How “help-to-buy” schemes can damage you. Don’t let the government set you on a path to ruin

I have recently been receiving feedback, questions and queries surrounding one particular subject.

So, today, I am going to look at it.

It seems that there is confusion about the term ‘winners’ curse’ amongst our valued Property Cycle Investor (PCI) newsletter readers.  In particular, what is it, what does it look like, how do you know you’re in it, and why do we call it what we do?

All pertinent questions.

We are talking about an 18-month to two-year period of each 18.6-year Real Estate Cycle, or a period of time that’s usually separated by around 18-20 years.

It makes perfect sense, given the timelines, that people forget, or can’t remember the last time they were in one. Or perhaps they are simply too young to have experienced one as an adult before.

I will give you a real-world example of what the term means.

So, you have no misunderstanding as to why we call this time – what we do.

And why it’s so important you do the opposite of what the majority are doing right now.

And should you find yourself in a position – much like the one I’m about to show you – I will give you an idea of what you must do from now on.

Let’s look now at an example, based in Australia, but applicable to anywhere you reside.

At this late stage of the cycle, there are some things you can absolutely bet on occurring. One of them is that governments globally will double down, then triple down, on helping young and new buyers get on the property ladder to help the government get reelected address the housing crisis.

The other is generating increasingly easier access to credit and much looser regulations.

And it’s with reelection in mind that the current Australian government has, once again, returned to the tried and tested blueprint.

Take a look at the following headline.

From the article:

Labor will increase the income and price caps for its signature Help to Buy scheme as part of next week’s budget, which it has promised will deliver cost-of-living relief.

Under the shared equity scheme, the commonwealth provides first home buyers with 30% of the purchase price of an existing home, or 40% for a new home.

The first home buyer needs to contribute at least a 2% deposit. The scheme is capped at 10,000 places a year, with a total of 40,000 places over four years.

We will look closer at the reality of these “Help to buy” schemes in a moment. Generally speaking, to even consider this viable, the key remains the finer details. Accepting the first scheme was inadequate, the Labor government has decided to raise the limits.

This equates to a price cap increase from $700K to $1 million in Brisbane, $850K to $950k in Melbourne, and $950K to $1.3 million for Sydney. It also sees the qualifying income levels required to apply increased: from $90,000 to $100,000 for single applicants, and from $120,000 to $160,000 for joint applicants and single parents.

Here is what Minister for Housing Clare O’Neil had to say in the above article. Bolded text is my own.

O’Neil said a lot of young Australians “can’t see themselves ever owning a home of their own, and one of our government’s goals is to turn that around”.

“Help to Buy is going to be a very important pathway for many Australians to get into home ownership. We expect the scheme will be really, really popular.”

Is that term aimed at these new homeowners, or O’Neil herself?

Let me show you what awaits those 40,000 potentially lucky new homeowners when applications for the scheme open at the end of 2025.

And you can tell me whether this arrangement is “really, really, popular” after all?

The last time I cared to look, the real estate market was just that – a market. Where willing buyers meet willing sellers and through the act of price discovery, settle on a price to transact.

The problem with government initiatives like this is they distort this process. Plus, they do it at exactly the wrong time. Look at Sydney after the recent February interest rate cuts by the RBA.

PropTrack data revealed February’s rate cut drove the biggest monthly increase in Sydney prices in nearly a year. Surprise, surprise.

Now, let’s add into this another behavior synonymous with this ‘winners curse’ phase of the cycle. It’s the mania that starts to take hold – of emotionally needing to be in regardless. This means the most marginal of locations and projects start to become the last possible place to get in.

Take a look at this headline:

So, let’s assume you are one of those ‘fortunate’ enough to qualify for one of these help-to-buy schemes and live in Sydney. You now have a price cap of $1.3 mil and only need to place down a 2% deposit. You decide to go to a number of auctions across a number of inner-city suburbs.

When you arrive, you see this.

