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| Image: Treasurer The Hon Curtis Pitt Photo thanks: Courier Mail |
Grant announcement
Queensland
Treasurer, the Hon. Curtis Pitt has announced in the State Budget that the
$20,000 first home buyer’s grant will continue for another six months. The
extra $30 million announced in the budget will extend the grant's reach until
the 31 December 2017 for properties priced under $750,000.
But the
Treasurer is either purposefully misleading young buyers or he is carelessly
unaware of the definition of the median house price statistics in the property
market across Australia including Queensland. Median house price statistics do
not include the price of new building sales and house and land packages.
In the
Townsville Bulletin today, Mr. Pitt was quoted "this grant can have even
greater effect in regional Queensland, where $20,000 maybe more than half of
the 10% deposit for a median priced house."
Mr. Pitt
went on to say “it's an initiative that will continue creating jobs and helping
more Queenslanders into homeownership."
Of
course, the Treasurer wants more people buying house and land packages. The grant
is designed to cause unsuspecting buyers to invest in the building industry in
order for new jobs to be created through construction activities. This is fair
enough because the appeal of a new home is warranted.
Innocent mistake?
Townsville
has some excellent builders and tradesman.
It could
be construed from the Treasurers statements that buyers are getting a good deal
with the free $20,000 handout. However, the truth is that the buyers are
left with an equity-to-value black hole in their financial commitments
immediately upon taking possession of the keys to a new home.
Real
estate agent Karen Voevodin from McGrath Estate Agents said, "If buyers
are quite savvy, they can save a lot more by buying an already established
home." Perhaps some people might see this as an agent serving their own
interest but this statement has a moral truth.
Yes, the
first home buyers grant is to stimulate building and to help first home buyers
into the property market. A $20,000 grant contributing to the deposit and
loan-to-value ratio criteria set by the bank helps buyers qualify for a new
home. It is a genuine attempt to help first home buyers enter the market.
However, it is less favourable than what a buyer may think and what a flippant
Treasurer may say in the emotion of selling his third budget.
Wisdom of experience
New home
buildings render an immediate value reduction upon the purchase being
completed, unlike existing second, third, fourth, etc. generational homes that
have already been washed through the property market and not the retail
construction market.
Buying a
new home is still a good decision if the home is being held for the long-term
and real socioeconomic realities are known. But what many new buyers have come
to realise after buying and living in the outer suburbs of
Townsville's sprawling housing developments, is that they soon struggle to come
to terms with the inconvenience, financial and relationship costs of
having to travel to and from fulfilling social, shopping and income precincts
in the City.
Where the
buyer's location of employment, demands of children going to school, playing
sports or visiting friends means an extra 30 minutes in travel per day, the
outer suburban new home soon becomes a cost too much to bear. The vast majority
of new home developments are 15-30 minutes drive from the strand or city
centre.
Of
course, we want to help our building and construction industry friends but the
families of existing investors equally deserve sale contracts just as much as a
local builder contributing to the growth of the property footprint of the City.
The property moguls have had their fair share of buyer money over
the years.
A buyer's
decision to enter the property market in the outer suburbs or closer to popular
facilities is a gift for the people of the City. Either way, it is looked at as
being good for the community overall.
Oversupply risk
Nevertheless,
the fact is the housing market in Townsville has an oversupply of land.
There is also more existing houses for sale then there are buyers wanting to
purchase. It is what the industry calls a "buyer's market.", with the
federal and state governments pledging millions of dollars for affordable
housing and more land releases. This information has become even more valuable
to first home buyers and mature buyers more broadly.
Young
buyers would be advised to take advantage of the buying opportunities in
existing housing before taking the Treasurer's direction on taking the $20,000
cash hand out for a new home.
Land in
Townsville is also in oversupply right now but the price has dropped less than
the value of the depreciated improvements builders construct on the land, which
was evident in the questionable 1% drop announced recently by the State
Government statutory land valuations (these are the values that impact council
rates).
Retail in new home building
It only
stands to reason that when you buy a new home, the builder is supplying
materials and labour at a cost. The builder is adding his own value, time,
skills and materials and selling the home for a profit.
Effectively,
the builder is a manufacturer of homes. The building materials, including the
builder's cost of the land, are calculated as an expense to their profit after
cost of sales. This is how the retail price is established.
Existing
homes, on the other hand, do not have a retail factor built into the price
unless the seller is overpricing the home to profit from the market's value
perception or price conscience.
