14 June 2017

First home buyers grant Pitted by Queensland Treasurer

Image: Treasurer The Hon Curtis Pitt Photo thanks: Courier Mail
Grant announcement

Queensland Treasurer, the Hon. Curtis Pitt has announced in the State Budget that the $20,000 first home buyer’s grant will continue for another six months. The extra $30 million announced in the budget will extend the grant's reach until the 31 December 2017 for properties priced under $750,000.

But the Treasurer is either purposefully misleading young buyers or he is carelessly unaware of the definition of the median house price statistics in the property market across Australia including Queensland. Median house price statistics do not include the price of new building sales and house and land packages.

In the Townsville Bulletin today, Mr. Pitt was quoted "this grant can have even greater effect in regional Queensland, where $20,000 maybe more than half of the 10% deposit for a median priced house."

Mr. Pitt went on to say “it's an initiative that will continue creating jobs and helping more Queenslanders into homeownership."

Of course, the Treasurer wants more people buying house and land packages. The grant is designed to cause unsuspecting buyers to invest in the building industry in order for new jobs to be created through construction activities. This is fair enough because the appeal of a new home is warranted.

Innocent mistake?

Townsville has some excellent builders and tradesman.

It could be construed from the Treasurers statements that buyers are getting a good deal with the free $20,000 handout. However,  the truth is that the buyers are left with an equity-to-value black hole in their financial commitments immediately upon taking possession of the keys to a new home.

Real estate agent Karen Voevodin from McGrath Estate Agents said, "If buyers are quite savvy, they can save a lot more by buying an already established home." Perhaps some people might see this as an agent serving their own interest but this statement has a moral truth.

Yes, the first home buyers grant is to stimulate building and to help first home buyers into the property market.  A $20,000 grant contributing to the deposit and loan-to-value ratio criteria set by the bank helps buyers qualify for a new home. It is a genuine attempt to help first home buyers enter the market. However, it is less favourable than what a buyer may think and what a flippant Treasurer may say in the emotion of selling his third budget.

Wisdom of experience

New home buildings render an immediate value reduction upon the purchase being completed, unlike existing second, third, fourth, etc. generational homes that have already been washed through the property market and not the retail construction market.

Buying a new home is still a good decision if the home is being held for the long-term and real socioeconomic realities are known. But what many new buyers have come to realise after buying and living in the outer suburbs of Townsville's sprawling housing developments, is that they soon struggle to come to terms with the inconvenience,  financial and relationship costs of having to travel to and from fulfilling social, shopping and income precincts in the City.

Where the buyer's location of employment, demands of children going to school, playing sports or visiting friends means an extra 30 minutes in travel per day, the outer suburban new home soon becomes a cost too much to bear. The vast majority of new home developments are 15-30 minutes drive from the strand or city centre.

Of course, we want to help our building and construction industry friends but the families of existing investors equally deserve sale contracts just as much as a local builder contributing to the growth of the property footprint of the City. The property moguls have had their fair share of buyer money over the years.

A buyer's decision to enter the property market in the outer suburbs or closer to popular facilities is a gift for the people of the City. Either way, it is looked at as being good for the community overall.

Oversupply risk

Nevertheless, the fact is the housing market in Townsville has an oversupply of land. There is also more existing houses for sale then there are buyers wanting to purchase. It is what the industry calls a "buyer's market.", with the federal and state governments pledging millions of dollars for affordable housing and more land releases. This information has become even more valuable to first home buyers and mature buyers more broadly.

Young buyers would be advised to take advantage of the buying opportunities in existing housing before taking the Treasurer's direction on taking the $20,000 cash hand out for a new home.

Land in Townsville is also in oversupply right now but the price has dropped less than the value of the depreciated improvements builders construct on the land, which was evident in the questionable 1% drop announced recently by the State Government statutory land valuations (these are the values that impact council rates).

Retail in new home building

It only stands to reason that when you buy a new home, the builder is supplying materials and labour at a cost. The builder is adding his own value, time, skills and materials and selling the home for a profit.

Effectively, the builder is a manufacturer of homes. The building materials, including the builder's cost of the land, are calculated as an expense to their profit after cost of sales. This is how the retail price is established.

Existing homes, on the other hand, do not have a retail factor built into the price unless the seller is overpricing the home to profit from the market's value perception or price conscience.

