As you can imagine, there are plenty of people who can’t afford these prices and they are crying out for something to change. But can something really be done here?
I don’t think anyone can honestly say that prices in Melbourne and Sydney are affordable to the middle class. You either have to be a high income earner or wealthy to buy in these cities.
Sure, the average working class family could take out a huge mortgage but they would be a slave to debt for the rest of their life most likely.
So what’s the deal?
I have been reading COUNTLESS articles and reports for years on why there is a housing bubble and how it’s going to create the mother of all corrections in 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013 ,2014, 2015, 2016.
There are a lot of theories being thrown around:
Capital Gains Concessions
I’m not going to pretend that I know exactly why the prices are the price they are or how to bring them down to a more affordable level. But it doesn’t take much to understand the most basic and fundamental rule in economics.
Supply and Demand
It’s so stupidly simple to understand yet so many go looking for more complex answers to justify their reasoning as to why this is happening.
If there are a lot of buyers (demand) and there is only so much land/property available (supply) the price for the land/property soars. And the same can be said if you switch it around. What do you think would happen this very weekend at auctions if no one turned up? The prices would plummet. No doubt about it. If there are less buyers than sellers the price of real estate goes down. This is proven economics 101.
So the question people need to be asking is not how the government can stop the buyers (demand), it should be about how they can free up the land (supply).
Carve it in stone, demand for Melbourne and Sydney real estate will NEVER cease for as long as I live. It would have to take such a colossal implosion of Australia for these two cities to suck. Not completely out of the question, but I will eat my shoe if there is EVER a time where you can’t sell real estate in either Melbourne or Sydney.
They are world class cities. Melbourne was ranked the NUMBER 1 most livable city in the entire world last year and if memory serves me correctly it has been number 1 or 2 for a few years running. Sydney is no slouch either coming in at number 7. I just want to highlight this point because it’s important. If you’re trying to buy a house in Melbourne you are trying to buy real estate in THE MOST LIVABLE CITY IN THE WORLD! The world… not just little old Oz. The entire planet.
What do you think this does to Melbourne and Sydney real estate when they are some of the best places to live in on the planet?
Demand goes through the roof.
You have got to be realistic here. You are trying to compete with not only Australians but the rest of the world when you buy. Throw in limited supply and you have a recipe for exuberant house prices.
I don’t see any measure the government can put in place to stop demand enough for the prices to go back to an affordable level.
The focus is always on the demand, but little gets said about the supply.
Is it unreasonable to assume that if municipalities changed zoning and planning laws and released more land to pave the way for new development that this could potentially deflate some of the house prices? To me it makes sense. If you increase the supply in the market, the current supply will be worth slightly less.
There are a few ways you can lower the costs of interest repayments:
Refinance to another bank at the lower interest rate
Pay off the loan quicker
Dump money into an offset account
What’s an offset account? Basically an account that reduces the principal that the banks calculate the interest repayments on.
Say you have a loan for $100K and the interest rate was 7%
You would have to pay $7K in interest every year.
If you had the same loan and interest rate but also had an offset account with $20K sitting in it, the banks would calculate your interest repayments in the following way:
Loan amount ($100K) minus offset ($20K) * 7% = $5,600
You essentially saved $1,400 bucks of interest repayments by just having your spare cash ($20K) sitting in the offset account.
Enter Credit Card Tarting/Stoozing
Some credit cards in Australia have the ability to transfer the balance (usually up to 80% of the credit limit) to another banking institution without a fee.
This is relatively unique to Australia and whilst I have read some other country being able to do it, it seems like most banks overseas won’t allow you to.
Credit card tarting/credit card stoozing is where you basically use a credit limit that has a 0% interest free period and dump that amount into your offset account to lower your interest repayments on your home loan.
Here’s a break down on how it works:
Open a low or zero fee credit card with a financial institution different to the main bank where you hold your home mortgage loan and mortgage offset account. You also need an existing credit card with your main bank.
When applying, ask for the largest credit limit they’ll give you.
Immediately balance transfer the maximum amount to your CC in your main bank, and then internally transfer this to your mortgage offset account.
Set up an automatic monthly payment from your mortgage offset account to the new credit card for the minimum repayment amount the card requires (usually 2% of the current balance).
You’ve now effectively got yourself a fee-free one-year loan at 0% interest, which you are using to offset (tax free) your mortgage!!!
One month before the interest-free period on the balance transfer expires, transfer the entire amount back from your mortgage offset account to the new credit card, and either (a) close the CC account, or (b) ring the bank and ask them to give you a new 0% balance transfer on the same card.
Wash, rinse, repeat.
How Much Could This Actually Save You?
Imagine that you and your partner both applied for CC’s with a max credit limit of $50K on each.
Following the strategy you both transfer 80% of the combined balance ($80K) into the offset account that is offsetting your home loan of $400K that currently has an interest rate of 7%.
Without the offset you would be paying $28K in interest every year
With the extra $80K offsetting your loan you would now be paying $22.4K in interest!!!
That’s $5,400 dollars every year in interest repayments saved without paying a cent!
And who said there’s no such thing as a free lunch?
Things To Be Aware Of
This strategy works best if you have a home loan. You could transfer the money into a high savings account and make money instead of saving it on interest repayments. But the interest rate on a HISA is lower than a home loan and you would have to pay tax on money earn’t so it’s not as effective.
Need to be earning a high income and have good credit rating. The bigger the limit is on your CC the better. And to get a big limit you usually have to be a high income earner with little debt already.
This may affect your credit rating! This is a big one. Applying for too many CC’s can negatively affect your credit rating which could affect your ability to get credit in the future such as home loans.
MUST STAY ON TOP OF THE GAME! If you stuff something up like not reading the fine print on balance transfers or missing your interest only period this strategy can very quickly cost you more than it saves you. You must be on top of everything. Not that hard to do but the banks are aware of credit tarting and the only reason they allow it is because they have statistical data that says that even though this is possible, odds are that the majority of people won’t have the discipline to stick to the plan and will end up paying more in fees than they save. Have you ever wondered why CC’s offer big sign up bonuses for free even if you cancel the card straight away? What’s the catch right? There is no catch, they just have the data that verifies that the majority of people are not financially savvy enough to stick to their budgets and they will most likely blow out their spending of their CC and incur CC interest fees which is where the banks clean up! They would much rather be charging you 22% (CC rate) interest than 7% (home loan rate) and are willing to give out freebies (CC sign up bonuses) in order to suck you into the trap.
Credit card tarting can be an easy way to ‘beat the system’ and knock thousands off your interest repayments, but to the undisciplined home owner who is not prepared to strictly stick by the plan it can end up costing you more than what it’s worth… Photo credit: Sean MacEntee via Foter.com / CC BY
Not a lot to report on this month. I managed to save around $4K but my super went down a little. Christmas is approaching very soon and my worst savings month last financial year was December so I’m looking to take a hit again this time. I’ll try to manage it a little better hopefully.