Inflation in the United States has just hit 9.1%. Australia is likely to follow suit, although, probably with a few months delay. New Zealand and Korea’s reserve banks have just lifted their interest rates another 0.50%. Australia is again likely to follow suit. Sri Lanka is in economic turmoil and has defaulted on its national debt, as has Russia. China is well in the throes of tightening its international lending. It appears the world is beginning to have its moment of doubt and pain.
The links between the decades long increase to house prices, the lowering of interest rates to virtually nil, and the governments ostensible fanning of the flames of the economy by pouring money into the construction and first-home-buyer industry, are inexorable. Anybody who sat back watching their home quadruple in value over 20-30 years, who expected the same result in the next period, without any recourse had their heads firmly and deeply shoved in the sand or somewhere else.
As someone with very little debt, both intentionally and unintentionally so, I can afford to sit back and have a good chuckle at the greedy who threw caution to the wind and decided to buy houses in record numbers when the houses were at record high costs. I have read article after article criticising the Reserve Bank of Australia (in particular Phillip Lowe) for the crime of indicating that interest rates would not rise until 2024. Let us actually look at the words used by the reserve bank:
The Board is committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target. It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The central scenario for the economy is that this condition will not be met before 2024. Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.
I don’t know if you can get a much more conditional statement than that. So why did so many people go balls-out and enter the property market at its absolute pinnacle? I posit that they would have done the following:
Taken financial advice from real estate agents (extrapolating recent exponential growth further);
Relied on government and parental assistance to make a purchase;
Assumed that prices would continue to go up;
Ignored that interest rates cannot go lower;
Ignored that interest rates would go up (even in 2024);
Assumed media representations of the Reserve Bank’s position on interest rates were true;
Benefited from the widening pay-gap between private and public sector employees.
As someone who works in the legal industry and has always found it perverse that real estate agents felt it appropriate to ask how much a solicitor charges for a conveyance, yet for the same question to be asked of an agent (who would often illegally obtain a sale, without a contract prepared, before even listing the property for sale) is considered most rude. For solicitors, in contrast to real estate agents, charging a commission based on the value of the property is illegal. Often a solicitor’s fees for the sale of a $million-dollar home is the same as if it were $200,000. Over the next few years, where the heavily indebted are forced to sell at a significant loss, efficiency will be key. Who do you think it will be who will be firstly dropped by the customer out of the agent charging a 2.5% commission or the solicitor comparatively charging approx. 0.1-0.15%?
Let’s do a bit of maths. Say one of our crazy buyers bought a house for $1Million and is forced to sell in the coming years due to not being able to afford mortgage repayments. Say that there is a 20% drop by the time they get to selling the property, that leaves them with a $200,000 loss. Do you think they would be inclined, much less able to afford, to pay a real estate agent $20,000 in commission to sell their house at a significant loss?
Having seen the types of people to purchase insanely expensive real estate over the past two years, my sympathy is with the first home buyers who (although they should have known better) purchased something for much more than it is actually worth. My sympathy also goes to the children of the greedy, who will inherit nothing from their parents on account of being over-encumbered by debt. My sympathy, however, is heavily allayed due to the fact that the denial occasioning such erratic behaviour is morally due to a thinly guised form of greed.
So, when someone shouts “who killed the Australian dream?” I can laugh, because after all it was you and me.