This is the story of the 3 little pigs who wanted to own a property of their own.
The first little pig was very careful with her money and she was surprised when the piggy bank said…….’We can lend you plenty because you have been a good little pig and saved well. In fact we can lend you twice as much as you need to buy that straw house. You can afford a big 2 storey brick house’.
But she was a wise little pig and wanted to start her property investing wisely so she borrowed just enough to get into the small straw house and have enough money left over to install a good security system to keep the wolves from the door. She knew that she could improve the house over time as she needed and as she could afford to do so.
The second little pig went to the same piggy bank and was told the same story. He went the whole hog and chose to take the opportunity to buy the big house and borrow as much as he could.
After time there was a crisis and all the piggy banks started to get tougher and work was hard to get. The stress and worry got to the second pig and it affected his job, his marriage and his health. In the end he lost his job and his house. Too much stress.
The third little pig, seeing all this happen, decided to stay at home and rent. He in fact never bought a home and lived happily ever after.
We want it all and we want it now. That seem to be the mentality of new home buyers now and it is such a foolish desire. Keeping up with the Jones’s has taken on a whole new meaning.
In a report released by SQM Research, the banks have clearly decided to increase the availability of finance to buy bigger houses. All for major banks have now lifted their loan to value ratio to 95% saying they are willing once again to accept only 5% deposit from first home buyers. A big temptation for borrowers to borrow more and buy bigger houses.
Smart young investors are thinking long term and are content to start at an affordable level, even adding the finishing touches years after they move in and being content to have the house grow with them as funds allow. Even smarter investors look for an enty into the property market by staying at home, investing in a property and renting it out while building equity.
When asked about his experience, the second little pig said ‘I thought the bank wouldn’t lend me money if I couldn’t afford it’.
Pigs might fly too!
Kevin Turner | RealEstateTalk Host
Sellers Guide–appointing the best agent and how to make sure you get top dollar in any market.
[email protected] | Twitter: @RealestatetalkNice allegory but it seems to be a bucket of cold water on aspiration.
Kevin who then should own property? Are you advocating a return to serfdom? I'd be interested in your thoughts on this especially for the third little pig.
Andrew
itsandrew
Go as far as you can see and you will see further.
In the early days of the United States they were all idealists. They'd come from the harsh landscape of Britain and they werent going to do things the same way whatsoever. So .. they banned the use of private property as such. All property belonged to the United States govt indirectly and you looked after it on their behalf.
This meant you couldnt sell a property without running it through a council .. you couldnt lend on a property because it wasnt yours to lend on, and you couldnt really sell a property as there was no buyer market anymore.
It took two harsh winters .. a total lack of capital money supply and actual starvation for the idealist citizens of the new country to change their mind about their approach to capitalist practises. And they never looked back.
If you have a problem with either the idea of ownership of property .. the fluctuation of free markets or the application of derivative based capital, I suggest you head to an idealist paradise such as Cuba .. or maybe Venezuela or Lebanon. Whats that i hear .. you dont think they are that great?
Exceptionalism has a price. And if you want to live in a realistic world you need a sound capitalist base. You may not approve of everything that goes on in such a society but thats what voting .. democracy and protests are all about. As Winston Churchill once said 'It has been said that democracy is the worst form of government except all the others that have been tried'. I'd apply that to capitalism WITH democracy. Until you can assure me of a better approach, I negate your false idealism.
I'm settling for 3 wonderful sets of pork spare ribs out of your deal.
In this country we VET our 95% applicants more thoroughly than ever. All the free money days are gone. You can still get these loans AND SO YOU SHOULD BE ABLE TO. With a reasonable asset base they gear poor performing deals into winning solutions. They arent for everyone .. and so they shouldnt be.
We arent the US .. our proportion of sub-prime deals is a miniscule proportion of our market and our loan structures are a lot more sound. Thats going to hold us up well in the longer term.
I don't get it?
In the end, a house, like any thing, is worth what you can sell it for.
If the 3rd little pig stays at home, who do the first little pigs sell to?
