I told you so !!!!!

No, but it’s still about 8x the average income of a first-time-buyer… To comfortably afford a $300k PPOR you’d want to be grossing over $100,000 pa.

Does this clarify the problem?

F.[cowboy2]

Wow, some really emotive stuff in here. Interesting to see how strongly some people feel about this. I guess this is a perfect opportunity for me to piggyback some questions that I cannot seem to answer, probably because I am part of Gen Y and haven’t had this same education that the Baby Boomers had. Anyway, to put my situation in context:

1. I am 24, live in Bris, earning approx $65k (fairly good wage)
2. In my 3 years work since uni i’ve saved approx $40k
3. I get taxed ridiculous amounts each year and need to minimize.
4. My partner and I cracked and bought a $25k car on a a 8% loan a year ago, but we are keeping well ahead of minimum repayments and should have this paid off in a year.

I went to see a financial planner 2 years ago, who gave me plenty of theory but nothing that i could use. Well, that is unless I bought into a managed fund through his bank [strum]

I have been reading reading reading for so long, but I just cannot decide what to do. I seem to start one thing after another but nothing ever seems like it will work. I am certain that if I buy a good investment property I will get over this hump, but my problem is, I can’t find a consistent definition of a good investment property.

Problem 1: How do I know which of the 1000s of Financial Planners in this city will be any good? I don’t just want good, I need the best, otherwise I will always be doubtful (and from earlier posts in this thread, rightfully so)

Problem 2: How do I get any consistency on a definition of a good property? +ve cashflow, high capital growth, mix of both, units, apartments, townhouses, proximity to cbd, historical growth, etc, have all been sold to me as indicators to consider when buying an investment, but all they do is confuse (and worry) me rather than give me confidence in making a decision. Everyone says, the most important thing is, do your research. Well I believe I have, but its not getting me anywhere.

Problem 3: How do I ensure that I don’t jeapordise my short term quality of life? I work very hard and want to buy me and my partner the best possible home, best possible wedding, best possible creature comforts. Otherwise I ask, what do I gain out of working? If I can’t see how my investing efforts are rapidly moving me to this goal or enabling me to continue obtaining these, I am not sure I can be sold on it..

I am sure that I just need to meet the right person or be told the right thing for all this to click. Unfortunately at this stage I watch time tick by and feel more and more paralyzed by my inability to just “get it”

I really hope someone on here can help!

Okay, so your $20k will cover stamp duty and buying costs on the $250k house, so you’d have a $250k loan. Remember, this is a sub-median property. To comfortably afford a mortgage, it should really be no more than 1/3 net income. At a stretch, you might consider 1/3 gross income. Repayments on this loan would be $800 per fortnight over 30 years at 7.5%. Using 1/3 gross income you’d need to be earning $63,000 pa. Using 1/3 net, you’d need to be earning around $90,000.

Let’s look at the other side of the equation – income. The average income in Australia is $43,000 per year (gross). Forget the $60,000 figures that are often quoted. They’re rubbish. The median income in Australia is somewhat less than the average (just as the median house price is less than the average), and the demographics of first-time buyers tends to put them even lower down the scale. Remember, if the median income is less than $40,000, that means half of all employed people in Australia earn less than that!

Using the 1/3 test again, less than 50% of all employed people could afford a mortgage repayment of $384 per fortnight (comfortably) or $513 (at a stretch). So less than 50% of all employed people can afford a mortgage of more than $120,000 (comfortably) or $160,000 (at a stretch)…

Am I getting the message through yet? Give some examples from realestate.com.au of the kind of first homes these people should be buying?

Another tack – more than 50% of houses are over twice the maximum price that half the population could pay…. Still not making sense?

Try another – how many people do you know who could afford to purchase the house they currently live in if they had no ‘equity’ in it or other houses? (Hint – it’s below 30% of owners with mortgages). Are we getting it?

Let’s go macro – The fact is, there is only so much debt that can be tolerated by our economy. All debt (‘good’ or ‘bad’) must be repaid, or at the very least, maintained. Every dollar in interest or capital repayments is a dollar that cannot be spent productively, either through consumption or investment in other areas. To maintain current house prices, housing debt must continue to grow for many years until it has passed the point where so much money is being diverted from economically productive activity to feeding the debt that a recession occurs. If house prices trend up again, this point will be passed sooner.

