the whole property and finance industry to reduce conflicts of interest.
Rather, the real key to the stability in a democratic society which encourages competition in the market place, doesn’t just come from good’ regulation, it requires self regulation, which in turn cannot evolve without a strong foundation of quality education – education many adults have grown up lacking.
From my own experience, by the time most first home buyers think about purchasing they’re in their mid- to late-30s, have been looking for around 12 months (or more) and know little regarding the sales transaction process, let alone the principals of good long term planning. Some come with no conception they even need a solicitor, and few have basic knowledge of what a pre-approval really means.
They look upon sales agents with suspicion, imagine they all earn in excess of $100,000 – with most failing to understand that the sales agent works on behalf of the vendor. Being encouraged to pay over and above the listed price range is not a sales agent “making you pay too much” it’s the sales agent doing what they’ve been engaged to do.
Basic lessons in property transaction, the Australian sales process, and principals of saving and budgeting won’t come from The Block, Escape to the Country, Location, Location, Location or Grand Designs, which all sell “the dream” while sheltering viewers from the bleak reality. It’s commendable that the government has slowly introduced financial literacy into schools as part of the national curriculum; however it doesn’t go far enough.
Without exception, property is the most expensive acquisition most will make in a life time – financial literacy models need to cover more than simply spending and saving, they need to cover evaluation and transaction in the property industry, as well as the principles of diversification.
Estimating the current level of literacy is hard at the best of times. However, in the ANZ Survey of Adult Financial Literacy the ABS were cited as saying: “More than half the Australian population aged 15 to 74 lacked the literacy and numeracy skills necessary to meet the complex demands of everyday life and work in the emerging knowledge-based economy”.
That’s a frightening statistic and flags a call of arms to do more than cover the basics.
Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.