I am beginning to be swayed by your arguments.

I guess it all points to the need to have a balanced portfolio of housing investments i.e. some high growth properties balanced with cashflow positive ones.

You argue a good case. I guess my only reservation is that this "housing crash" has been on the cards since 2003 in Australia and since around 2005 in the US yet hasn't happened yet. Maybe this is because we don't want to believe it or simply that interest rates haven't reached the right level yet?

You are making some key assumptions:

1. People won't be able to continue along the debt path of the past – it has to come to a point where they can no longer afford the increasing debt.
2. Because of point 1. house prices will eventually have to tumble.

With regard to point 1. – what about if banks bring out longer term mortgages like they have in Germany/Nordic countries? In Germany/Nordic countries the mortgage periods (from memory) are around 100 years and therefore you pass your debt (and house) onto your children to repay. This lowers overall monthly repayments.

Also with regard to point 1 – What about if rents rise by enough to cover said debt repayments. If you believe the current media hype – rents in Sydney are due to rise by 40% beteween now and 2009. Surely this would soak up a large chunk of the debt repayments?

With regard to point 2. – I don't disagree that the housing market is a cyclical one and that house prices do stagnate (sometimes over long periods of time). What I'm saying is that (on average over the long term) good properties in sought after areas i.e. in the current market that would be those generally up to 10kms from the CBD (with a few exceptions) will double every 7-10 years.

Basically you can use statistics in different ways to argue 2 completely different points of view.

I'm sure if I had the time (and inclination) I could pull some figures out of my ars*e to back up my point of view. This all just harks back to the fact that the property market in most major cities is a 2 tiered market. In Sydney you have the inner-city, east and the north shore going great guns and the people in the west suffering. When you look at the Sydney market as a whole (through the eyes of statistics) you woul think we are experiencing very moderate growth over the past few months. Not so in my backyard (inner west). Two 2 bed houses down the road from me in Petersham sold for $750K and $705K the past month and a large % of properties are selling over their reserves at auction.

Don't put too much reliance in stats as sometimes they don't paint the true picture!

Sorry – what I meant to say was you could refinance every 2 years as the property prices increase (will take 7-10 to double!).

You don't necessarily have to reduce your debt to work less. Provided you have bought well and the properties are appreciating the average 8-10% p.a. the 85% cashflow mortgage will work well. It is more risky than a standard loan as you are capitalising the interest but it will provide for less mortgage payments for the first 2 years and as long as you refinance after that – well into the future. As long as you keep enough of a buffer in your offset account i.e. at least one year's interest payments (to cover slow appreciating years) – by refinancing regularly you should be ahead of the game.

As rents rise over the next few years due to low vacancy rates accross the board, the increase in your overall debt should be slightly offset. Definitely not a strategy for everybody but something to consider as a "thinking outside the square" strategy.

I agree with Grreg. You should always buy below market value as this ensures you have a get out plan if it all goes sour. Always plan on the worst case scenario as the people you are wrapping to are generally not the best at repaying loans, they will miss payments here and there.

Life is like a box of chocolates – you never know what you’re going to get!

I would buy it if:

1. You think it is in a suburb that is insulated against downturns i.e. close to major infrastructure, within 10kms of city, large block of land etc.
2. You believe you can add value to the property through renovation, sub-division etc.

Life is like a box of chocolates – you never know what you’re going to get!

It’s a simple case of affordability as John Fitzgerald says:

1. Take the median house price and work out the monthly mortgage repayments based on an average 30 year loan.
2. Now take the median household income for the area.
3. Divide 1 by 2 and multiply by 100.

If the % arrived at is above 35% then there is going to be a lot of people hurting out there. Which there are, as from memory if you did this in Sydney, or Melbourne you would arrive at a figure well over 40%!!

So 1 of 3 things can happen to improve affordability:
1. Wages must rise dramatically – not likely under the new IR framework.
2. Interest rates will fall – I would be putting my money on them rising.
3. House prices fall.

Looking at it logically option 3 seems to be the only prospect (in most markets) for the not to distant future.

Are there areas that will rise still – sure, but the majority of areas will fall back so that affordability improves and more buyers can enter the market again.

Just my 2c worth anyway.

Life is like a box of chocolates – you never know what you’re going to get!

Hi Ecatt,

There’s one held regularly at Petersham, RSL on Sundays I believe. See:

https://www.propertyinvesting.com/forum/topic/21084.html

Life is like a box of chocolates – you never know what you’re going to get!