......"If I Could Only Give You One Piece of Advice"...
Today I'm writing to you about an important subject.
It's a subject that's critical to your future wealth and happiness.
In fact, it's something that could have a bigger negative impact on your wealth than any other investment.
And yet every way you turn the mainstream press, government agencies, and vested interests will say you're a fool if you don't follow their advice.
Well, I'm here to tell you to ignore them. It will be hard, because you'll come under a lot of pressure...especially from family and friends.
But if there was only one piece of advice I could give you, it would be this...
If you plan on buying a house because you think it's the best way to build wealth, stop. Don't do it. Rather than improve your financial position, it's more likely to ruin you.
I know, it's a big claim, but I'll explain why in a moment.
On the other hand, if you already have a house and mortgage...or if you plan buying a home because you prefer that rather than renting...or you want a holiday home because you can afford it, that's fine.
I won't stop you.
The important point is to not fall into the trap of thinking you'll make a profit from your 'investment'.
As I've written in Money Morning for the past four years, you need to think of housing as an expensive consumer item. Think of housing in the same way you think of buying a car, or buying an Ikea table, or a big-screen TV.
No-one in their right mind buys a car, Ikea furniture or a big-screen TV thinking they'll turn a profit on their 'investment'.
You buy those things because you need or want them...they're useful, but they're not an investment.
You should apply that same thought process to buying a house. Housing isn't a real investment, and most importantly, it isn't a key driver of the Aussie economy.
Let me explain what I mean...
Why Your Home Isn't a Gold Mine
I spotted these two headlines in the mainstream Aussie press this week:
'No bubble trouble in house price rise' - Sky News
'Housing rise to offset mining fall' - The Age The second headline is the most troubling.
It's this type of ill-educated and dangerous argument that I've fought against over the past four years.
Despite that, almost every day people sell the lie to Aussies that housing is the key to prosperity. They tell us that even if the rest of the Aussie economy collapses, don't worry because we can always build houses.
One of the key arguments the housing spruikers make is that house prices always double every seven years. They say that all you need to do is buy a house today and watch the capital growth double every seven years.
It means that an average $400,000 house bought in 2008 would be worth $204.8 million in 59 years. If that's not a great inheritance to leave to the kids, I don't know what is.
They or their kids will never have to work a day in their life.
Of course, it's also complete hogwash. It can't and won't happen that way.
How do I know? I only have to look at history...
Retirement Debt-Bomb
Take this story from superreview.com.au:
'"The increase in property prices has provided many with the opportunity to increase their debt and use it to assist others or sometimes to live a life beyond their means," said the study.
'As a result, some Australian retirees are likely to have a mortgage to pay off in their retirement, which will impact their quality of life, according to the study.' Many baby boomers believed they were investment geniuses. They bought a home in the 1960s or 1970s, just when the 40-year global credit and inflation boom took off.
As they saw the value of their homes skyrocket, they bought more properties and convinced their kids that housing was the path to eternal wealth.
So, they kept leveraging up. Why stay in this little house and make this much when they could buy a house three times bigger and make three times the profits.
That means just when they should be hitting retirement debt-free, they're hitting retirement with a six- or seven-figure debt load.
Take this from Business Spectator:
'Will extra debt neutralise increases in the superannuation contribution rate? Studies of retirees' financial positions show that many people accumulate debt faster than they add to their super.
'Once they are old enough to access to their superannuation, they pay off their debt rather than create retirement income. Is this poor planning, or are incentives at work that make superannuation unappealing?' That's the thing; your home, even without a mortgage, is an illiquid asset. You can't earn any income from your home (unless you rent a room to a lodger, a trend I think you will see increase over the next 10 to 20 years).
All you can do is borrow money from a bank with your home as the collateral...and then pay interest to the bank.
But that's not an investment. An investment is something that earns you money, not something that earns someone else money.
And this isn't just an Aussie phenomenon. As the UK Guardian reports:
'Two-fifths of people approaching retirement are failing to save anything to help support themselves when they leave work, research showed today, with many of these "pre-retirees" having a substantial amount of debt...
'In fact, the median or typical amount of savings is [...] £8,593, and the savings of a small number of rich people are disguising the relative poverty of a large minority. More than a quarter of 55-64-year-olds still have a mortgage with an average debt of £52,535, and one in five still owe more than £75,000 on their homes.' What makes this situation worse is that the average income for people in these age groups is just £1,284 a month.
They don't have a chance of paying off their mortgage and having any savings left to fund their retirement.