This means the price of an existing home is based on a more realistic "market value" or "median price" assessment which the banks, insurance companies, governments, and courts use valuation science to conclude a residual value at a specific time. They then calculate risks to their own assets such as money. Divorced properties and deceased estates are valued this way also.

Getting a loan

The banks factor this immediate market value adjustment into the mortgage you purchase from the bank or through a mortgage broker. That's why the contract price loan-to-value ratio is 80% loan and 20% buyer deposit for the residential property, which the bank knows and on many occasions do not share unless you fail to qualify or you ask. Commercial transactions are less again with that 60% in loan and 40% is deposit because the banks carry more risk to then the buyer.

If the buyer cannot raise the 20% deposit, the banks will offer a mortgage insurance product priced at thousands of dollars extra. The insurance controls the risk, and in some unethical situations, targets the buyer with higher "book risk" meaning a higher loan-to-equity ratio.

This way,  the insurance instrument will cover the cash flows and balance of equity as collateral to the bank. Should the buyer not pay the loan out within the terms agreed or not make the required payments, the property could be sold to another buyer and capitalised. At which time, the liability is disposed of by lender and the bank and buyer go their separate ways.

Value vs Price

Back to the market value point, this is a critical concept for buyers to understand. It is a real money figure that determines the debt to equity ratio you are accepting when purchasing a new or existing home. Whether buying a house, vehicle, business or investment, this is the financial measure applied to any asset purchase decision.

Capital, cash flow, and equity or debt are the real measures of wealth. If you have more value in assets like a house than you have in loan liabilities on your assets, you are technically free of incumbency and bank security. This is what most people strive for, but savvy investors are aiming for independence and freedom of wealth where the mortgage becomes redundant in your life.

It's important to understand the real value of housing, rather than price, because it is more meaningful in terms of what's in the buyer’s interest than gaining a $20,000 grant for new homes only.

The grants serve as a selling tool, like the "prices are down" advertisement by Coles in the food market, for builders and governments to grow their business profits or politicians attracting voluntary supporters for their policies going into the next election.

Image: Typical first home buyer family

Road to freedom

Buying any property should be about your wealth and freedom to eventually do what you want when you want with whom you want. Taking a money deal and not a value deal will guarantee young buyers will be a slave to the mortgage system unless they learn the point of value concept instead of seeing the deception of the price.

Always remember this! The original definition of the word "mortgage" comes from the Latin word "mortuus". Later the French language adopted the words "mort" and "gage", which means "death pledge" in French.

It's a simple fact that value-conscious buyers win. Money conscious buyers on the other hand lose. From the most ancient text and for any of the biblical observers with us, "money is not evil, but the love of money is evil". Get away from focusing on the money and pay attention to the value instead.
Investing for the long-term is the best way to see the biggest purchase decision in our lives. 

Therefore, rational, smart, wise research and advice is very important.

Better solution

The truth of the matter is that new home sales are neither measured nor treated in the median house price statistics. So comparing a $20,000 first home buyers grant to existing median property price data is misleading and harmful to our young people.

Educated property investors will see the double standards in the home owners grant in its current structure, luring young people into an unnecessary, government manufactured sales pitch. Now, we can certainly see through the Treasurer's mistaken use of the money incentive in the budget.

If the Hon. Mr. Pitt would like to reference median house prices in promoting new building supply, he might consider applying the first home buyers grant across all residential property products that would benefit first home buyers. Why not reduce the grant to $10,000 and broaden its application?
However, I suspect the real focus for the Treasurer is on stimulating the economy and creating jobs for the building industry and therefore claiming the short-sighted jobs that are created from construction.

Such behaviour of deceptive and misleading announcements have been unlawful in professional services industries for many years. Marketing that is intentionally deceptive is unethical and certainly illegal in Queensland. Let's call it out for what it is and then we can proceed with what can be done now to be better prepared.

What first home buyer can do now

Young buyers who subscribe to our TREN News and eMagazine service will be better informed and even protected with expert wisdom and opinion.

The news and special guides and expert contributions are often provided for free.

Next time an irresponsible leader or an innocently mistaken politician, or commercially conflicted professional, seeks to sell ice to an Eskimo that takes for granted our young people starting out in the property market, they could be seen for what they really are promoting.

We provide a platform to ask questions, share comments and stories for everyone to benefit from the "real values" of intellectual property. Get educated and don’t become a victim of the money system.

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