Agree that most want it all and now – that's what got the second little pig in trouble. But, if niether the 2nd or 3rd little pig can afford or want the 1st little pigs house then that house isn't worth much.
yes & that is all the first pig paid, not much.
Lots of ‘not much’ adds up to quite a bit also may have a lower risk profile which suits piggy 1.
Scott No Mates wrote:Lots of 'not much' adds up to quite a bit also may have a lower risk profile which suits piggy 1.Yea, that makes sense – play it safer.
I guess that is why many PIs try to lvr more bottom end property. 2 slum apartments vs a 4 beddy in the burbs for rent.
Land banking seems safer still, for the first little piggy though.Not necessarily advocating slum city but well priced properties in better areas which can still be held for capital gains in the long term and reasonable but not brilliant rent returns.
I know some owners who are happy with only 60-70% of market rent but the level of maintainence is quite low. When the Properties come to rent there are queues of applicants.
Here’s the kicker, the area is zoned for townhouses and will be sold as a development site in years to come.
itsandrew wrote:Nice allegory but it seems to be a bucket of cold water on aspiration.Kevin who then should own property? Are you advocating a return to serfdom? I'd be interested in your thoughts on this especially for the third little pig.
Andrew
I didn't interpret it that way, it seemed more a warning of the dangers of over-committing in a desire to have it all now.
A lot of people dont (or didn't) want to settle. I was on my 3rd PPoR before I actually owned a 'house'. I worked up to it. I know plenty of people who insisted that if they were going to purchase, it had to be a house in the area where they wanted to live.They weren't going to climb a ladder to get there, they wanted to go right to the top.
When I did finally buy my house, I went to the banks to see how much I could borrow. I then did the figures and thought "wtf, I can't afford to borrow that much". I didn't have a very extravagant lifestyle at all, but taking on that debt would definitely have cut into my standard of living, and left no room for negative impact on my commitments. So instead I figured what I would be comfortable committing to, allowing for rate increases and possible impacts to income.
A lot of people when I mention doing my own sums to work out what I could afford look at me in amazement. Its never occurred to them to spend any less than the maximum the banks tell them they can borrow. Now I've just settled investment property number 4 with safety net in both savings and serviceability, and they're still struggling to make repayments with no idea how they'll handle rate increases.
Bjs .. thats a very nice approach.
However the one factor you forget to lay out on the table is all your efforts is the major component of the risk. The risk always lies in either not knowing what you are doing or not preparing for what you are doing. Taking out any format of loan can be intimidating.
When the banks turned around and said no to one of my creative suggestions, I put an advertisement in the local money section offering a better than bank rate for the risk of lending to me .. from the public. I got my money three times over .. took advantage of one and when the other guy felt he had missed out on lending to me .. whacked together a SECOND creative offer to mesh with him. So out of refusing to accept that my debt was bank negotiation, and the risk component was my issue .. i geared a near million dollar deal with a relatively low gearing ratio of 15/85. At the time it was perfectly acceptable to all parties .. and the deal took eight months to construct and render into total profitability. At which time I sold with a capital gain of substantial proportions.
Gearing to a high level is only a risk when you do dumb deals. I find that most of my high LVR deals rely on me having reasonable asset and equity to back it all up. But more importantly .. a deal of 95% loan allows for the more immediate purchase of the asset concerned. It does apply a more significant level of risk to the whole deal. It also allows for a greater and quicker accrual of equity (in percentile terms) than a larger investment of capital would allow for. It is more of a gamble, as the input into the deal is less. But it also remains a neccesary component of the bank to supply a high risk deal. It allows for more bank profit .. it also allows for more customer equity in the asset quicker. Without this there would be people waiting years to complete housing deals.
The other side is if you play too conservative and take on NO risk component .. you spend time and money on saving to make the deal. We all operate in a limited timeframe on this planet whether we like it or not. And there will always be some people who want to get more done in a more limited timeframe. Thats where borrowing from the bank for anything comes into play.