And yet spruikers still tell you that houses are a great investment and that housing will spur the Aussie economy after the mining boom ends...
Aussie 'Retirement Cliff' Approaching
You may have heard the over-used term 'fiscal cliff'. It's used to describe the budget and debt position faced by the US government (I won't go into the details here, as it's not important to this story).
The reason I mention it is that retirees the world over (including Australian retirees) face a 'retirement cliff'...and unfortunately they're hurtling towards it at 200km/h with no brakes.
But let me get back to one point: the idea that house prices double every seven years. If you believe that bunkum, it would mean a house bought in 2005 for $400,000 would now be worth $800,000.
Unfortunately, for home-owners, it's not even close.
According to the Australian Bureau of Statistics (ABS) survey of eight Australian capital cities, the house price index has gained just 41.2% in seven years.
For the housing spruikers to be right, the index should today be at 200.
Even worse, for anyone who took out a mortgage in 2005, taking into account interest costs and other housing costs, the index would have to be at least 234...just for them to break-even on their 'investment'.
That means in effect, house buyers (with a mortgage) have made a 38.6% loss on their 'investment' in seven years...hardly the path to wealth and prosperity the housing clowns would have you believe.
Let's get something straight. The 40-year housing boom from the 1970s to the late 2000s was an abnormal period. What we're living through now and into the future is a return to the normal house price behaviour...that is periods of ups and downs, but over the long-term no net price moves.
And so the idea that house building will fuel the Australian economy when the mining boom ends is just ridiculous. Here's why...
Housing Won't Help the Economy
As I mentioned above, housing is an expensive consumption item. It isn't the driver of an economy.
Real economic drivers are mining, manufacturing, agriculture, business services, technology...basically anything you can export, or something that adds to the running of a business or improves business efficiency.
Housing doesn't fit into any of those categories. Housing — like all other consumption items — is the reward you gain from productive labour.
Housing is what you can buy when you've made something or provided a service that others demand.
But the ease of credit issued by banks switched this dynamic around. When you borrow money it means you can get the reward now and then work later to pay back the loan.
Again, that works with any form of lending. You can save to buy the plasma TV, using money you've set aside from your income. Once you've saved enough money, then you can buy the TV.
Alternately, you can borrow money now, buy the plasma TV, and then use money you set aside from your future income in order to pay off the loan.
I'll say it again; thanks to easy bank lending, you can get the reward today and work for it later. That's true for plasma TVs, cars, furniture...and yes, housing.
I always say it's like an athlete who hopes to buy and eat a cake after they win the race...except this athlete decides they can't wait to win the race, they want the cake first. It seems like a good idea...until it comes to running the race.
So, think about it. The headline in the Age says 'Housing rise to offset mining fall'. We've seen similar headlines and commentary from the mainstream press.
The theory is that when the mining boom ends (it already has), Australia can just build a bunch of houses and that will drive the economy to more prosperity.
But here's the thing. If you accept that housing is a consumption item (which it is, there is no sane argument against it), and if you accept that borrowing to buy a house means earning income in the future to pay it back, where will that income come from?
Surely not from building houses? Even the biggest property spruikers can't suggest that Australia can make a living from buying and selling houses to each other.
Can the Aussie economy really survive as a closed economy that only functions on building and selling houses? No, of course not.
Insular Economies Fail
Regardless of its size, economies need to interact and trade with other economies. That's how economies and civilisations grow and improve.
Before the arrival of explorers (or invaders if you prefer), the native American and Australian populations were stuck in the Stone Age. Before continental Europeans arrived in Britain, the country was similarly undeveloped.
And before migration and communications from the Middle and Far East, Europe was bereft of many luxuries that most people now take for granted.
Relying on an insular economy is as dangerous to an economy as in-breeding is to human health.
In short, buying houses for investment reasons is the single worst decision you could make. Housing only boomed for 40 years because of a sustained credit boom caused by governments and central banks. That boom is over and won't repeat in your lifetime. You're now seeing a return to the norm.
There are many, many better places to put your money if you're serious about investing and retiring with wealth, rather than debt.
And no, not all of them include investing in the risky stock market.
The key to investing and retiring wealthy is to understand the fundamentals of the market in which you invest...to understand the risk and reward...and also to understand the real way to build wealth.
That means accepting that property investing is dead. It's a fallacy that housing is the way to build an investment fortune.
Housing is what it always has been: shelter...and a consumption item.
So before you buy that house, for whatever reason, stop and think long and hard. If the sole reason is to make a profit, I'll tell you right now — don't do it.
