Crisis of confidence or crisis of affordability?
GUEST OBSERVATION
The following comment echoes a dilemma of many potential first home buyers in Australia:
“I am in late 20s, early 30s, $150,000 household income, $200,000 in savings - what should I do? Do I buy a property and risk my cash on an asset which is said to fall in value, or do I rent and invest my money into shares?”
The numbers may differ from person to person but the concern is the same.
I dealt with the issue of property prices in Australia and what will happen in the future, so instead I would like to focus on the issue of confidence.
If we analyse Australia's current economic situation objectively, we have a six decades long history of strong growth in property prices, historically low interest rates, a low unemployment level and an economic growth rate which is the envy of other developed nations. Also, it is relatively easier to finance property purchases nowadays than it was 20 years ago. In addition, there are ample examples of research demonstrating that residential property in Australia is potentially the best investment class over the long-term.
Yet, the fear of losing money, “because property prices are doomed to fall” and a pessimistic outlook are paralysing many to the extent that they are incapable of making a decision to buy a property.
Where does this fear come from? Why are we the biggest pessimists in the world despite surviving the global financial crisis quite well so far? We used to have severe recessions and other economic calamities before so, what’s different now?
Let me digress for a moment and reflect on the “old times”, when things were viewed from another perspective.
How things used to be
Back then in the 1970s, 1980s or even 1990s, there was no talk about a possibility of property prices falling. The idea was to line up for a loan at the first opportunity and to get your first home as soon as you got your first full time job. It didn’t matter that the property had to be in a location on the city outskirts – you were buying what you could afford, and not your ultimate lifestyle.
The logic was that you pay your first property off as quickly as you can and then upgrade to something better and closer to city centre. Then do it again. And again. So that in the period of 15 to 20 years you could end up with something to enjoy for the rest of your life and which suited your lifestyle.
Your grandparents did it that way. Your parents did it that way. Everyone just followed the same routine. No questions asked. Everybody knew you cannot go wrong following this recipe.
I am generalising but it conveys the overall attitude of an older generation of Australians towards residential real estate. Now, let’s fast forward to present times.
How things are now
Parents and grandparents are no longer the role models and the primary source of wisdom. There is a new paradigm now.
Younger generations now take advice from media manufactured, faceless avatars and do-gooders on the Internet who create, either knowingly or unintentionally, the environment of fear, uncertainty and general misinformation.
This is not a criticism of a younger generation – quite the opposite. It is extremely difficult for anybody to make a decision with full confidence in such circumstances. The problem is more universal and relates to all generations living in present times. However, those of older age have those big decisions well and truly behind them while younger people have to face them now or in the near future.
The causes
It could be argued that it is the symptom of modern times that we are so overloaded with everyday tasks that are unable to find time to learn, discuss concepts and ideas with peers and elders we respect, analyse information and then make conscious decisions. Consequently, everything needs to be served on a plate for easy consumption where there is no need to exercise the brain too much.
As an example, we “do research” by skimming through news headlines and the more extreme and negative they are, the more attention they are likely to attract. We express our approval, opinions, or even protest, by clicking “Like”. And we tend to make only binary decisions: “Yes/No”, “Good/Bad”, etc. It seems there is very little time to ponder on “what if…” scenarios.
That is why media (traditional and social) and the internet in general have such a profound influence on what we think and do – they deliver snippets of information in chunks we are able to process without much effort.
The ease of dissemination of information in the digital age means there is a room for all sorts of views but what makes into a wider circulation is controversy and extreme cases.
So, we hear and read: “Property prices to fall 20%”, scratch that, 40% sounds more dramatic! But no one bothers to answer a fundamental question: "…and then what?"
Will they stay low or rebound? Is it likely that government would not intervene and would not try to prevent such a disaster? If there is intervention, what could be the impact on prices? Does this prediction have any merits after all?
It could be argued that there would be too much thinking involved to get these answers and in the fast paced digital media world there is no time for that because of editorial deadlines. The main game is headlines that attract the audience - not necessary the real story behind them.
And nobody bothers with putting caveats on such predictions either – by the following year the public will not remember “current scares” since focus will move onto the next extreme set of predictions.
A big part of the problem is how we interpret information published in the media – instead of treating those claims as a starting point for further investigation we tend to jump to a quick conclusion: “I saw it on TV so it must be right.”
It is rather rare that a balanced and objective view of the state of affairs reaches wider audience via popular media channels – there is no incentive to publish such information simply because there is nothing sensational about it.
Therefore, we are probably as much to blame for what is happening as the media. That is, we do not demand in-depth analysis behind the story simply because we don’t have the time to digest it. We just assume that someone must have done it diligently to come up with the conclusion, so the headlines will do just fine.
It is rather rare that a balanced and objective view of the state of affairs reaches wider audience via popular media channels – there is no incentive to publish such information simply because there is nothing sensational about it. Balanced views simply do not attract enough audience.
The effect is that only simplistic, negative, very often contentious, views propagate - leading to a widespread misinformation, like: “Property prices will fall in Australia because they have fallen everywhere else”; “We have affordability crisis because of negative gearing and speculators”; “Foreigners are causing property prices to rise”. There are a tonne of those around.
It should therefore come as no surprise that a significant proportion of would be buyers is put off making a decision.
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Some unexpected consequences
There is a number of quite ironic consequences resulting from all that doom, gloom and misinformation about the property market in Australia.
