Before we get into Australia’s coming economic boom, here’s a completely unrelated but important point: You can’t believe what you read in the media.
That might not be much of a revelation, but consider just how blatant this can be. Every morning, the office’s editors scour the news for overnight events. As the ‘resident German expert’, it’s our job to take a squiz at the German media as well.
The following two headlines popped up on our screen, one from the American media and the other from Germany:
‘Simmering Feud Between France and Germany Erupts Into Verbal Warfare‘
‘Hollande auf Schmusekurs‘, which translates to ‘Hollande on a Shmoozing-course’
Both headlines refer to Chancellor Merkel’s visit to Paris. There’s no way of knowing which headline is remotely accurate, but the point is that the media is more clueless than your hamster when it comes to what’s going on in Europe.
There could be a revolution in Spain and all you’d hear about is tapas. But never mind Europe. Australia is the happiest country on earth, according to an OECD index. Only there’s a small kink in that claim. You need money to buy that happiness. A lot of money.
Australia may shine when it comes to health, safety and civic engagement, but it lacks lustre when it comes to work life balance, income and life satisfaction. These are the areas that are crucial for preparing for your retirement.
In other words, it’s difficult to build up enough income to live off because you’ve got to work so hard just to tread water. Accumulating wealth to live off in the future adds to the burden even more.
What’s driving this vicious cycle? In our opinion its high property prices. And if our colleague Phil Anderson is right, property prices are about to get a whole lot more expensive. In fact, he expects property prices to renew their march upwards for another 14 years!
Now we’re rather sceptical of that claim. But, to be fair, we haven’t seen his justification just yet. His new video will be out soon, so you can see for yourself. Just keep an eye on your inbox this afternoon.
The thing is, even if Phil is right, another 14 years of rising house prices aren’t good news for most Australians. That’s because property is a cost of living, not a productive asset or investment.
Wealth from rising property prices is an illusion because your cost of living rises too. And the paper wealth of owning property is inherently dangerous because so much debt is used. Would you borrow to buy 80% of your stock market portfolio?
The only way to benefit from rising house prices is to own a home while anchoring your cost of living. You’ll find out how you can do that below. But first, why are rising property prices bad?
Property is a Cost of Living
How do property prices drive the cost of living? Well, we all need space to do what we do. Space to live and work. And if that space is expensive, the costs are passed on. It’s quite a simple theory. But you witness proof every day.
Coffee costs $4 in Albert Park, $3.80 in St Kilda and $3.50 in Narre Warren. Property prices scale up at a similar rate as you get closer to Melbourne’s city centre. On an international level, Australia’s property and cost of living are both the most expensive in the world. The two are intertwined.
The real question is what’s making property expensive in the first place? The answer is debt.
Willingness to go into debt drives up property prices by allowing buyers to bid at higher levels. And Aussies are more willing to go into debt than most. In fact, we’re almost medallists when it comes to mortgage debt levels – fourth amongst advanced economies according to the IMF’s 2009 figures.
With close to a quarter of Australians struggling with their mortgage according to Commonwealth Bank, you’d think we’re maxing out already. But if there’s one thing that can encourage people to borrow more, it’s rising house prices. And that’s just what Phil Anderson is forecasting. We’ll leave it to him to explain just what’s going to happen and why.
What’s more important is to realise that rising house prices aren’t real wealth.
The Wealth Illusion
If house prices across Australia rise 20%, are home owners wealthier? They aren’t, because an equivalent house will cost them 20% more than it once did. You might’ve gained $50,000 in wealth, but your next house will cost you $50,000 more. In terms of housing, you’ve gone nowhere.
Rising asset prices are only good in relative terms. If house prices rise, only home owners who sell and become renters will be richer, assuming rents didn’t also rise. You have to live somewhere, after all. But rents tend to go up alongside prices.
Meanwhile, more expensive property will have driven up your cost of living generally.
Of course, you have to be sure you avoid a house price crash if it comes. Don’t invest in an asset for capital gains unless you know when to sell.
Otherwise your paper gains could evaporate, leaving you with a whopping mortgage worth more than your home. 25% of Americans are currently in a situation where they owe more than they own. Having negative wealth isn’t great, especially as you approach retirement.
As far as we know, few people were smart enough to sell their American homes in 2006 before house prices tumbled. But you might be smarter than the Americans. Phil Anderson uses a cycles to determine buying and selling points. If he’s right, you’ve got 14 years of gains ahead of you.
Double Your Wealth, Halve Your Cost of Living
There is one way to skim the crème off the top of rising Australian house prices. In short, you own Australian property and live overseas.
Not surprisingly, Phil Anderson has done just that. He lives overseas for much of the year and owns Australian property. As property prices rise, Phil’s wealth should benefit disproportionately to his cost of living.
Even if Phil is wrong and house prices fall, this strategy could work. In fact, if you own your own home outright it could fund your entire retirement! Consider this scenario:
You rent out your Australian home and live in one of the three ‘Retirement Bolt Holes’ we cover in this special Money for Life Letter report. According to the magazine International Living, in one of the three havens covered, $1500 a month will get you an ‘over the top luxury two bedroom condo with great views’, or cover your entire cost of living twice over. Imagine living a lavish life on someone else’s rental payments!
If Australian house prices rise, you’ll live like a king while your friends struggle with the rising cost of living. If house prices fall, your rental income will allow you to pull through with style while other retirees panic about their falling wealth.
But, as you can read in the report, retiring overseas can be a risky business. Make sure you choose carefully.
The Daily Reckoning Weekend Edition
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