Housing Bubble!

Reading an article this morning on SMH and came across this quote from Warren Buffet – “To make money they didn’t have and didn’t need, they risked what they did have and did need… if you risk something that is important to you for something that is not important to you, it just doesn’t make any sense.”

It’s easy to get caught up in this wealth creation drive that most Australians are on at the moment and as someone that purchased a home before this real estate madness, we too have considered an investment property. However there are minor details that really bugs me and that is the fact that the increase of property values I think are driven by the investors, the interest only loans and the aura of negative-gearing. What scares me the most though is this, almost half of the loans approved in NSW in November 2014 are for property investments, what happens when there is an economic downturn and that 50% of investment borrowers suddenly feel the pinch and realise they can no longer sustain the loan. My guess is that some of these borrowers are already stretching themselves by owning a rental property that probably yields just enough to pay the interest off. All of a sudden it feels like real estate has become a get rich quick scheme these days.

The most obvious choice would be to sell the property when a sudden change in your financial situation occurs, I think this is where the snowball effect will start. I’m not a doom & gloom kind of guy but I cannot understand the logical thinking behind some people who are convinced that house prices will “never” fall. There a major factors to consider here, negative gearing doesn’t mean you can claim the 100% of the shortfall so if you’re in the highest tax bracket, that will the most you can claim and let’s face it, it’s hard to imagine that 50% of all property investors are in that tax bracket. This brings me to another point – equity. When we were considering an investment property, we didn’t have the capital to use as a deposit but had an idea that we would have enough equity in our current property to access in ideal circumstances to fund the purchase. The problem with this however is that we realise it’s not free money and we eventually have to pay it off because we are borrowing against what we have already paid as well what our property could be valued at.

Nowadays it is considered normal to have an $800k mortgage, after all, that is the median house prices in Sydney. At $800k repayments are just below $1000 a week given that the interest rates remain at 5.00%, once it rises to 7-8% the repayment jumps from between $240-$360 a week, that is a substantial increase and these families are staring down the barrel of paying $1600 more in their mortgage a month. That to me is the most scary part. Yes the rates are at their lowest for a long time but unless you have plans on paying your mortgage off in 5 years, then you could be in serious trouble if you’re just making the required minimum monthly repayments.

One of the reasons why property prices have risen over the years is because of the low stock availability and because of fear of missing out, but I think that’s about to change or at least eventually.

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