March 24, 2024 by Dymphna

The scariest idea I’ve heard in a while

This sounds like a horrible idea.

Want to hear the scariest idea I’ve heard in a while?

We’re in the middle of a housing crisis, and we definitely need to get innovative, but this sends chills down my spine:

Mirvac chief executive Campbell Hanan has thrown his weight behind the push to develop lower-value mortgages, allowing more first home buyers to step on the housing ladder by acquiring a home without land in a housing estate or master-planned community.

The growing popularity of land lease communities – which allow buyers to purchase a new home on land for which they pay rent – suited downsizers with equity from the sale of their family homes, and a loan product that would also allow first-time buyers into that market would be good, he said.

“When you get to a position where affordability becomes the challenge that it is today, it does beg the question whether you can divorce land and the cost of building houses,” he told The Australian Financial Review.

The key challenge he’s trying to unpick for his land lease communities is that banks just won’t lend on property unless they have security over the underlying land.

Which is why they work for cashed up retirees who have the cash to purchase the dwelling outright, and then have the income streams available to service the rent on the land.

But they don’t really work for anyone else.

So should we make these kinds of properties available to first home buyers?

Oh gawd, what an awful idea.

Remember, when you’re buying a property, you’re actually buying two separate assets bundled together – there’s the land and the dwelling itself.

The land tends to appreciate in value. They’re not making any more of it, and there’s a chronic shortage of it already. And the more the population grows, the more scarce it becomes, and the more its value goes up.

Land appreciates.

Dwellings on the other hand go the other way. They get run down and need repairs. Like cars, they lose value with use. And at some point, with no upkeep and maintenance, they will become worthless.

Dwellings depreciate.

And so if the plan here is to ‘divorce’ the land and dwelling, what the developer is saying to young buyers is, ‘we’ll keep the asset that’s appreciating in value, while you go out and get a mortgage to pay for the asset that’s depreciating in value.”

If that sounds like a raw deal for young buyers, trust your instincts.

There is absolutely no way that a buyer is going to get ahead financially in this scenario. It might be marginally better than renting, since you probably get greater security of tenure, but on a purely financial basis, it’s going to be pretty much exactly the same.

Not only that, you’ll have a debt of $200K to $300K on an asset that loses value every year.

Surely banks will take a dim view of that when assessing your serviceability when you do decide to start building your portfolio.

So yeah, nah. This sounds like a disaster.