Firstly, it makes us vulnerable to exploitation by unscrupulous spruikers. In particular, on one hand it all leads to a perception that “property ownership is a dumb idea” (whether for living in it or earning income from it), that “everybody is losing money” and “everything is going to collapse very shortly anyway”.
On the other, it creates a fertile ground for those who claim to have a “secret formula” to “make it all magically work for us” and “to make the taxman pay for everything” - if we only spend $10,000 on a seminar and instructional videos, and some more on personal coaching.
There are plenty of people who fall for a magic of big numbers and a prospect of becoming a property mogul - despite the fact that there are no secrets to making money with property, just clever marketing.
The second consequence is that it led to emergence of new industries with a sole purpose of helping people to buy into property – from online discussion forums, dedicated blogs and property search portals profiting from advertising, through those selling specialised reports, smartphone apps, DIY property investment books and seminars, to buyer advocates and mortgage brokers offering information, tools and services for a fee. And now even financial advisers are getting on-board with advice on investment in property via self-managed superannuation funds.
The overload of information and assistance, rather than helping in making decisions, has a totally opposite consequence – that is, more information tends to paralyse us rather than aid in making those hard decisions.
Yet, it seems that, for many, it is harder than ever to make a decision. The overload of information and assistance, rather than helping in making decisions, has a totally opposite consequence – that is, more information tends to paralyse us rather than aid in making those hard decisions.
Not to mention that everybody demands a fair compensation for their work so, that assistance can add quite substantially to the overall cost of buying, making us even more apprehensive about making the decision.
Not many of these services existed 20 odd years ago and information was not so easy accessible either. So, the bulk of advice and assistance was coming from parents, relatives and your local bank manager – all for free.
The trust that young people had in older generations is no longer as strong for the current generation of young people. Maybe this is also due to the fact that the elders also have become confused and no longer have as strong a conviction about the merits of purchasing a property as they used to have in the past.
This is unfortunate because that trust was crucial in providing moral and emotional support for young people getting into debt for the first time. And it helped to positively reinforce the decision.
The perception that nothing can go wrong because “everybody is doing it this way”, created by decades of success stories by people they knew personally, was also very empowering.
In other words, it appears that the whole support structure that helped in making tough decisions is significantly weakened, if not entirely collapsed. There is really nobody that can be trusted anymore since those who offer assistance are there only to gain something from us (i.e. either clicks, patronage or real money for a service). The notion of “impartial advice” is somehow compromised in those circumstances as one can never be certain of true intentions behind provided information and advice. We are really on our own with those big decisions.
Social considerations that cannot be ignored
Then there are also social pressures impacting on the decision whether to buy a property or not. In the 21st century fun, globetrotting, gadgets, extreme sports, celebrity status, etc. “symbols of good and joyful life” are valued much higher than debt on a property located somewhere on the city's outskirts. Committing to owning a property early in life would mean sacrifices (i.e. less of the fun things) and would undermine rather than enhance the status of individuals in the eyes of their peers. So, at young age the choice is easy – don’t buy.
By the time people are ready to settle and start a family (which happens much later in life than in the past) they have already got used to the convenience of living in the city but they are overwhelmed by the amount of money required to continue that lifestyle as a family unit (either renting or buying, which requires taking on a substantial debt). This is when the anxiety about the future really kicks in.
The fact that Australia has not really experience economic hardship since early 1990s means that many of younger people also do not know what to expect when the hard times do come, adding to the anxiety and multiplying the fear factor (ie. because of the unknown).
This is a point in life when headlines like “property prices are overvalued by 40%” or “there is housing affordability crisis in Australia” are becoming a drawcard for this demographic group because it helps them to cope with the anxiety by reinforcing the fact they are not alone in this predicament.
However, these are not the real reasons why they are unable to buy - it is all primarily about the mindset.
A simple solution
The reality is that things are never black and white as they are over-simplified by media for the purpose of easy consumption. What we mostly hear in the media are opinions and not indisputable facts based on evidence – even those expressed by experts.
So, this fear is not substantiated with a valid reason. It is just a consequence of not knowing what to believe in, as well as not having the adequate knowledge to objectively assess what others are purporting to be the “ultimate truth”.
The only way to overcome this paralysis it is to get to know the facts. And this requires making the effort of starting to think for yourself.
The bottom line is that one cannot outsource thinking because there is a big price to pay at a later date.
End note
I did use many generalisations in this article to emphasise the important issues underpinning the problem but, of course, there are many exceptions, as current property sales statistics show. There are many first home buyers that are making the decision to buy right now.
It all boils down to a mental state of having a confidence in the decision you make. It requires knowledge and conviction that this knowledge is not tainted.
It takes effort and lots of thinking before you can get into that mental state. So, taking time to think should be as important as attending the gym or undertaking other routine activities of your daily life. Sorting out finances to buy a property is the easy part.
There are no right or wrong decisions. However, since there are consequences of each decision, there will be those decisions that one can live with and those that will be regretted until the end of one’s life.
The key is to be mentally prepared to bear those unpleasant consequences when you make a decision which produces an outcome that is not in your favour.
This is the only secret one really needs to know to make a decision whether to buy or not to buy a property at present time. Affordability has nothing to do with it - it is all about the confidence.
Arek Drozda is an independent analyst who has worked in the public and private sectors for over 20 years in business development, data analysis and in building geographic information systems.