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[Podcast] The Real Estate Rip-Off: Is our Housing Market a Ponzi Scheme?

[Podcast] The Real Estate Rip-Off: Is our Housing Market a Ponzi Scheme?
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Today we’ll be discussing whether residential real estate in Australia is a Ponzi scheme or not.

For many years, there has been a debate about the sustainability of the Australian property market and whether it is a Ponzi scheme waiting to collapse. My Podcast 449

Some commentators have argued that rising house prices are being driven by speculation and greed and that it is only a matter of time before the bubble bursts.

In my mindset message, I’m also going to share with you what I believe is the most important money lesson to teach your children.

Regular listeners would now usually have a guest on the show but every now and then I just have a chat – just you and me – and that's what's going to happen today as we discuss these two important topics.

Is our housing market a Ponzi scheme?

We started the year with high hopes, but recently RBA Governor Philip Lowe told us that inflation will hang around longer than he had hoped and it won't fall into the RBA's preferred band of 2-3% until 2025.

He also told warned that there are a few more interest rates to come.

Not surprisingly this brought out the usual suspects predicting a bloodbath for Australian real estate likening our housing markets to a speculative Ponzi scheme.

So what is a Ponzi Scheme?

A Ponzi scheme is a fraudulent investment scheme where returns are paid to earlier investors using the capital contributed by newer investors, rather than from legitimate profits generated by the scheme. Ponzi

The scheme's operators typically entice investors with promises of high returns that are too good to be true and often use various tactics to create the illusion of a profitable investment opportunity, such as falsifying financial statements, creating fake investment portfolios, or using high-pressure sales tactics.

The Ponzi scheme typically collapses when it becomes impossible to find enough new investors to pay returns to earlier investors, or when investors start to withdraw their funds.

So, is the Australian housing market a big Ponzi scheme?

As I said, there are some claiming that our housing market is a Ponzi scheme created by speculative investors, debt, and migration.

However, that’s not right!

The truth is that the Australian housing market is underpinned by strong fundamentals.

1. Our housing markets are underpinned by a high proportion of owner-occupiers.

One of the key factors that support the Australian housing market is the high rate of owner-occupancy in the Australian housing market.

According to the Australian Bureau of Statistics, currently, around 70% of all residential properties in Australia were owner-occupied.

This means that the majority of homes are owned by individuals and families who are living in them, rather than by investors who are purchasing properties for the purpose of speculation.

This high rate of owner-occupancy creates a stable base of demand for housing that is not driven solely by speculation.

2. Australia’s strong economy

Another key factor that underpins the Australian housing market is our country's strong economic growth and high employment rates.

According to the World Bank, Australia has experienced consistent economic growth for well over two decades, with an average annual growth rate of around 2.7% between 1993 and 2019. Economy

Australia also has one of the lowest unemployment rates in the world, which creates a stable environment for the housing market and supports the demand for housing.

It also means that despite rising interest rates most Aussies can afford to pay their mortgage and bank mortgage default rates are at extremely low levels.

3. Immigration

Finally, the Australian housing market is underpinned by a growing population, which is driven by both natural population growth and migration.

While migration can be a concern for some and has been cited as feeding “the Ponzi scheme”, it remains a fundamental driver of economic growth and demand for housing. Immigration5

In particular, skilled migration has been a key factor in the growth of our economy.

But there have been housing Ponzi schemes in the past

Property booms usually start with a genuine rise in demand for housing, but sometimes they can turn into speculative bubbles driven by the expectation of higher prices, rather than being based on a genuine need for accommodation.

When this happens, we have the makings of a property market Ponzi.

The bottom line

It is encouraging to understand that Australia’s housing markets are underpinned by the stability of a large percentage of homeowners who have purchased a home to live in rather than chasing cash flow or capital growth.

Our housing markets are resilient because they are underpinned by strong fundamentals, including a majority of owner-occupied properties, low levels of debt, strong economic growth and employment, and a growing population.Property Market

As with any market, there are risks and concerns that need to be addressed, but overall, the Australian housing market remains a stable and attractive investment opportunity for strategic investors with a long-term focus.

Links and Resources

Michael Yardney

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Some of our favourite quotes from the show:

“We’ve got a much bigger percentage of owner-occupiers than other countries.” – Michael Yardney

“Around half of all owner-occupiers in Australia have no debt at all against their home.” – Michael Yardney

“If we think about the rich and successful people, one of their key Rich Habits is the ability to delay a small instant reward for a later and more generous one.” – Michael Yardney

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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.


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