Property Investment: A Waste of Australian Youth?
I, like every other non-‘home owning’ 30 year old Australian, feel a tacit pressure to accept the pre-ordained genetic destiny of all Australians and waste some money by ‘investing in the property market’.
I can happily tell you that I have completely ignored all the advice that was blasted at my peers and am currently enjoying myself on a self-funded long-term world trip. Comfortably watching as my bank balance declines. And never regretting for a second that I could have put that money towards a deposit for an investment property; like a good little Australian property investment trained monkey.
This is what I was thinking about recently. Sitting in a garden out the back of an old brewery-turned-hotel in the southern Netherlands town of Mechelen. Sipping a coffee.
So think, I shall.
I like using this space to think out loud. Writing things down allows organisation. The delete button gives clarity. Publishing it makes you commit. An edit allows you to change your mind when convinced by sound argument.
So here goes:
The ‘property investment’ game has already been won by the professionals. And my peers, the young Australian property investment monkeys, are not even playing on the same field. Or even the same game. We are asked to play for the leftovers. Or, maybe more simply, we are the game. We are the reliable useful idiots that the professionals move around the board. They are playing. And winning. We are being played.
By the professionals, I mean Banks, Mortgage Brokers, Financial Planners, Property Developers, Advertisers, Retirees with a pile of properties and everyone else who facilitates, encourages or, more insidiously, needs average young Australians to take out massive loans they can’t afford to buy property they don’t want to plan for a future they don’t value.
All for the low low price of the best years of their life…
Coming Clean:
Before it starts to look like I have some ideological motive against home ownership, I should make it clear:
I would like to own my own home. I would like to be financially secure. I would like to have a reliable income from sound investments. I would like to be free to do the things I want to do with my life.
My issue is with the claim to average young Australians that property investment is the best thing they can do to achieve these goals. To achieve any goal. To even become a respected adult. To do anything responsible with respect to caring for your family. Any question, it seems in Australia, can be answered with ‘property investment’.
The constant message that we need to ‘get on the property ladder’, or ‘start to build some equity’ or ‘get a foot in the door’, is what I take issue with. Because I don’t think that there is any reason to believe that, for the average young Australian, this is the best way to achieve the aims of financial security, relationship harmony, and personal development; let alone wealth building. And I think it is a reliable way for young Australians to experience financial hardship, relationship strain, career stagnation and personal crises.
All for a fee to you financial advisor, and a recurring payment to your mortgage broker….of course.
Setting the Scene:
Righto, so if I go to a property investment-style website (that will absolutely sort you a buyers’ agent for your next property purchase…) I can find that:
“…2,245,539 Australians or around 20% of Australia’s 11.4 million taxpayers owned an investment property in 2020-21“
Of those:
- 71.48% of investors held 1 investment property
- 18.86% held 2
- 5.81% held 3
- 2.11% held 4
- 0.87% held 5
- 0.89% held 6 or more
I’ve got to think that absolutely no one is ‘building wealth’ by holding on to one ‘investment property’. It is far more likely they are having to personally deal with an annoying tenant or fix the gutters on the weekend. Forever.
But we know that property investment (and mining…) is probably the best way to break into one of those lists of ‘Richest Australians’.
And, again just spitballing here, that lot who are wearing suits and making their way on to rich lists are not fixing gutters on the weekend. They are also probably unlikely to have accidentally succeeded at the game. For all of the death of expertise over the last few years, it turns out that some people really are better at some things than most people.
So, the people building real wealth are probably that lot in the ‘held 6 or more’ - the 0.89% of the 20% of taxpayers. Realistically, the winners of this game are probably in the top 1% of that 0.89% of 20% of Australian taxpayers; and are probably the ones leveraging ownership (under a company or trust) of dozens of dwellings, their own property management companies, their own subcontractors in trades for maintenance and their own real estate services as well.
So?
So compared to those who are actually wealthy from property investing, what can the retail, weekend property investor hope to achieve in between working her day job and enjoying her life?
How many of us actually think we are in the top 1% of 0.89% of 20% of Australian taxpayers who are really property investors. Or even just in the top 20,000 taxpayers at…anything?
