Why I finally bought another property and is this a good financial decision?

Finance & Fury Podcast

Welcome to Finance and Fury. This episode is about a bit of personal story “Why I finally bought another property and if is this a good financial decision?”

1. So – if the episode title didn’t give this away - I have recently bought a property – well - technically not true – we purchased land – and are building on this for a home to live in – so I wanted to share my story and thinking on this decision – hope it can help others who are in a similar position or thinking to myself
2. To start – if you have been listening for a while – you may know I have been fairly bearish on property for the past few years –
   1. I have been talking about property over the past few years – based around the metrics – the financial aspects of property didn’t make much sense to me personally –
   2. Property in Australia is some of the most expensive in the world – when compared to household incomes
      1. Not the most expensive in the world -
   3. But when comparing Australia to other nations that also have very high property prices on average – one major difference is the amount of available land that we have compared to them
      1. It does change from region to region – city to city – for instance – Hong Kong and Singapore
      2. Both of these nations have very high populations – and very limited availability of land supply

• Most housing is high density apartments – if anyone has been to these places you would know what it is like

1. Interestingly - China has started to emerge with a number of cities being in the top 10 list – but they have a massive population – and people have been moving into cities over the past few decades to look for work
   1. Process of urbanisation that most developing nations go through – Australia has certainly gone through our own form of this – where over the past 100 years we have gone from a situation where around 60% of the population didn’t live in cities – to now around 85% of the population living in cities
   2. But the interesting thing with Australia is that we don’t have that many major cities – especially when compared to our land size

• This comes back to our history – settlement style living only really started here over the past 200 years – unlike parts of Europe – or the US which was over 150 years before us

1. So, this has left us with a situation of limited cities and with this – high demand for housing in one of these – especially Melbourne and Sydney – with limited supply of available land and high demand in a few major cities – prices go up
   1. We also have a high population growth rate – especially through immigration – so prices go up further – to the point there are affordability problems for many younger Australians
2. I sold my last place in 2017 and have been renting since
   1. It just made financial sense – so I made the decision – invested the proceeds of the sale – moved close to the city and rented an apartment
   2. Didn’t keep much in the way of cash – except for some emergency funds -I don’t like cash –
   3. Especially at the moment
3. I have been concerned about a property correction in Australia for a few years now
   1. There are more risks in the housing market and economy than there have been for many years.
   2. Household debt is extremely high and even a small rise in interest rates will put a lot of people under pressure, forcing many to sell and others to dramatically cut back their spending.
   3. This could lead to forced sales will see even more properties on the market – with the increase of supply – could see prices fall further
   4. You don't have to be an expert to see the clear risk of a downward spiral that could occur from a property slump –
      1. where increased interest rates could lead to lower spending, reduced spending leads to job losses, which leads to mortgage defaults, which lowers home prices, leading to even more spending restraint and defaults – becomes a quick downwards spiral – like what happened to Japan in the 90s or Ireland after the GFC
   5. Given that in Australia we have had an extreme run-up in household debt – and household debt to GDP at the same time – this has been reflected in increasing home prices – given that it comes from debt – and not real economic growth – increased the fragility of prices so there is certainly a high risk that Australia will experience a home price fall at some point – but when? Who knows – and there is no guarantee it will happen
      1. However – whilst some cities may be in a bit of a property bubble – but it doesn’t mean the whole country is
      2. And it seems like the Government and monetary policy officials are trying everything in their power to keep property prices high – so at the very worst – we may see a decline in property prices – but this mainly would occur within the over demanded regions
      3. Beyond this – there may be a stagnation in property price growth for a while – depending on the area
   6. So buying a home may be a surprising decision – was a hard decision to come to terms with
      1. May not have been the optimal financial decision – explain why soon – but was it the better overall decision? – well it was – as not everything comes down to financial decisions – there is more to life
      2. For the past few years – my wife and myself have wanted to become more self-sufficient –
         1. This is mainly a lifestyle goal – growing our own food – have some space - well that requires land –
         2. So we set some goals – to have at least an acre of land – around 5,000 square meters – if not more – so that required land a little outside of the city

• However – ideally it would be somewhere within around 30 minutes travel to the city –

1. So we made the decision about 12 – 14 months ago – to look at buying a place that met this criteria – plus a few others – like having sewerage, NBN, power – etc
   1. Trouble was – at the time – we didn’t have much or really any home deposit – I don’t like holding cash – and everything was invested – but I didn’t want to sell investments for the purchase of a PPR – would set back my other financial goals – for passive incomes long term
   2. For the past 12 months – made a major goal to save enough for a home deposit –

• We set some goals – one was that I wouldn’t use investment funds to sell to cover the property purchase – but at the same time – it meant I had to cease investing for a while

1. 2 months ago – we found the perfect bit of land – met all of our criteria – good spot – river views and access – so we purchased a block of land – and are about to start building in the next few months

So is this the best or worst financial decision I have made?