Then you realize there are 22 registered bidders for this house. Then the first bids instantly exceed $1.3 mil. Despite renovation work estimated by the agent in the region of $600K just to bring it up to standard, the winning bid is accepted at….$2.8 million – $700K above the reserve price.

Yes, that was the actual winning bid for the above property. This is the market our new potential homebuyer has entered.

Another grimy terrace – this time with boards of wood on the floors to cover the rotting timbers – sold at auction on March 8 for $2.8m, $700,000 over reserve. There were 17 bidders.

In February, a derelict Woollahra terrace once owned by a hoarder sold for $2.45m, $600,000 over reserve. There were 24 bidders. The agent revealed the damaged home was full of “feral” junk for two years.

Other sales for rundown homes include a Lilyfield home snapped up for $2.5m, a Redfern hoarder house for $1.35m and original condition Bronte home sold for $3,825,000 – $725,000 over reserve.

Please note, not one of those unfit-to-live in homes even started below the $1.3 mil cap. What hope do our newly financed home buyers even have here? Still think this scheme will prove “really, really, popular?”

This is the real estate cycle in action. The final flurry of speculative and emotion-led investment decisions manifest in the most marginal areas, turning once maligned areas into the best performing suburbs.

Where else can these prospective buyers possibly go but tens, maybe hundreds of miles/kilometers away from the inner city to afford to find a price point where they can compete. This is why this time is called what it is on the PSE property clock.

When it comes to property, overleveraged buyers, even if they win the bid, are soon going to regret ever doing so.

What compounds this dynamic even further is the so-called assistance provided by governments. By allowing only a 2% deposit minimum required to secure the loan, you effectively lock these people into a death spiral when peak turns to bust. There is virtually nil equity acting as a buffer against falling land prices.

You then discover your loan is upside-down, where the loan outstanding is greater than the valuation of the collateral (your new home) pledged against it. More importantly, this makes you the bank’s public enemy number 1.

Because you hold a non-performing loan. Have you ever had the pleasure of dealing with the banks when they want their money back? And I haven’t even covered our investor cousins and their negatively geared properties yet.

The above article details a story about a couple who brought a home using this shared equity scheme back in 2017. I won’t bore you with the details except this. Thanks to leveraging against the equity built up in their first home, they have since bought 12 investment properties.

By piggybacking off the equity of each subsequent purchase and lending against it. This investor noted his portfolio is negatively geared, in other words losing money after rent and expenses are factored in. But he isn’t worried.

Mr Duff has avoided feeling the full brunt of that cost, though, because some of the investment properties are held in the couple’s self-managed superannuation fund, and therefore, their yearly superannuation contributions cover the costs.

Phew, so just his entire portfolio and future retirement funds are at risk.

The winner’s curse.

So we are crystal clear.

The reason the winners’ curse phase is listed on PSE’s property clock is because it is specific to the land market. It is the culmination of land prices that are far too high being brought up and speculated on by people who are too highly leveraged and doing all this at the precise wrong time.

If you try to identify this time focused solely on the stock or crypto markets, you will miss this. So, don’t. Use the term for the market it is meant to represent, and that is the land market.

Even more importantly – is this you? Are you a recipient, or hope to be, of one of these many help-to-buy schemes proliferating across the world now? Do you hold negatively geared properties in an investment portfolio?

What’s your plan to avoid becoming yet another victim of the winner’s curse mania phase of the current cycle? You do have one – right?

If not, it is never too late to plan, and becoming our latest Boom Bust Bulletin (BBB) member is a great way to start. Let the BBB guide you on the inherent timing of the economy only knowledge of the land market can give you.

Each month this history and knowledge will be yours via monthly written editions and video postcards that will help explain the real estate cycle like never before.

Depending on where you reside, you may have only 16 months left to get your financial affairs in order. Forewarned is forearmed, and your best defense against what’s to come is by understanding and using your knowledge of the real estate cycle and in particular its timing to help you.

It’s what you “don’t” do that will make the biggest difference at this time. And it’s one of many ways access to the BBB can assist you.

Sign up now.