"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.)
Dan Denning
The Daily Reckoning Australia
What's the solution to the housing crisis? Is property a good investment? Leave a comment below.
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by ROBERT J CARR on 31 May 2007:
I have been burnt by ACR
Comment by John Aldwich on 31 May 2007:
Re high risk debenture issuers. Have a look at First Capital group Limited and its First Capital Securities Ltd and Explorer Investments subsidiaries.
While smaller than Fincorp & ACR and less blatantly dishonest, and under the radar because they only got underway after the ASIC report into issuers, they should be next cab off the rank to fail as soon as ASIC work out they are paying themselves and funding losses out of round robin transactions using debenture monies adn their asset values are illusory. Witness Empowernet, valued in FIC books at implied over $4m for a 20% stake paid in inflated FIC shares, as a set up prior to being listed at implied $50m mkt cap but having been started with $1m in January 2006 it has failed to raise the $10m, ok try $7m, ok now try $3m in its prospectus attempts from the gullible Anthony Robbins fans necessary to support its listing. Did I mention the company does not even make any money even though it is promoted as having decades of experience?
Comment by Maurice on 29 June 2007:
Property Ventures in New Zealand works like this too. Lawyer Clive Cousins just got called "callous" and forced to repay $1.5 million to a client from a client
Comment by David on 3 July 2007:
Hmm.. scary stuff.. What do you guys think about City Pacific (CIY)?
Comment by Justin Vincenti on 23 July 2007:
If you want to live comfortably for the next 20 years, PAY RENT AND INVEST IN SHARES. You pay more dead money on the interest repayment of a mortgage, than you do on rent. To confirm this, just do the math. If you take out a 20 year mortgage under current rates, about half of your repayments will be absorbed in interest for the life of the loan. If you take out a 30 year mortgage, it will be about two thirds. If you invest in shares from your own money, you will have more disposable income for yourself, and no debt. It also puts you totally in charge of what you own and how much you pay.
If you really want to own your own home, the best way to do it, is to either concentrate on building a share portfolio, or superannuation, or both, then use that money to buy a house upfront. no mortgage = no dramas, and you will be a lot richer in the long term.
Comment by Nicko on 20 August 2007:
hmmmm
buy shares you say, just last week they went tumbling down, people don't need paper money, they need a home to live in.
i have been hearing this rubbish about houses crashing since my neighbour sold his house for $25,000 20 years ago because he was scared about the market crash and not being able to pay his mortgage, he moved to the bush and bought a cheap block of land, built a cheap shack, that is now worth about $50,000 and my house where I still live is worth $385,000 as would be his, are you people telling me that a massive property crash is going to reduce my home back to $20,000 ?
I doubt it, I am seeing this all over the internet about Australia's property crash yet I am seeing year in year out prices still rising.
Comment by Travis on 26 August 2007:
Nicko, backward looking euphoria; great isnt it!?! Problem is most of Australia has got it and they aren't doing the maths i.e. housing is now unaffordable for anyone who is not already in the game....real estate is flogging a nearly dead horse but it certainly seems to me with rising interest rates, little land, poor sentiment etc. that housing is at its top and even though - looking backwards - there has never been a 'crash', your about to see a big one!!!
Sell now and put your money into tulips!
Comment by Chris on 9 December 2007:
This is a well rounded system that rewards anyone who has invested in property. They pay whatever, it doesn't really matter if its 10k, 30k 60k over the odds because when its all said and done they will share the losses with the government.
The fact that people are being forces out of their homes due to financial strain rewards them again because they now have a willing audience to rent the homes they have invested in, people who are now content to rent for prolonged periods because (in their minds) its better than the perils of home ownership and the financial stress that comes with it. Its a cruel system but the fact remains people do not give a stuff about other people, the old mindset of "I'm right thanks Jack" kicks about in everyone's mind who has property or is investing in property or both.
I earn $90k + a year and my wife $40k, we live in a single bedroom apartment in Melbourne to try and save money, we are in our mid twenties and have almost no hope of ever having the opportunity to truly own a home. We don't believe that $500 a week for 30 years on an interest only loan to live 40 minutes from the city, our family and our jobs is what this country was about, these circumstances just show me that the gulf between the haves and the have nots is widening and unfortunately the side i am on is a minority.
Our economy is booming on false foundations, remove mining and all that is holding up the rickety framework of a 'booming economy' is housing. It will be an eye opening experience when the primary investors now (people aged 40-55) no longer have a capable audience to pay them their returns on their investments, they will probably feel as screwed over by their parents as we do by them!!
Comment by Geoff on 1 March 2008:
only 90k yr Chris? Ah...you would be one of the "haves"....rich prick!!!
Comment by Matthew on 27 January 2009:
I was about to invest around $30K into ACR once upon a time. The (Indian) guy on the telephone was at pains to assure me that "unsecured" notes were really safe and that the term "unsecured" was actually very misleading and when would be the earliest that I could quickly not miss this opportunity to send money to the bank account he kept giving me the number of.
Ahh, indians + finance industry = nasty, nasty. Luckily I ignored him.