1. Doesn’t come down to financial – whilst the financial side does play a part –the primary focus has been on lifestyle with this decision – self-sufficient and space to start a family
   1. Come back to why this can actually help financially long term in a second – but for a personal place of residence – the major consideration is does it meet your lifestyle goals?
      1. No point buying a place to live in long term if you don’t like living there
      2. You may as well buy an investment property and have someone else live in it –

• But then comes other considerations if the aim is for the property to be for investment purposes

2. It did take me a little while to come to terms with the journey of purchasing another property
   1. One of the major considerations was not being able to invest cash over the past 9 months - has been really hard to do – seeing the markets go down and having a lot of cash lying around too some discipline to not deploy the funds into the markets
3. The other thing that was playing on my mind – was if property prices will go down in the future –
   1. understanding how the property market works – having the growth being fuelled by interest rates and borrowing capacity – in other words, not real growth – it made me very apprehensive to buy property –
   2. However – when looking at the one saving grace for property – and how I view property prices – it is all about land – and not the property itself –
   3. It is important to distinguish between the two – when people talk about property – most of us take it as a package deal –
      1. You buy a home – or you buy property – most people don’t think about the separation of the land and the premises that sits on it – as each has a value component to it
      2. This line of thinking can be a little easier when looking at apartments versus house and land
         1. For an apartment – you are essentially just buying the property side of it – with technically no land
      3. So coming back to the question – of if buying land to build a house was a bad financial decision –
         1. What makes property prices go up? Demand and supply –
         2. Demand – comes from individuals’ capacity to buy property –
         3. Supply – this can be two-fold in property – where you can have high residential – and low residential – difference is the number of properties and the forms that they are in
            1. I guess technically it can be – Singapore or Dubai are two examples – but this is very expensive to do – so it doesn’t lead to a decline in prices – but apartments can be
            2. Think about the number of apartments that could be places on 5,000 square meters of land – a few hundred if it is 10 stories tall – so all of a sudden – you go from one home on the land, to maybe 300 – this creates a situation where the supply is greatly increased – reducing the prices –
         4. So if you are questioning buying a property – ask yourself the following
            1. Is it affordable - this means thinking carefully about how secure your employment is, and if your budget can maintain repayments not only at current rates – but if rates increase – may create affordability issues
               1. In addition – you have to think if you have the capacity to maintain repayments for several months if you did have to look for a new job
            2. How long you plan to live in it – if you are planning to live in the place you buy for the long term – and it is affordable – this helps to reduce the uncertainty of the decision
               1. If this is the case - then even though you may not get it for the cheapest price, you'll probably find it is worth at least as much as you paid for it in a decade's time – the whole point of buying a PPR is to live in it – but it doesn’t mean that you want to lose money
               2. On the other hand – if you plan to live in it for a few years in the hope that there is capital appreciation and sell in a few years – it may not work out financially
               3. Why? The entry and exit costs can eat away any returns – buying a property has stamp duty – selling a property has agent costs – plus the moving costs and additional costs that come along the way
            3. What is the land to house price ratio?
               1. For me this is a big one – land can’t be artificially increased
                  1. But this is all on the home itself – the land is still as valuable –
               2. This is all about thinking long-term and planning cautiously
                  1. Not the time for excessive risk-taking
                  2. And this doesn't mean buying now is for everyone – because it never will be – however if it is part of your financial goals – you have the funds available and it is affordable – then the correct decision is to buy
               3. Plan to use a property to build wealth - Strategies – Use the property as a forced savings tool – Accumulate funds and then borrow on a second loan for investment purposes –
                  1. Have a goal set out – putting away funds each month
                  2. I’m excited to get back to investing – but have a goal and a strategy in mind
                  3. Spend the next 12 months to continue to pay down the debt – knock down hopefully $100k - refinance – and introduce a debt recycling strategy

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