Is now the time to buy or build?
As Australia emerges out the other side of the COVID-19 pandemic, low interest rates and government grants make to buy or build a new home an attractive option.
But what exactly is the best option: buy or build?
If you’re confused, you’re not alone.
>> READ MORE: BUYING, SELLING AND RENTING DURING COVID-19
HomeBuilder scheme
At Baileux, we have been receiving calls from buyers asking if now is the time to buy a block of land and build a house because of the Federal Government’s new $25,000 HomeBuilder scheme.
The scheme, announced earlier this month, will grant around 27,000 eligible first-home buyers and owner-occupiers $25,000 to put towards building a new home or significant renovations, in bid to provide a “tradie-led recovery” for the economy.
To be eligible, a recipient has to be an owner occupier earning no more than $125,000 per annum singularly or $200,000 as a couple, the contract must be signed between June 4 and December 31, 2020 and construction has to commence within three months of the contract date.
Understandably, the buyers calling Baileux are therefore under the impression the HomeBuilders scheme is a great opportunity for them to enter the market.
But here’s the truth.
A government stimulated economy
Facts are, once the JobKeeper and potentially JobSeeker payments are reduced or wound up, the true economic impacts of COVID-19 will be felt.
Currently, the government has stimulated the economy to the point where we have an over representation of ‘ghost’ companies, companies that are continuing to trade because of the economic stimulus packages in place until September.
Therefore, it seems the government is putting schemes, such as the HomeBuilder grant, in play as an avenue for the greater population to put their money back into the market while the government simultaneously winds back its stimulus packages.
While there is no doubt the HomeBuilder scheme will assist those already in a position to build or planning to build, the side-effect of this housing stimulus will be a vacuum effect.
>> READ MORE: RBA CUTS RATES TWICE TO HISTORICAL NEW LOW
The vacuum-effect
By pulling forward planned build projects or renovations to help prop up the construction industry, through generating this initial hype with the likely effect of activity dropping thereafter, we are essentially creating a pump and dump scenario.
The issue with this pump and dump scenario could be that new home builders who enter the market may nor be entering with sufficient enquiry to weather any market corrections we may see in real estate in the near future.
Reportedly, many are anticipating this could be from anywhere from 20 to 50 per cent. However, when looking for guidance for our future is always in our history.
Let’s look at the Spanish Flu, for example. Some experts have reportedly likened the 1918 outbreak to the COVID-19 pandemic. While sadly, 15,000 people died of the Spanish Flu in Australia, the event saw the housing market increase by almost 10 per cent because Australia’s population grew due to soldiers returning from World War 1 and people fleeing war stricken nations.
Currently, with our borders closed and international flights and travel a shadow of pre-COVID-19, it would be remiss of us to expect a similar outcome this time around.
Once-in-a-lifetime economy correction
Australia’s unemployment rate is reportedly also at a 23 year high with six in 10 employees in the private sector receiving JobKeeper payments. This represents around 6.6 million people and a further 1.3 million are on JobSeeker.
According to Australian Bureau of Statistics data, in May 2020, around 13 millions Australians were recorded in employment. Now in June, with half Australia’s working population on government support there will undoubtedly be a huge impact when the support is wound up or reduced.
>> READ MORE: FIVE TIPS TO BUYING A HOUSE
With all the stimulus available currently, it’s easy to feel like the money is endless and it seems we have forgotten the financial debt crisis last year, which on top of all this government spending has now ballooned our debt out to in excess of $500 billion at the end of this financial year.
There was concern Australia’s record high household debt levels in late 2019 could be explosive in another global financial crisis, according to a report on ABC News last year.
“Should global economic growth and credit conditions continue to deteriorate, a new bout of financial stress could erupt, and the financial markets could become more vulnerable to episodes of contagion,” the OECD warned in a global Business and Finance Outlook in 2019.
But if we were worried about our debt problem causing a financial meltdown then, on top of that we have a housing bubble, that is reportedly looking very similar to the housing collapse of 2008.
According to Forbes, with real estate driven by credit, when the credit dries up, so does demand for those assets meaning Australia’s housing bubble could again, pop badly.
Therefore, on the balance of possibilities it is highly likely we will see a once-in-a-lifetime correction of the Australian economy, which will most certainly have an effect on us all.
Needless to say, with all that is happening at the moment and with all the indicators pointing to a market correction, it is a good time to be making good financial decisions and making sure we do our research to ensure they are informed ones.
