Real Estate Myths Destroyed

BB you can't have it both ways .

If they miss out on the opportunity to buy multiple properties ( which I think is incorrect ,I believe it will just take longer , more consistent application ) they will then get to buy a cheaper PPOR . which is better for everyone as it give people more money to spend on things and invest in businesses.

I have no problems with an economy that encourages people to invest in businesses over property , but up to now that's not the system we've had .

If the incentives were different , I think a lot of the younger creative guns here would be out there looking for / creating the next big thing in business ideas which would be better for the country .

Cliff

 

I strongly believe a tweak in attitudes, spending habits and expectations will see a lot more young folks get their own place. Its not rocket science. I have worked with quite a few youngsters who when changed their attitudes, approach and level of action, were able to secure a ppor that they were happy with and never thought would be possible.

 

Have what both ways? @HUGH72 inferred he disliked people who salivate over those who wish misfortune on others in the form of a house price crash, but in the same breath was salivating over using real estate as a vehicle for increasing his own wealth (which in my view is to the detriment of other home buyers). I wasn't talking about multiple properties, so not sure what you are trying to say here... or what you mean about a cheaper PPOR.

 

Supposedly, there are so many people missing out on buying houses but I don't see that money re-directed into starting businesses.

I hear this over and over. Housing is unproductive and people should be encouraged to invest in businesses. My question is what are all these business that are not being started up? I would have thought if there was demand, and money to be made, someone would jump in a make that money. We are being told that young people are being conned by overpriced real estate. We are also being told that real estate is sucking up all the investment money, leaving none for businesses. The basic argument is that people should be investing in businesses instead of real estate. Yet the stark reality is that most small businesses in Australia will fail in their first few years of existence. So if we really want to con young people, we wouldn't sell them overpriced real estate, we would tell them to start up a business.

The bad news is that survival rates for small businesses are very poor. In the period 2007-2011:

• 60% of sole proprietor (no staff) businesses failed;
• 40% of 1-4 person businesses failed;
• 35% of 5-19 person businesses failed; and
• 40% of small businesses were not profitable

​

Why do small business startups fail? | EmpireOne Group

I can't see how this is an any better outcome than investing in "unproductive" housing.

I have no problem with this, but I do think there is a limit to the number of "big new ideas". What I don't like to see is great business ideas being driven offshore because of a lack of incentives to stay local. I think there is a balance here between accusing housing of being "unproductive", overly incentivising housing, not enough incentives for genuine business startups and pushing young people into businesses that are likely to fail. I agree the balance is wrong but I don't accept that housing is "unproductive" and that business investment is the panacea to all that is wrong with the Australian economy. I also don't think it is a good idea to push every young person into a business when they may not have the knowlege or skills to make it work.

The other side of this is a lack of investment in business expertise. For example, many business fail due to a lack of planning and strategy and poor cashflow management. I don't see a lot of effort being directed in upskilling people to develop knowlege or skills in business planning and strategy and cashflow management. Without that investment in the people starting the businesses, it is no wonder that so man fail. It would be good to see some resources directed into this. As well as incentives, we need investment in the people starting up the businesses.

 

If someone cant get their act together to invest in 1 ip, running a business is much, much harder requiring a lot more skills, imo.

 

Because the majority of people missing out on housing can't afford to start a business either. Starting businesses is comparatively far more expensive than housing because the access to capital is much more restricted. The median household in Australia can't afford a house, nevermind the risk you go on to outline in trying to start a business, remember that the median household income in Australia is just 65k, meaning that 50% of the households in Australia live on less than that, when you throw in that 85k is the average salary and the point at which over 90% of incomes fall below you realise that most of Australia is just trying to survive.

The stats you outlined are why people don't go into business, Australia has some of the harshest lending criteria for business, there are no incentives to help business, there are a whole bunch of rules to try and stop businesses being able to even access their tax losses nevermind having any kind of actual support through the tax system.

The thing with a business is that it basically requires you to quit your job, it's not like buying a house where you keep your job, surviving on 65k is already very difficult, try saving enough on that to be able to commit two years to getting a business off the ground and that two years is a damn quick result realistically.

The idea is one of the great "positive externalities" that a property crash would bring with it but the current lending criteria on business, government policies and general business landscape makes it a very unlikely side effect, which is sad because it would make Australia better if people were more invested in business and innovation, it just doesn't seem to be an Australian priority though which is why you see so many of our brightest minds head overseas to seek out the support their ideas need.

Take Atlassian which has been in the news lately, started by two guys from Australia it had to go overseas for funding and to continue because Australia had next to no interest in it. That's a 4.5 billion dollar company that should have been Australian and instead has a tiny office in Sydney as it's only tie to Australia.

A crash though would be catastrophic for the economy, especially if it was driven by serviceability problems (property prices dropping on there own really does no harm, it's when people have to start selling at a loss that you have real problems because it eats away at the entire financial system).

 

Yeah businesses are extremely expensive. I've been looking at purchasing a supermarket and any decent ones are all $1 million + rent (tens of thousands a year). One supermarket was being sold for $1.2 million. If you wanted to purchase it outright it would set you back $3 million. Australia is literally turning into a country of rent seekers. Why bother going out and busting your balls when you can just buy the property and than charge exorbitant rents to the point of where you're actually earning more and taking less risk than the person operating!?

Edit- I wouldn't want to follow America's market into a completely dog eat dog world and I generally think we've got a much more equitable society. However, one thing you can't fault with the US is their entrepreneurship and pro-business agenda. Not everyone can work for the FIRE sector or Government...