This
means the price of an existing home is based on a more realistic "market
value" or "median price" assessment which the banks, insurance
companies, governments, and courts use valuation science to conclude a residual
value at a specific time. They then calculate risks to their own assets such as
money. Divorced properties and deceased estates are valued this way also.
Getting a loan
The banks
factor this immediate market value adjustment into the mortgage you purchase
from the bank or through a mortgage broker. That's why the contract price
loan-to-value ratio is 80% loan and 20% buyer deposit for the residential
property, which the bank knows and on many occasions do not share unless you
fail to qualify or you ask. Commercial transactions are less again with that
60% in loan and 40% is deposit because the banks carry more risk to then the
buyer.
If the
buyer cannot raise the 20% deposit, the banks will offer a mortgage insurance
product priced at thousands of dollars extra. The insurance controls the risk,
and in some unethical situations, targets the buyer with higher "book
risk" meaning a higher loan-to-equity ratio.
This way,
the insurance instrument will cover the cash flows and balance of equity
as collateral to the bank. Should the buyer not pay the loan out within the
terms agreed or not make the required payments, the property could be sold to
another buyer and capitalised. At which time, the liability is disposed of by
lender and the bank and buyer go their separate ways.
Value vs Price
Back to
the market value point, this is a critical concept for buyers to understand. It
is a real money figure that determines the debt to equity ratio you are
accepting when purchasing a new or existing home. Whether buying a house,
vehicle, business or investment, this is the financial measure applied to any
asset purchase decision.
Capital,
cash flow, and equity or debt are the real measures of wealth. If you have more
value in assets like a house than you have in loan liabilities on your assets,
you are technically free of incumbency and bank security. This is what most
people strive for, but savvy investors are aiming for independence and freedom
of wealth where the mortgage becomes redundant in your life.
It's
important to understand the real value of housing, rather than price, because
it is more meaningful in terms of what's in the buyer’s interest than gaining a
$20,000 grant for new homes only.
The
grants serve as a selling tool, like the "prices are down"
advertisement by Coles in the food market, for builders and governments to grow
their business profits or politicians attracting voluntary supporters for their
policies going into the next election.
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| Image: Typical first home buyer family |
Road to freedom
Buying
any property should be about your wealth and freedom to eventually do what you
want when you want with whom you want. Taking a money deal and not a value deal
will guarantee young buyers will be a slave to the mortgage system unless they
learn the point of value concept instead of seeing the deception of the price.
Always
remember this! The original definition of the word "mortgage" comes
from the Latin word "mortuus". Later the French language adopted the
words "mort" and "gage", which means "death
pledge" in French.
It's a
simple fact that value-conscious buyers win. Money conscious buyers on the
other hand lose. From the most ancient text and for any of the biblical
observers with us, "money is not evil, but the love of money is
evil". Get away from focusing on the money and pay attention to the value
instead.
Investing
for the long-term is the best way to see the biggest purchase decision in our
lives.
Therefore, rational, smart, wise research and advice is very important.
Better solution
The truth
of the matter is that new home sales are neither measured nor treated in the
median house price statistics. So comparing a $20,000 first home buyers grant
to existing median property price data is misleading and harmful to our young
people.
Educated
property investors will see the double standards in the home owners grant in
its current structure, luring young people into an unnecessary, government
manufactured sales pitch. Now, we can certainly see through the Treasurer's
mistaken use of the money incentive in the budget.
If the
Hon. Mr. Pitt would like to reference median house prices in promoting new
building supply, he might consider applying the first home buyers grant across
all residential property products that would benefit first home buyers. Why not
reduce the grant to $10,000 and broaden its application?
However,
I suspect the real focus for the Treasurer is on stimulating the economy and
creating jobs for the building industry and therefore claiming the
short-sighted jobs that are created from construction.
Such
behaviour of deceptive and misleading announcements have been unlawful in
professional services industries for many years. Marketing that is
intentionally deceptive is unethical and certainly illegal in Queensland. Let's
call it out for what it is and then we can proceed with what can be done now to
be better prepared.
What first home buyer can do now
Young
buyers who subscribe to our TREN News and eMagazine service will be better
informed and even protected with expert wisdom and opinion.
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and special guides and expert contributions are often provided for free.
Next time
an irresponsible leader or an innocently mistaken politician, or commercially
conflicted professional, seeks to sell ice to an Eskimo that takes for granted
our young people starting out in the property market, they could be seen for
what they really are promoting.
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