YPS Club Mar 24: special Guest Peter Wargent describes how Australian properties are so resilient

I think what you bring up there, Pete, I just want to take this to apply it to other things because, you know, we talk about the talking heads, the economists and the bank economists and the property experts and the people flogging whatever they're flogging to do with property. There's so many scare topics that we've seen over the last four years. Like if I name them, we've got Covid's come, we're all locked down. Property prices are going to go down last year. Oh my God, there's a financial cliff. Everyone's got a fixed interest rate. We're all going to like, you know, fall off the edge and then we've got, you know, how can people actually eat with, you know, all the interest rates we've got going? There's going to be a mass of properties that are sold, then we have all the tax things that have changed in different states. You know, there's going to be a max sell off. And, and as you said here, you know, we don't, we're not building enough properties. We're going to have all of the, you know, the rental market. No one's going to have anywhere to live. But we make amends. How, how are we so resilient? What, what's your thoughts on, you know, all of these big kind of trends which seem logical, like we're in lockdown, should property prices go up, who's buying? You know, there's all these fixed interest rates. We see the big numbers. The banks are saying it's going to be a collapse, there's not. What do you think? What's your thoughts on that?

Yeah, I did an interview with Dr. Cameron Murray, who's written a book called the Great Housing Hijack and he's done a lot of academic papers and a lot of the models that people use, the mental models are just plain wrong for housing because as you say, in fact, if you went back 30 years, you could pick any given year, there would be a fiscal cliff or interest only cliff. Banking World commission, you know, 9, 11, there's always something that's apparently going to crash the market. As Cameron pointed out, that the correct way to think about the housing market. In fact, I'll just use myself as an example, right. Because it's easier than trying to explain it in economic terms. So I came to Australia, well, originally as a backpacker. So, you know, no, no budget, you know, shared with one of my best mates down in the Shire. 50 bucks a fortnight or something, you know, that's all I could Afford. I was just working at Mascot then when I thought I qualified as a chartered accountant, I was shacked up with a then girlfriend, partner. My budget was 500 a week, that's what I could afford. So move to Bondi, like every other problem on the universe. And then it's like, right, 500 is what I can spend and then I, then I go and look for the property. And then later on I got made a manager director, right, my budget, 750 a week. I'm going to rent somewhere. So I've been a rent vesta, different story. And then I'm going to get somewhere where I can see the opera house. That's my thing. But I'm starting with a budget, then I'm applying it to the housing market later on. You know, three grand a week, right? I want six bedrooms and a view of the golf course in Noosa and a swimming pool. But it's always starting point is the budget. And then the wealthier you get or the higher your income goes, the more you spend. And that's how the housing market works. As we get wealthier, we apply more. And if you look at rent to income ratios, that is how much people spend. It hasn't changed. You know, people talk about, if you go back to 1980, people would have been spending 30 to 35% of their income, or depending on how you measure it, pre tax, post tax, a bit less, potentially maybe a quarter or something like that.

I remember interviewing like John Edwards from residex in like 2010, 2011, and he was saying, you know, it's 35 to 40% of your incomes, you rent or your mortgage and that's unsustainable. That's, you know, that's really difficult and why it hasn't changed that much. We live with it, right?

I think there's one thing that has actually changed and the RBA did a paper on it and that is the bottom income quintile, in other words, the bottom fifth of income earners. The ratio has gone up and that's because the government stopped building housing. And that's the problem because you don't want people at the lower end of the income brackets really struggling for tenure. That's a bad thing for them and for society. The government has not provided social housing really. You know, they build a bit, but it only replaces what gets demolished. So that's an issue. But for anyone, every the other 80% of renters, the line is dead flat. So use myself as an example. But that's kind of how the overall market works. And then if you look at why is Australia getting wealthier and spending more on housing? I mean, how long have you got? We've got a perfect open economic model. We've got our own interest rates. Unlike a lot of parts of Europe, pre floating Aussie dollar, we've got the highest. The biggest share of millionaire migration in the world is now to Australia, so largely from India and China and elsewhere, but it's the number one destination for that. We've got the biggest mineral wealth per capita of anywhere. You know, half of the northwest. Well, we both worked in mining, so, you know, something we know all about. Got some of the most popular universities. There's, there's just so many things like if you're trying to bet against that, you know, you kind of really. You're on a bit of a losing battle there, really. And once you understand that model, it's a lot easier to work with it. Europe, Southeast Asia, lived in lots of parts of Australia. But we keep on coming back to coastal Australia because there's nowhere better to live. It's interesting parts of the world, but it's a place to bring up kids, you know, it's safe, good culture, you know, go to the football, enjoy a beer, play golf. You know, there's. There's so many good things about the country as well that it just keeps on performing.