Realistically, I think average young Australians are being allowed to role-play the ‘game of property investment’ on their weekends while the professionals wait for you to lose your job at an employer that doesn’t give a shit about your dreams so that ‘Southern Property Pty Ltd’ can snap up your home when you quickly sell it at a loss.
I just think it is very difficult to become a successful ‘property investor’ in Australia. Even suggesting that average young Australians can compete with private equity money and teams of analysts to make the best property investment decisions, or that they can compete against established property development firms who can leverage economies of scale when building or renovating, is absurd.
And the people making money from this story being spun to young Australians probably bear some (certainly not all) responsibility for over-lending to those same young’uns without realistic mortgage stress-testing or consideration of personal circumstance change.
”What happens if you are stuck between jobs for longer than expected? Could you service your mortgage/s”
”What happens if interest rates go…I dunno…up?”
And to be clear, I am talking about the average young Australian. The Australian who has been told that their long-term problems will be best solved by getting a rental home in an up and coming suburb. Or maybe one day even have a portfolio of three properties.
I am not talking about the 0.89% of 20% of Australian taxpayers with 6 or more properties, who probably treat their portfolio as a second job. Nor am I speaking about the (probably) 1% of that lot who are really kicking goals.
Just the average young Australian.
Property-Flipping - What if the Math doesn’t Math?
A young couple are going to flip a house in their journey towards a property investment empire. So they buy the house, move in, live in it and renovate at the same time.
(Cue a ‘Kath and Kim’ joke here - I think there is a scene where Kim And Brett do exactly this, hope that the baby comes along while they are renovating, then are very chuffed when told by the bank that they have overcapitalised…)
They do as much of the renovations themselves to save money. They intend to rip out the old carpets, sand back the floors and walls, gut the kitchen, then polish the floors, paint the walls (pastel, of course), pre-fab IKEA kitchen blah blah blah.
What is the expected return on this decision? Over what time frame? And at what cost?
What if the (hopeful) expected return on that $650,000 ‘fixer-upper’ was an extra $100,000 on the selling price and it took 6 months.
A six month turnaround for $100,000? Well damn. There might be something in that!
Well, the average Queensland renovation apparently costs around $60,000 dollars (does that seem high?). But let’s try and model it out as a couple who has just watched ‘The Block’ and has decided they can do it themselves.
- They spend something like $25,000 on materials.
- Then get to work.
- After 6 months of working a few evenings per week and on their weekends, they are finished.
- You can be absolutely sure there will be some photos on Instagram of this moment (and of every single step along the way…).
- Champagne will be popped. Someone will yell “WOOoooo!!!”.
- Then they engage a real estate agent and market their newly renovated investment property for $750,000 and look forward to the relatively quick $100,000 increase in sale price.
- They are now property investors!
Scene!
But wait:
- Less the cost of materials of $25,000
- 45-day marketing campaign by real estate agency = about $1000
- Conveyancer/solicitor fees = about $1000
- Styling/staging/clean up = about another $1000
- Then the 2.6% commission for the real estate agent = about $15,000
Ok so we are down to $57,000 profit from the flip -
- Then naturally, our budding young property investors are hit with Capital Gains Tax on……the capital gains = about $20,000 (assuming their taxable income is about $100,000 and the selling expenses and ’buying’ expenses are factored in)
(I’m not an accountant, I just plugged some of this into a CGT calculator…)
That gets us to $37,000 profit free and clear from the flip.
Not bad. Not bad at all.
It’s not like they had to pay to rent somewhere else during all this. They just roughed it, and smashed that renovation out of the park ‘The Block’-style!
Now remember this took 6 months:
- They worked a couple of evenings per week after their day jobs and then big days on the weekends - so let’s say about 20 hours per week. Each.
- So 40 man-hours per week. Let’s round down to 30-man-hours per week to account for some days off here and there, some weekend afternoons having a barbecue in the shell of their renovated house, these sorts of things.
- And this assumes that they never asked for help (cough free labour cough) from friends or family…
- So for 24 weeks there was 30 man-hours of work per week
- So 720 man-hours of work across the 6 months to get that sweet $37,000 profit after the renovation
Or - $51.40 per hour.
