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One of the biggest purchases you’ll ever make in your life is the one to buy your own home.
It’s an emotional moment in one’s life.
Not just when you sign the contract to buy, but all the work and effort that got you to that point in the first place such as sacrificing the nicer things in life like a better car or that dream holiday you’ve always wanted to go on.
All to save up the absolute key to getting onto the property ladder – the deposit.
If you have done this before, you’ll appreciate the massive hurdle this represents.
So, what if I told you the days of having to sacrifice and save over many years for that same deposit may be over?
A new program recently trialed in California may spell the end of the traditional down-payment.
How does it work? And why is this an important development telling you where we are in the 18.6 year real estate cycle?
Because if you time this right, it does represent an excellent method to grab your first home. But you can equally get your timing wrong and suffer dire consequences that last a lifetime.
This opportunity has a finite window open, you cannot afford to get this wrong.
Read on and I’ll explain why.
Forgivable Equity
All residential properties require a deposit to both secure the mortgage and to provide a minimal level of equity.
These levels differ across countries due to different banking laws, loan to value ratios (LVR) and regulations.
For instance, where I live in Australia, a standard 20% down is agreed upon between a potential buyer and the bank to facilitate and qualify for the remaining 80% as a loan.
So it was with interest that I read a news article about a new program launched in the US state of California to help their first-time home buyers.
California’s Forgivable Equity Builder loan allows first-time homebuyers who have enough income for a monthly mortgage payment to borrow up to 10% of a home’s purchase price to buy a house outright. The loan has an interest rate of zero percent, but borrowers who don’t occupy the home for at least five years may have to repay the loan.
So much to unpack from such a small paragraph.
The “Forgivable Equity” loan is a loan which covers the deposit amount that would-be buyers would have had to either saved or secured from elsewhere.
Under this scheme, up to 10% of the total cost of the property may be borrowed.
This effectively becomes the ‘down-payment’ if you are a first-time home buyer and reside in the same property for at least five years.
However, should you decide to leave or sell up, that 10% loan, as it were, becomes payable back to the state government.
The new effort comes as real estate prices have hit record highs in California, and rising interest rates have pushed monthly payments up hundreds of dollars. A standard down payment of 20% for a home in California can cost upwards of $100,000.
I wrote to you last week about the so-called conundrum that is going on in the US right now.
Where they are witnessing rising interest rates, inflation, and home prices, all at the same time.
It’s critical to understand this, you can read up on last week’s blog on this subject here.
Anyway, as I’m sure you can gather, one of the attractions of this scheme is that zero percent interest rate on the 10% down payment borrowed.
But can you see the irony here too?
Most first-time home buyers need to use savings accounts to build up a normal deposit.
But savings account interest rates are the same – that is, zero!
Are you starting to twig to the idea that banks do not want nor need your money as a deposit on their balance sheets?
For a bank, it’s an expense. One they simply don’t need or want.
Now, because the government is involved means they get a large say on how this system will be administered.
From what I can tell, only certain type of property will qualify for this program, for the time being.
We are talking apartments, condominiums, and single-family homes.
However, it would not surprise should this prove popular that it be expanded in terms of those who qualify or the type of properties that fall under the scheme.
How much more do you need?
This is something the Property Sharemarket Economics (PSE) team will follow closely over the next few years.
And not for the obvious reasons either.
Can you appreciate how things continue to line up here? The increasing amount of evidence this blog uncovers and provides to you each week.
The 18.6-year Real Estate Cycle is not just turning, but it’s about to get quite frenetic.
We are now in the second, more speculative, half of the cycle, where the credit spigots are fully opened up.
I mean, what else do you need to see to convince you of this?
Here is a government lead scheme that offers “credit” in the form of a deposit such that the first-time home buyer then goes to a bank to get a mortgage, or “more credit”!
In effect, 100% financing, approved by the governments. How hard do you think they would have lobbied to get banks on board with this?
The biggest punchline for me though is this.
It completely distorts the very purpose of the program, that is, to assist first time home buyers onto the property market. This is because the price of property will simply get more expensive, the more schemes like this are launched. Or as I say in this blog: in time, land (because that’s the key component of the price of a property) take all the gains from such developments.
As such, property will continue to get more expensive, not cheaper. And therefore, property will require ever larger amounts of credit to afford.
As a disassociated bystander, this is madness to watch unfold.
However, the demand is there for this to continue for a lot longer yet, right up till it can’t.
There is a clear and actionable window now to take advantage of something like this yourself. Frankly speaking, there will be more of these ‘ideas’ from governments all around the world.
So, my advice is you better get your timing right.
No better way to secure that timing than by becoming our newest Boom Bust Bulletin member.
It will teach you the history of the 18.6-year Real Estate Cycle, its specific timing and why it continues to repeat to this very day and guide you to the opportunities it presents as it turns.
Soon we will all have available to us levels of credit not seen for almost 20 years.
You have a window open now upon which to leverage this into buying a new or first home for instance.
But, if you go all-in on leverage during what we call the “winners-curse” phase of the cycle, I guarantee a lifetime of servitude to the banks paying it all back.
Learn the timing inherent in the cycle and avoid this fate.
Sign up now.
Best wishes,
Darren J Wilson
and your Property Sharemarket Economics Team
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This content is not personal or general advice. If you are in doubt as to how to apply or even should be applying the content in this document to your own personal situation, we recommend you seek professional financial advice. Feel free to forward this email to any other person whom you think should read it.