According to some, Australia has an (under-supplied) housing crisis and an affordability crisis. I don’t subscribe to either claim. I do agree that we have a crisis. A very big one. But it’s got nothing to do with undersupply or affordability. Our crisis is a financial literacy one!
Let’s get this clear: there is a big difference between general intelligence and financial intelligence. A respectable occupation, a university degree, business ownership, and a six-figure salary may imply a person has above average intelligence. But these are simply the byproducts of that person using their general intelligence to generate income.
We all have skills and we use them to make money. Financial intelligence, on the other hand, is more a measure of what we do with the money we make. And it’s staggering how few people truly have financial intelligence. They don’t understand the basics, such as the power of compounding and leveraging, good debt versus bad debt, and how negative gearing works. And most shocking of all: it’s because, as a nation, we don’t teach people these fundamental financial principles.
Every day, as a professional property investment, I see the consequences of Australia failing to invest in its financial intelligence. For example, when planning and strategising an investor’s investment choices, there is a huge advantage in looking at different combinations of the best use of their available capital and cash flow. But a lot of people don’t see that a tweak to the amount of capital one way will have a very different effect on their cash flow than would a tweak to the amount of capital another way.
An investor thinking they can afford one property can often afford multiple. Most property investors do little more than select a property and get a loan approved to pay for it. With greater financial literacy, they could make their money work so much harder.
The statistics are damning
According to the Australian Bureau of Statistics, only 4% of Australians are self-funded retirees by age 65 years. The other 96% of people rely on a taxpayer-funded pension, remain in the workforce, or are dead. These shocking statistics unequivocally confirm that Australians in general are financially illiterate.
Ask yourself these questions (and be honest):
- Were your parents in a financial position to exit the workforce when they wanted and continue living their desired lifestyle? Have they passed these skills on to you?
- At high school, did you study a subject about managing money, budgeting, the power of compounding and leveraging, and the importance of saving?
- On entering the workforce, did someone explain to you basics such as how interest rates are set, the difference between good debt and bad debt, and how negative gearing works?
- Has anyone ever sat you down and explained that your superannuation will be nowhere near enough money to comfortably retire on?
- Do you have any idea how big your investment portfolio needs to be if you wish to live your desired lifestyle without having to work?
I’m tipping that you answered ‘no’ to most, if not all, of these questions and the reason is simply that there’s a yawning gap in your knowledge!
Confronting? Don’t worry, you’re in plenty of company!
Australians have above average education, are hard-working, enjoy low unemployment, and earn above average incomes. So why is the self-funded retiree portion of the population barely a drop in the bucket? Because too few people understand what it takes to get there. They aren’t financially literate. And this includes many of the white collar professionals often revered in the community. (They answered ‘no’ to most of these questions too!)
Those who choose to invest in assets such as property because they understand and want to avoid the consequences of relying on pensions and superannuation will, generally speaking, achieve more financially than those who don’t. But we still shouldn’t kid ourselves that we are adequately educated in financial matters.
We can’t be trusted to invest responsibly
The underlying principle of compulsory superannuation is: We know that you need assistance but we don’t trust you to be responsible or to make sound decisions so we (the government) will lock your money away until you turn 60 years of age.
A household (couple) receiving a government pension gets the grand sum of about $30,000 a year. This only permits a very modest retirement lifestyle, but the sheer volume of people depending on taxpayer-funded pensions places a massive financial burden on our growing and aging population. In an attempt to address this burden, the Keating Labor government first introduced compulsory superannuation in 1992 by forcing employers to contribute 3% of an employee’s wage to a fund that is preserved until the employee retires. As we know, the contribution rate has progressively increased to beyond 9%.
There are many advantages to compulsory superannuation, but it being set up so the funds can’t be accessed until retirement and having someone other than the recipient make the investment decisions for the funds are arguably the most compelling indicators of a frightening degree of financial illiteracy among Australians generally.
I put it to you that if, instead of increasing the employer superannuation by just 1% we invested it in financial literacy among the Australian workforce, we’d be making a much bigger dent in the burden of taxpayer-funded pensions than superannuation does.
We have to grasp ‘opportunity cost’
I find very few investors understand the concept of ‘opportunity cost’. While we’d prefer to be sharing our property market research with our investor clients in preparation for their next purchase, it is becoming increasingly common in this post-GFC era for us to deliver clients some bad news about the outlook for a market in which they previously invested in as a DIY. We commonly see this with investors who bought a house-and-land package within a recently converted greenfield site. It’s not uncommon for the property’s current market value to be as much as $100,000 less than what they paid for it brand new only three or four years ago.
Unfortunately, not everyone can understand the benefits of disposing of one asset with a poor outlook in order to put the capital in to a different asset with a much better outlook. Opportunity lost.
We have to stop blaming affordability and undersupply
I don’t agree with those who claim Australia has a housing affordability crisis. Most people have a job and a reasonable income but have never been taught how to use that income responsibly and so they go forward financially illiterate and worse off than they could be.
There’s a poor-me segment of our population who seem to want the creature comforts they see others having, but aren’t prepared to make the sacrifices over time to acquire them. They want the nice car, the fancy clothes, fine dining, and an inner-city apartment all by the age of 25. Then there are others who could make a few changes to boost their earning capacity, but think ‘w/e’ is an abbreviation for ‘weekend’ not ‘work ethic’. This isn’t about affordability. This is about attitude and choice.
Then there’s the choice we all have about where we live. We shouldn’t cry poor over not being able to afford a $500,000 inner city pad when we’ve got the choice of downgrading our ‘must haves’ wish list, being a bit further out of town, or selecting smaller digs. There are locations all around the country with below average unemployment rates, a great lifestyle, and quality three-bedroom houses for around $300,000—just like the many we invest in for clients all the time.
It is supposed to be difficult to buy a home. It always has been. Just as previous generations who had no choice other than to stump up a 20% cash deposit before their bank would even look at them (unlike these days were home loans are available with as little as 5% deposit). And, how hard do you think it was to pay the mortgage when interest rates hovered around 17%?
So, affordability isn’t the issue. Undersupply isn’t the issue. Financial education is the issue! Investing as a country in our financial literacy and encouraging people to learn and apply the basics when using their income and making investment decisions would see far more people much better off and the nation less burdened over time. It’s simple maths, people!