If it was more like 40 man-hours per week, then this drops to $38.50 per hour.
For $50 bucks an hour, this young Australian couple worked their asses off, gave up their evenings and weekends, took phone calls from the plumber and electrician in work hours, had to forego that weekend away with their friends and probably were stressed, anxious and hated each other for that month in the middle there.
All with the great Australian dream in mind.
It almost seems like it would have been easier to just pick up some extra shifts at work…
And what would have been the counterfactual to our couple coming out of this with $37,000 free and clear?
What would have happened had they not done the renovation and just lived in the house for a couple of years?
Well, Brisbane properties have appreciated at about 6% per annum averaged over the last ten years.
A $650,000 home appreciating at 6% annually for two years would result in a property ‘valued’ at $730,340.
A total appreciation of $80,340. And this would be un-taxed because the capital gain has not been realised. And I think there would be some sort of discounted Capital Gains Tax because it would now be their primary place of residence based on some minimum time living in the residence, should they decide to sell at this point.
What was the point of working all those nights and weekends…?
…
Now the rebuttal here is usually that the couple would have then re-invested that $39,000 in to the next property and repeated the process in their burgeoning property flipping empire. Well, sure, but to what end? How many times will they do this? Could they even be bothered? How long could they really keep up living in a construction site and working after hours and every weekend? How long coud they physically keep it up?
More importantly, how long would their relationship last?
Would they be better off just getting an evening or weekend job somewhere to save a similar amount of cash? It would certainly be less stressful…
And what is the endpoint? Does it follow that this couple flips houses and trades up their equity until they are flipping their latest property on Sydney Harbour? Does anyone think this is realistic? Has anyone ever even head off someone doing this?
…
The other rebuttal is that this young couple could not sell for a quick flip, but rather take the equity in their newly improved and appreciated renovated home, and invest that into an investment property. Another mortgage. Another pile of expenses. The traditional route here is to put some tenants in, answer annoying phone calls about getting the gutter fixed, have to kick that tenant out at the end of their lease because they were messy, have to deal with real estate agents and on and on. Again, for what?
Well, the traditional answer is so that you can then roll the equity from that second property into a third. Repeat. Into a fourth. Repeat. On and on until the real estate agents and mortgage brokers of Australia change the laws of physics and conservation of mass until every Australian fulfils their individual Australian dream and own dozens of properties each.
Just as if you need to ask the price, you can’t afford it; or if, while playing poker for an hour, you can’t work out who is the patsy, then it’s you; then if you have to ask if you are playing in the big leagues of property investment or not……then you are probably not.
…
The more realistic scenario is that our couple just…stops. To live their life in their damn house. And make it a home. And stop pretending to be skilled tradesmen with years of experience. And stop pretending to compete with professional property developers who can afford to run on low margins because they have 25 projects on the go at once. And stop pretending to be able to match it with the professional data analytics companies. And stop paying a commission from every property flip to that dickhead young real estate agent who rocks up in his shitty BMW. And stop working after hours for free, doing things they have no idea how to do. And stop getting annoyed at each other because they don’t have the time or money to take a holiday. And stop skipping those weekends away with friends. And just get their evenings back to themselves after they gave their days to their usual employer.
And just love each other. And have fun in their lives.
While chipping away at just ONE mortgage - on their castle, their home.
The Quick Weekend Renovation - A Delicious Lie:
As the son of a carpenter and cabinetmaker, I’ve got to break this to you.
The average young Australian is not getting that back deck done on the weekend.
You are just not doing it.
As someone who grew up with dinner table talk of concrete pours, framing, fix-outs, bathrooms, vanities and kitchen cabinets and bench top selection; I can tell you that the weekend warrior has no idea what they are doing.
That’s well before you get to the electrical work, which can literally kill you…
(Sideline: I would be the most ‘weekender’ of weekend warriors. Completely useless….)
As someone who would watch ‘The Block’ and ‘Renovation Rescue’ with subject matter experts calling ’bullshit’ every 30 seconds, I can tell you that you have been lied to and duped by sexy advertising.
You are not doing that ‘quick structural renovation that will add value to your investment property’ on the weekend.
Don’t get me started with dreams of ‘weekend bathroom remodelling’.