Partially bj, I do agree that there can be a problem with recklessness. But it seems overplayed in that the second little pig is a bit of a straw man. Distressed mortgages and defaults do occur but are extremely low. The story seems to be aimed at scaring people rather than looking at sensibly approaching risk, lifestyle choices and vision for your life.
Life for the third little pig is fairly bland and I don't know what they will do in retirement. It would be nice if they could be allowed to aspire to something more than a lifetime of renting?
Anyway, that's just my take.
Andrew
itsandrew
Go as far as you can see and you will see further.
Don't disagree with either of you. I guess I'd say calculated risk is good, but blind risk is bad. Its the people who just accept that what the banks will loan them is what they should borrow that scare me (for their sakes). Its like the people who hear that negative gearing is good and paying tax is bad, so they run out to buy the most negatively geared property they can find without putting any thought into what the actual goal is (making money).
That said, I was reminded the other day, the first property I bought was a 2br unit in Hawthorn (Melbourne) about 12 years ago now. I remember shortly after I bought it, another unit in the same complex came up for sale, and my (now) parents in law were visting my (then) girlfriend and I. They talked about how they'd always wanted to buy an investment property but didn't, but when I suggested they come to this auction and try to buy they shrugged muttered some excuse and changed topic. I couldn't help but think how much better their situation would be now if they'd taken a chance and bought that property then.
They're a little different than pig number 3 above since they do own their own home, but they never bit the bullet to invest. That said, it seems like some people buy any old property and any old price just to say they're investing, instead of considering whether they're actually good investments aimed at meeting specific goals or not.
There are a lot of would be investors and home owners looking for a second property, thinking they know it all and have no financial intelligence, this can create a great degree of risk if your can’t forecast your revenue to capital and liabilities in a property.
This also comes down to peoples action threshold, I’m how ever a person will take any opportunity and make it into something even if it’s a dead deal to others. But that’s because I have resources to back this up.
Another is, sometimes people that like tangible assets also create a governor on there mind, thinking how would I? A simple member of society manage this massive feat of owning multiple double story homes. It’s like when you look at an apartment block and someone tells you to go clean it on your own, the same belief that runs through your mind at that time is the same as owning property.
For the people who are renovators out there don’t stress if your don’t have experience, I had a guy that was a bricklayer for 20 years screw up a renovation on his own property, and didn’t relies how he was losing money. Everyone has the same value of risk sometimes just depends what’s yours.
My question is who owns the home that the third little pig lived in? A smart investor, that's who.
Sparkys wrote:My question is who owns the home that the third little pig lived in? A smart investor, that's who.That seems like more of an answer than a question:)
My question is to the post above this. If a lot of inexperienced PIs are playing with the market, wouldn't that make the whole market risky, even for the experienced PIs?
not in the least. Everyone assesses their own risk & exposures. The ones who bear the risk are the investors & the bank. Neither control the market.
Scott No Mates wrote:not in the least. Everyone assesses their own risk & exposures. The ones who bear the risk are the investors & the bank. Neither control the market.So if a whole bunch of wannabe PIs get in on the action – that's not going to effect the demand side of the equation, the consequent rises in equity and lowerring of bank lvrs?
Don't get me wrong here, I'm not saying that PIs who are in it for the long haul and smart about their lvr can't make a good thing out of their investments. What I am saying is that a market where everyone and their dog wants to own a second house and is given the oppurtunity to do so must effect the game for those long term PIs.
For instance, take NG. The rise in the amount of NG property in Australia has been pretty impressive over recent years (I'll probably use it as a way to lessen my ever increasing tax and pay off my holiday/retirement home whilst I rent close to work) and this has an effect on how much government attention NG gets. The more tax payers that claim it, the more of a target it is likely to become. Ultimately, I'd like to think this doesn't effect all the really smart LLs who should be positively geared anyway.
Also, though I agree investors bear the risk, I'm not sure how much banks have. It's the age of bailouts, don't forget. If our property market tanks, I bet the country is given no choice but to rescue the big 4. Commonwealth bank may become more commonwealth again:)
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