MONEY MADE SIMPLE: Even kings have their limits

Noel Whittaker is the author of Making Money Made Simple. His advice is general and readers should seek their own professional advice before making any financial decisions. Email:

IN 1027 King Canute stood by the seashore and commanded the incoming tide to halt. Of course, the tide ignored him and he ended up with wet feet. Contrary to the common myth, the wise king was not showing off - he was demonstrating to his subjects the limit of a king's power.

Canute's order to the sea is a perfect analogy for attempts to make housing more affordable for first home buyers. It simply can't be done. It's ironic that the catalyst for the global financial crisis was President Clinton's idea that housing should be available to everybody. It started with a boom as the American property market became overbuilt, with loans being offered to everybody irrespective of ability to pay. It finished with a bust whose reverberations are still being felt around the world.

But the GFC was more than a bust. It triggered collapses in stock markets everywhere with interest rates around the world falling to historically low levels as central banks tried in vain to stimulate their economies.

Australia was not immune. But what was different here, was a growing attack on our superannuation system by politicians and so-called independent think tanks.

So we faced the perfect storm. The average Aussie investor had lost all faith in the stock market; they had been scared off superannuation because of the adverse publicity and threatened changes; and knew that earning a piddling 2% in the bank wasn't the way to go long term.

Consequently, they invested in the property market. As interest rates fell, making mortgages more affordable, prices started to rise and - as always happens, the moment any asset class starts to rise in value - everybody wanted to jump on the bandwagon. Yes, that made it tougher for first home buyers, but every government initiative to make housing more affordable has simply raised home prices because more buyers are attracted to the market. Think of the first home owners grant and stamp duty concessions.

Labor's policy of restricting negative gearing to new homes simply won't work. It will push unsophisticated investors into new property where the profit has already been made by the developer, leaving the established market wide open for savvy investors who understand that the way to make money in real estate is to buy a rundown property on a good block and add value to it.

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