Aside from being delusional, this is disrespectful to the skilled tradesmen (and women) who literally do this for a living after a four-ish year apprenticeship.
You can’t do their job to the expected aesthetic (and legal) standard. Just as they likely can’t do yours.
You have, once again, been convinced by good marketing material - in the form of cool cuts to camera and emotional auction results on TV shows - that you can actually conduct renovations on your home (to an acceptable standard) yourself.
(Yes, yes I know you can paint the walls of that front room in the cream or white or off-white or bone or ivory or beige cough did everyone catch that Richie Benaud joke cough that you’ve been seeing in the magazines. I’m not talking about that…)
Bunnings Warehouse makes a profit when you try. So do the skilled tradesman who come and fix your mistakes.
And never mind the financial strain of this nonsense, you now have literal physical and emotional strain - on you and your partner and family - allegedly who you are doing all this nonsense for.
Your kids just want to kick a football with you.
Your daughter just wants to play dolls with you.
They don’t give a shit about the outdoor reading nook that you saw in a magazine, even if it does have amazing Hamptons vibes….
The Myth of the ‘Property Ladder’:
Ladders have rungs. They also need to lean on something solid. There is no defined gap between the rungs. Someone can always knock the ladder over. And some bastard can always pull the ladder up from the top - leaving you standing in the dirt.
See. The metaphor can be just as dumb as explanatory. (Or is this a simile?)
You can play with the metaphor (?simile) any way you like. It’s just a metaphor. A metaphor that is psychotically detached from the strained young Australians working overtime to pay for that second mortgage because they sincerely believe it is the way to ’build wealth’ for their future.
Your daughter doesn‘t give a shit, mate. Just go home and play Barbies with her.
Another dumb metaphor that could just as easily be applied to this is that of an escalator. An escalator, like a ladder, helps you move forwards and up (or up and to the right as some financial advisors might prefer to say). The thing should move without too much effort (oh that’s a very nice financial advisor metaphor - something something passive investment, blah blah positively geared). And it has steps that can be used if the escalator stops moving (again, I’m salivating over how good this metaphor is - when the market slows down you can progress in steps on the stalled escalator by engaging in a bit of capital works - whack a new coat of paint on that property, re-do the bathrooms - that’ll sort those stagnant rental yields; then you’ll be back on that escalator, your portfolio moving forwards and upwards; yeah that’s a good one).
But here I can turn the escalator metaphor into something darker. Escalators have rails. They are difficult to exit. You either arrive at the top. Or land at the bottom. If the top is financial security and ‘wealth’ (whatever that means), then what is at the bottom?
The bottom is financial doom - something like depleted savings, bankruptcy or, even worse, family strains and relationship breakdown and divorce and missing your kids’ footy on the weekend.
I can make it worse. What if the escalator you happened to hop on to (mortgage, rolled some equity into an investment property, now you’ve got some tenants in) turns out to have very high rails (you’d be selling at a loss mate, sorry the rent won’t cover anywhere near the repayments fella, just hang in there) and……is going backwards.
Maybe because you are coming off that fixed rate loan soon. (Holy shit have you seen what our monthly repayments are going to be?) Or you were hoping to go for a new job but now cannot leave at the risk of losing a steady income. (Yeah I know I hate it there luv, but it’s stable and imagine if that new role didn’t work out…We have a couple of mortgages to worry about first…)
We know what’s at the bottom….
You now have to run up a descending escalator just to hold you position. You can’t get off. (Property is illiquid) There is no suggestion that someone is going to come and fix this fucking malfunctioning escalator. And stopping to take a breath means that you reliably descend. To the dark and scary ground floor.
I think that some average young Australians are already on this horrific metaphorical descending escalator. And they may not even know it.
Invest in the Right Things:
Here is where I challenge the claim, made by practically everyone in Australia, that property investment is the best vehicle with which an average young Australian can secure his or her future. Safe as houses…
The advertisements for property are sexy. Always attractive people playing in parks. Children running through the open plan living area, out the full height sliding glass panel doorway into the seamlessly integrated patio area. (It brings the outside in…our modern take on the traditional Queenslander etc etc) Magazines full of Hamptons style interiors - do you even know where the Hamptons are? Do you really give a shit?
