“Housing dream vanishing,” reads a headline on-line. “Housing affordability has fallen to its lowest level ever recorded by a key industry measure of the market, set up 23 years ago.” The average monthly payment on a first-home mortgage is around AU$2,387. This adds up to about 30% of net income for the first-time home buyer. Affordability has declined for four straight quarters.
What’s the solution to the housing crisis? Is it more credit? This would just drive prices up. Is it more land? There seem to be plenty of properties to rent. They just don’t happen to be in areas where people want to live. That’s the trouble with a boom. The visible signs of wealth inflate expectations for everyone. The reality is that house prices will have to fall to become more affordable, or new buyers will have to live outside the red-hot city centres and capital cities.
Unfortunately, the trouble in the property sector isn’t confined to new homes. Following in the footsteps of Fincorp and Westpoint, property investment company Australian Capital Reserve (ACR) is on the verge of collapse. More than AU$300 million dollars could be wiped out. This money was raised largely from small investors over the last seven years. Investors were promised higher interest rates on the firm’s unsecured property developments.
Everything comes down to valuations and expectations, doesn’t it? ACR slapped huge valuations on its property developments in Victoria and New South Wales. This put dollar signs in the eyes of investors who were prepared to believe that property is always a rock solid investment. When the company was cut off from financing by a stop order from the Australian Securities and Investments Commission, the jig was up. And now, investors may lose everything.
With global borrowing costs so low, you have to wonder why any credible firm would chose to raise capital in bits and bites from mum and dad investors. Most banks seem willing to open their chequebook to anyone with a pulse. Unless your intentions are less than honourable to begin with, why would you raise money for million dollar property developments from small investors? (Hint, the answer is: it is easier to screw the individual investor than it is to screw the bank.)
The Daily Reckoning Australia
What’s the solution to the housing crisis? Is property a good investment? Leave a comment below.