We are a family that could potentially make use of the builder stimulus, but I have a natural aversion to these types of measures given what has occurred with previous episodes.
The worst versions of previous economic stimulus, in my opinion, were the ones where the stimulus was capitalised into the price or cost of the purchase or works, and it is not difficult to imagine that occurring in this version. I foresee that there will be a lot of renovation quotes coming in very close to $150,000 – to keep the out of pocket cost after receiving the grant to the minimum of $125,000 – when without the stimulus measure the quote might have been $20,000 less anyhow. It could also lead to increased interest in older homes for renovation or demolition for a new build and thus be capitalised into the purchase price.
As a homeowner I do not find the idea of receiving at best a discount (due to the $25,000 grant) of 16.7% particularly appealing for a number of reasons.
As discussed in posts from mid-February through March, when I realised in early February the consequences of the emerging coronavirus outbreak in Wuhan I placed a number of hedging positions to pay out significantly if/when the pandemic caused the economic impact I feared it would.
The benefit and challenge with these hedges is that they are like an insurance premium on which you continually receive a quote on the value of cashing out. I did collect on the insurance – well before the market bottomed, but given how quick the market moved my return was over 3,000% within 6 weeks.
But here is the thing. I do not have the insurance policy in place any more. And while market movements after the market bottomed, i.e. share prices retracing most of the March losses, suggest that I did well to collect the payout I did, the events that I was hedging against are still very much in play.
The economic impacts of the pandemic are still very much playing out – we already know that our regular family income will be down this year, but it could definitely get worse as employers are busily reviewing operating costs and consequently headcounts. Having zero regular family income within a few months is a definite possibility for us, and this is a current or potential future reality for very many Australian families.
As a country already with an extremely high level of home prices relative to incomes, and thus high household debt, the wisdom of encouraging Australian families to plough even more of their hard-earned, or their anticipated future earnings if they increase borrowings, into their home when our economic future is this uncertain seems to be heaping folly upon prior folly.
I have spoken often about the imprudence of maintaining a housing bubble economy for a decade now in my policy contributions and early in the pandemic I highlighted how this was a particular vulnerability for Australia. Stimulus measures aimed at a continuation of this is not surprising, but it only perpetuates that vulnerability.
The utility of owning our own home and how much we spend on it has been a major intellectual endeavour of mine for 2 decades – having delayed buying a home in Brisbane before we went overseas in January 2001 to cement my future as a leading research scientist in my field, we have been playing catch up ever since and it has focused my attention on making the very best decisions that I can for my family.
That has certainly extended beyond the analysis of when and then the process of buying our family home to how much is appropriate to spend on renovations. A few years back we made a good capital gain from some investments. It was sufficient to either pay down a good portion of our outstanding mortgage or build a deck on our home to capture the views (not just those already on display off the original very narrow verandah, but those we imagined in our minds of us lounging on outdoor furniture as we sip some wine while watching the rugby league in our outdoor living room.)
When we bought our home I told everyone that would listen that, yes, relative to the way the market had been for the prior decade our home purchase did seem like a good buy, because it sits on a nice piece of well-situated land and the home is in good condition for its age, but that we still most certainly overpaid on a long term basis relative to incomes. The benefits of the quality of our land would only really be reaped many years later likely by our benefactors.
As I considered a few years back what to do with the capital gains of that successful investment, the more I thought about sinking more money into our home the more I realised that I would be doing it to achieve that magazine-like image in my head and that it was unlikely to genuinely enhance my family’s lives significantly.
Given how much was required to purchase a home when we did, and when I considered the cost/benefit of the spend for a deck, I quickly realised that it was not worth it until the value of money to us was significantly less (i.e. until we had a far greater supply of it, if ever). Moreover, by sinking more money into the home we would not significantly reduce our risk – sure it would increase the value of our home, but that would only assist us if we fell into financial difficulty and needed to sell or recapitalise, so that it became someone else’s home.
If an adverse event happens the builder will not take back the renovation and refund the money. Of course the banks are always willing to lend more on an asset if the renovation has increased its value, and critically now, if you have regular income. However, Australians in general already carry very high levels of debt. While we are definitely not levered to the degree that many others are who bought their home in the last decade, our preferred situation would be to be debt free.
So we could not justify the spend on a deck or conducting major renovations on our home.
We did not decide to pay those funds into our mortgage, however, as we did have an idea which we felt would genuinely enrich our lives proportionately with what we would spend acquiring the separate asset.
For a total cost of half of the minimum out of pocket spend on this renovation stimulus we bought a holiday home, with 4 bedrooms and a wood-fired stove, in a small village in Italy.
Believe it or not liveable homes in the south of Italy can be bought for a total cost (including fees and taxes) of 1/20 of the median-priced Sydney home. Yes that is correct – just 5%. And in doing so you get to experience immersion in a culture that has developed over thousands of years, and have a real and enduring connection with people who authentically value community and relationships above wealth and the other silly symbols that people try to assert their status through luxury homes and cars.
So if you are fortunate to have $125,000 at your disposal, then I suggest that instead of sinking more into your Australian home you broaden your horizons. With that you can buy a lovely Italian holiday home and have plenty left over to refresh and furnish it (if you need to as many homes are sold furnished), as well as pay for many annual family visits in the years ahead.
If you do that, you will be adding economic stimulus into a region that has been down on its economic luck for a good while now, but you would not know it by how lovely and friendly and jovial – simpatico – are its resilient people!
If you have read through to this point then this might well make sense to you, and you might like to learn a bit more of our experience (in a highly stylised re-enactment that premiered on US television in January). Note that the home that we decided on in the show is our actual home, and because of our wonderful neighbours the “shocking” walls will be gone by the time we get the chance to visit again. Search “Time to Chill in Abruzzo” and at present the best version on YouTube is the one by “Lili”.
By the way, if we are fortunate enough to get through this pandemic in good health and with our financial security in tact, well lets just say that the theme of our house hunt with me wanting some land for fruit and olive trees, and grape vines is accurate, and we might just be looking to make another dream come true. I do like the sound of “Edgo’s Olio” and “Edgo’s Montepulciano d’Abruzzo”.
My overall point is this – before you go ploughing more resources into your current existence, which may limit your future options, do not be afraid to think out of the box on what is possible for you and your family. I do not suggest for a moment that our choices will appeal to everyone. But perhaps there are other things that will genuinely enrich your life if you have the courage to dream. After all, that is what “The Great Reset” is all about…
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© Copyright Brett Edgerton 2020