Why are there no sexy ads encouraging people to invest in their relationships? Or their careers? Or in a 60 day emergency fund?
Because if there is one thing that is going to destroy your relationship, it is the financial strain of dealing with that second mortgage after you were convinced to borrow against the equity in your primary place of residence so you could get that worst house on the best street of that up and coming neighbourhood that don’t worry I’ll fix the gutter over there on the weekend and yeah she’ll be right there’s plenty of overtime at work we’ll be sweet.
Your family don’t give a shit. They just want you.
And for the most part, your employer doesn’t give a shit. They just need to make sure they pay you slightly less than you are worth such that the company makes a profit and can afford to continue running…and employing you.
There is a non-zero number of average young Australians diligently showing up to their fake jobs who have a mortgage they will never be able to pay off. By which time they will be stuck in a home they don’t want to live in, with a spouse that hates them. Oh, and they’ll have arthritis by then. So they won’t actually be able to do that hike in Peru they had always wanted to do……
Well they won’t be able to afford it anyway, I suppose.
And why does every Australian feel the need to talk about property first? The next up and comer. The return they got on that Smith Street unit. The rumour of a new development just to the east. An inside word from a mate in real estate.
Why does everyone have a mate in real estate?
Why don’t we discuss how awesome it is to have our ‘6 months of living expenses emergency fund all sorted’?. Why do we place more value on (lets be realistic) some at times speculative investments in real estate rather than just having some cash saved up for when you roll an ankle and are off the tools for a few weeks?
Is it really so revolutionary to value having some safety in the short term before you start dreaming about your property empire in the future….?
Invest in your relationships. It will be the most important decision you make.
Invest in your career so that you can’t be fired. Or are at least not worried when you are. Or already have that side business humming along profitably that you can now properly work on.
Then make a dumb decision to ‘join the property ladder’. Not before.
No One Wants This:
I don’t think any average young Australian actually wants this.
There is no Australian alive whose dream as a child was: “I cant wait to be a 35 year old woman with a roommate because I’m hustling to pay off my investment property”.
Remember - my claims here are about the peculiarly Australian disease of ‘property investment’, and how it preferentially afflicts average young Australians.
To the people who say “I can’t wait to own my little slice of paradise, paid off, my castle, my home” - I’m with you. No issues there.
But I challenge anyone to dig out the little “one day when I’m a grown up I’ll be a ______” thing they did in pre-school and show me where it says “…a property investor”.
Mine said “stunt man” for those wondering.
…
Because not all ‘returns on investment’ are financial.
Investing in yourself and your career can lead to a fulfilling sense of purpose in a field that you value.
Investing in a relationship can lead to a life of love and happiness (or, work out early if you are incompatible with each other, and amicably save each other heartache in the long term).
Or ‘investing’ in something like world travel can return a quenched thirst, perspective, life lessons, funny failures; since you know that there will come a time when you are ineligible for some of those returns.
P.S.
If anyone reading this is thinking something like “This is stupid, I am doing just fine with a portfolio of five properties. It‘s easy, I just keep track of all my expenses in my excel spreadsheet so I can model out all my repayments in line with my income. And it’s not that big a deal because I’m a qualified carpenter and I got my real estate licence as well so I can do everything myself.”
Well then, my brother in Christ, you are not the ‘average young Australian’ that I am talking about…
P.P.S.
This is all well before we get to the slightly more icky and conspiratorial topics like how the inflow of foreign money from countries with…differing…views of personal rights for the purposes of storing money in a safe jurisdiction artificially inflates house prices for the rest of us.
I can assure you that the east-Asian businessman parking money in a safe asset like a Sydney property as a ‘study residence’ for his son does not give a shit about how hard it is for you to get on the property ladder…
P.P.P.S.
There is probably some egregious error of mathematics or in my assumptions in that renovation section. But I think the gist of my point still stands.
By the way, are we really expecting property to appreciate at about 7% per annum for ever?
Is that median Brisbane house worth $700,000 today really going to be worth $1.4 million in 10 years? $5.4 million in 30 years? Really? Are wages going to keep up with this? I dunno. This is smart person stuff…