 

Whilst I do agree with most of what you're saying - there's still certainly a lot of very *cheap* quality businesses around. The fact you can buy quality long term businesses for 1-2.5x earnings is a proposition that those with the know how and deep enough pockets are capitalising on every day of the week.

The main issue (especially in your example) is that lazy retail is priced quite high, as it requires little skill or finesse compared to technical or innovative industries.

A large amount of rent seeking in Australia is derived by the inequalities in the system thanks to regulation - in particular planning laws. The current system has mispriced a core asset class which has created a distortion to prices and risk rating, which is heavily draining other productive areas of the economy. Why invest in business/private equity/venture capital when you can get a relatively low risk return for sitting on your hands and funnel money into the real estate.

 

Businesses don't have to be expensivr; youre thinking with an investor mindset and not an entrepreneurial one if buying existing, nothing wrong with that but naturally it is going to involve more capital.

2 friends started a business now valued around $15m with 40k combined savings, all in 4 or 5 years. Another started with 10k and it's worth around 2.5m now and imo on track for 5-8m by mid 2017.

In some respects there has never been an easier time to start a business for someone with low capital, it is no longer restricted to the traditional model of rent a shop; get stock of some kind and sell it and with the Internet we now have access to ideas, inspiration, contacts, suppliers etc that we didn't in the past.


Australia is a high cost environment but has a high earning and spending demographic. Target the good of Australia whIle trying to avoid the bad (ie high cost).

 

I understand the SA and Qld Governments have been accepting immigrants who decide to come here and run businesses. So if Aussies wont do it... leave it to foreigners to take the risk!

 

The problem is financing those businesses. They're certainly out there but banks generally wont lend more than 50% towards them which means you still need significant savings to actually buy them... or a house to secure it against which again pushes people away from business and they buy the house instead.

Entrepreneurship is great if you have the idea and the skills to execute it but for the vast majority of people they just don't possess that ability. I dare say the number of grass roots ideas that fail is even higher than those buying into a business, which is already outstandingly high.

It really is a tough situation, running a business is absolutely not for everyone (you could argue, most people even) but there are a lot of capable people locked out of it by the capital side of things, would be great if Australia would put a higher priority on supporting all kinds of business and begin to shift away from property which at the end of the day really is an unproductive asset class. Unfortunately the high risks relating to running a business in Australia are reflected in the financing side of things and that's tough to change, it's always going to be a very high cost environment and you can't do much about that.

 

yup agreed, running a business isnt for everyone and im far from advocating that everyone does it. you're right though, there would be some capable people out there who unfortunately are being held back from taking that plunge due to silly house prices, in particular sydney. i mean are people genuinely not going to agree that a crappy house on well under 1000sqm in bloody parramatta isnt ludicrous?

something that's been touched upon earlier too is the financing. imo because we are a nation so blinded by resi property that is the mentality throughout the country. banks here are atrocious when it comes to funding businesses, they just dont "get it" as everything is either retail customer or big business focused. compare it to a country like say singapore which is traditonally a lot more entrepreneurial, the bank there are themselves a lot more open to those ideas.

to give you an example, many years ago westpac was trying to get a business of mine to move over to them, came over with a team of 3, gave the whole spiel etc. i asked about the option of borrowing against a cash term deposit for the business, ie if i put in 200k how much money can you lend me? in singapore it would be 500k or more. these idiots went away, asked for time to put a proposal together etc, came in and presented an offer of a $100k loan against a $100k deposit. Ie, they wanted me to give them my money and borrow it back at a higher rate. This is level of absolute stupidity at many banks and the lack of commercial awareness of their staff, after the initial questions to confirm i was misunderstanding him i think i said something like "you must think im an absolute idiot if you have the balls to present this, get out of my office you've wasted enough time".

 

One word. YOLO. And those who adopt this attitude are happy to tell me in my face.(

 

Good article. The only problem with it is that the author is to optimistic. The reality, in my opinion, is worse than he states.

 

Agree fully with all of this... the financing hasn't got much better! You're doing well if you can get a 50% LVR going for business.

The banks in Australia have really had it too easy for too long and as such they've lost their adventurous spirit and the Australian way to take a few risks in life. When they can lend billions on residential property at very little risk and have an army of morons willing to donate to their cause via the plastic fantastic I can fully understand their side of the equation, why take a risk on someone wanting to buy a business instead no matter how good the proposal is.

I don't see it changing anytime soon either. There is far too much money tied up in residential property for it to be allowed to operate in a free market anymore, the government will have to keep propping it up because it can't crash anymore, it's become the virus that will kill the host if it dies at this point because Super and the Banks are both married to it (among many other things). I do think the current governments approach to restrict the foreign exploitation and APRA changes to pull back the lending based firestorms are good, realistically the market does need a correction because the RBA needs to get the ability to raise interest rates back or we've got bigger problems!

 

Finally read it, impressed, Correct Mythology is pretty much spot on, my guess is most will ignore it, because it is far easier to do so.



MTR

 

I have just purchased a business at 75% LVR with no security on property, only a general charge against the assets of the purchasing company.

Interest rate is loaded but its a no brainer given the sky high ROI, and no early repayment penalties so I can just refinance it after a year if I choose.

 

Banks must love KFC franchises

 

Haha I did say generally If you don't mind me asking, what kind of business was it?

 

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