Visionary. Value focused.

Discussion – Real Estate stimuli

Australian Government has been throwing quite a lot of stimuli for real estate market in 2020-2021. Most of them aim to ease the effect of COVID-19 pandemic. Some of the stimuli include the Home Builder grant, the Stamp Duty exemption/reduction. Let us have a look and discuss who actually benefits from the grants, and what should we do to make use of them.

Tl; dr;

• The grants aim to increase the moving of currency within the society, to pull money out of savings and into the circulations.
• They mostly are beneficial to business owners whose companies service in real estate space, which in turn increase the business activities in that sector.
• I myself, decided to freeze most of my assets in place and observe the market. I have done something but would like to keep it closer to my chest until I finalize the paperworks.

What comprises real estate?

To understand the next few ideas, we need to understand what is real estate. As we all know, real estate, in the context of physical property where we live in, are the combination of the land and the content that is placed on top of it.

Now, this brings us to a thought, should we treat land and the contents differently? If so, what are they and why are they different? I am going to give you a definition of each, and you can decide on which one you want to focus your money in.

Land is a commodity (sort of)!

As per Investopedia, a commodity is a basic good that is used to manufacture other goods and services. Why is it “sort of” a commodity? Well to be a commodity, a piece of land has to be equals to another “equivalent” piece of land. And we have not been able to have a universal system where we compare land with land and see if they have the same value.

A characteristic of land that I would like to share with you, is that land itself is not very useful, but more like a heavy baggage when we see it as a financial asset. As an empty block of land, it is definite that we need to pay Council Rates and (possibly) Water rates every year. It is a possibility that the land appreciates in value. However, that is a speculative play and therefore carries some risks, which we will discuss in future blog posts.

The land only becomes useful when there are developments on top of it. The development can be anything, such as crops, cattle, houses, apartments, offices, etc. Once there are contents on the land, there are chances that they will produce income that provides us cashflow, which is important to keep us in the game.

House is a consumer good.

Have you ever thought of why only the building got depreciated and not the land? I take a shot in the dark here and say any fixed development on the land, are consumer goods. They are items that you buy to use, to consume. These things only lose value over time, unless there is an aspect of rareness in them, e.g. unique architecture.

Good thing about the depreciation rule in Australia is that we know exactly how much value the developments are losing over time. For example, residential properties slowly lose value over 40 years period. I will not go into the details here as you should talk to a quantity surveyor to know more.

What are the grants for?

With the above concepts in mind, we can clearly see that the Home Builder Grant is for building houses, which essentially just like giving you $10 to purchase a consumer item priced at $100. Note that I didn’t say said item valued at $100. I have seen the developers of House and Land packages pump up the price of their packages to as far as $25,000 to match the Home Builder Grant amount. As a result, anyone who utilized this grant with a House & Land package, or even Off the Plan in some cases, are getting minimal benefits, if any at all. The money is going from the Government, through the buyer, and into the bottom line of the developers. At the end of the day, the buyers have their Australian dream fulfilled, the developers exit the project successfully, the government gets the money moving around and pull some out of our savings. So it is a win-win-win scenario, right?

Let’s talk about the other scheme, which is the reduction in Stamp Duty. As we know, the Stamp Duty is temporarily adjusted until 01 July 2021 with a discount of up to 50% for purchasing properties. Combining with the Home Builder Grant, this may have convinced a few investors to purchase another asset. As a result, more money is going out of savings and into the circulation, which is good for economy. Same formula as above, win-win-win scenario.

Is it the greatest opportunity of a lifetime to buy real estate?

There is no denial that these grants change the gameplay of Real Estate investment in Australia. Some people are happy to take the leap, some others are quite concerned. In my opinion, one should not purchase anything because of external push, but to careful assess his or her situation internally, and make decision upon them. There are risks associated with purchasing real estates that unaware buyers are not prepared for. The crash in 2008 is caused by the Mortgage Back Security policies, allowing people to take out mortgages that they cannot repay. When allowing to be greedy, people has no difficulty pushing the boundary, and sometimes drive themselves off the cliff.

This is why I don’t actively follow the news and react to it. Rather I choose to learn how to control my own financial situation and from there, I make financial decisions knowing that I can tolerate the risk that may or may not come.

Summary

I just want to congratulate the people who actually does something during the pandemic. You are already better than others who waits on the sideline. I always tell my friends that it does not matter if your first investment turns out to be a total disaster. The main thing is that we are still young and have the time to correct our mistakes, as long as we learn something out of it. However with these purchases in a sensitive time, careful considerations of personal finances should be carried out to ensure you are safe no matter what.

“The secret to happiness is freedom… And the secret to freedom is courage.” – Thucydides

By Tuan Nguyen