In the current market young buyers should save and rent, don't buy now! David Collyer

Peter Wargent used Property Observer a few weeks ago to have a chortle over my February 2012 prediction of a steep and imminent land price correction.

He gloats: “Since the property market troughs in mid-2012, unfortunately, prices have not fallen by 20% or even 15%.”  

Hmmm.  Prices still remain well short of the 2010 peak.  Add three years of insistent 2-3% inflation to the following graph and the real price changes start to hurt.      

Clearly, my call was courageous. The bursting of The Great Australian Land Bubble has not yet happened.  The economic catastrophe for the heavily indebted and the banks remains dead ahead.  

I have been warning young home buyers against borrowing heavily and signing away their lifetime earnings to buy a house in a market climax.      

I urge them to rent, which is an absolute bargain compared to buying.  If a negatively geared property investor wants to subsidise my lifestyle, I’ll have his dollar.  

I urge them to save a giant deposit.  If rent is dead money, then by the same measure so are interest payments.  There is no point exchanging paying rent on a house for paying economic rent to a bank.  

I urge them to build up their credit rating so they have ready access to loans in the future.  

And I urge them to await the inevitable correction.   A detailed explanation of these forces, which every Property Observer reader should know and understand, is here. 

Peter Wargent cites various mainstream forecasters who see modest future rises and asks ‘what happens if the market forecasters are right?’  

If they are right, renting will continue to be an eye-popping deal.  

I am staggered that negative gearers are prepared to stick fistfuls of dollars into tenants’ pockets, month after month, year after year.  1.5 million ‘owners’ have 1.8 million rental properties, a little over one each. Almost all are middle income earners. 

They pay a very high price to reduce their income tax, as the graph below shows.    

A detailed critique of Negative Gearing can be found here.      

The proportion of rental investors among buyers in the residential market is now around 35%.  They will never make a decent return at current price to rent ratios.  

Wealthy people do not enter into deals with low cash returns and big borrowings on fragile, high maintenance assets like houses.  If they love bricks and mortar, better returns are available in commercial property, without the stress.  

Peter Wargent asserts: “More than anything, my message was to do something by spending less that you earn and investing in a diversified portfolio of assets rather than fail conventionally by doing nothing.”  

Agreed.  This sentiment is central to achieving future financial independence.  

So, avoid lumpy illiquid assets, after-tax debt, poor returns and high risk.  I think this exactly describes Australia’s residential property market.  

Don’t Buy Now!