There is a positive flip-side. Almost every dollar borrowed works its way into the general economy. If a person who paid $120,000 for a house sells it for $300,000, much of the extra $180,000 will be spent on consumption, investment, construction of a new house or purchase of another existing house. In the last case, the money is simply transferred to another person – somewhere along the chain it will pop up in consumption, investment or construction. Thus the economy thrives while borrowing continues. Consumption boosts employment, investment boosts shares, construction boosts the housing industry, the buying and selling boosts the real estate and banking industries. All good, right?

Well, yes, but only if this level of debt-growth is sustainable. If private debt is growing faster than private incomes, this is unsustainable. If total debt is growing faster than GDP, this is unsustainable. If debt-growth is unsustainable, then it must at some point slow, and the areas that are being boosted must contract. Remember, this is completely independent of the previously mentioned impact of debt servicing on economic performance. The problem is, the two are likely to occur simultaneously. Furthermore, one must wonder whether our economy has really been growing in a productive manner over the last decade, and how much of GDP growth has been boosted by borrowing?

So how does the general economic future look? Not good. We’re faced with 2 options:
– continue to borrow at an unsustainable rate until the tipping point is surpassed and recession ensues.
– slow borrowing to a sustainable rate at which point we’ll go into recession.

How does the future of house prices look? Not good also. The options are:
– slow borrowing to a sustainable rate at which point house prices will fall drastically and recession ensues.
– continue to borrow at an unsustainable rate simply to maintain current house prices even though this means the national LVR will increase (negative wealth effect) and the tipping point is surpassed, recession ensues and house prices fall.
– increase the rate of borrowing to provide another lift in house prices, a further boost to the economy, and ultimately ensure that one of the first two options must be taken much sooner, and the negative consequences much more severe.

Hmm, no wonder I’m concerned.

Still no clearer, huh? I’ve tried my hardest. Maybe it’s you not me?

F. [cowboy2]

This is the essence of the problem we have here. The RBA’s hands are tied. If interest rates are steady or fall, we will keep on gorging on debt (primarily to purchase houses at inflated prices) until the ongoing cost of this debt pushes the economy into a deep, dark, drawn-out recession. If interest rates are raised enough to bring debt accumulation back to sustainable levels*, there will be simultaneous crashes in real-estate, shares, employment and ultimately a very sharp recession.

Darned if they do, darned if they don’t!

* This would require the annual growth in housing debt to drop by at least 75%. That would require one of the following:

• roughly 70% fall in house prices
• roughly 70% fall in turnover
• roughly 40% fall in house price + roughly 50% fall in turnover

Another spin on this – with the current new housing loan at $250,000 (depending on source), this would need to fall to between $62,500 (at current turnover rates) and$150,000 (with a 50% drop in turnover). The impact on house prices is clear. The impact of a 50% drop in turnover would be astonishing. It represents a 50% reduction in buyer demand. Imagine being a vendor – each month watching the ‘time-on-market’ statistics grow and seeing competing inventory grow… Being a mortgage broker or real estate agent would be worse.

Now remember, this is the ‘best case scenario’, the one where everything else is hunky-dory, and only our debt-habit is adjusted…

F. [cowboy2]

Point taken! [grad]

In future I’ll restrict my rabid, pompous, rambling and discourteous posts to threads originated by myself, and make pointed, polite, succinct, rational posts in others’.

F. [cowboy2]

Hi,

Let me just say that I have found Foundation’s and Wealth’s view on the future macro and micro housing pricing most interesting in this thread as well as in others.

Currently, my partner and I are still renting.

So, Foundation, what is your personal recommendations on what a young couple wanting to get into the property market by next year? Considering the forecasted views on the inevitable correction in the housing prices?

Looking to hear from you.

Cheers
Daniel Lee [specs]

Hey Foundation. Look, you obviously are a smart cookie but all I am saying is that when I wanted to buy a house, I didn’t let anyone (even the bank) stand in my way. I couldn’t afford a whole house, so I went shares with my dad in a unit, which we rented out. I lived at home and was about 18.

Next I bought a quarter share in a house with my dad, brother and ex-boyfriend.

Next I bought my own house and actually lived there. Money was REALLY tight and if I couldn’t have afforded it, I would have gotten in a boarder.

My point is that if you want something badly enough, you will MAKE IT HAPPEN.

I don’t know much about macro, micro or anything else. I know that we have made good money from renting houses and we have never been making great salaries. We did without and scrimped and scraped for years while we were getting our heads above water. I would not change a day of it.

I believe it can still be done if you want it badly enough. If I was starting out today, I’d get in a boarder or two to help me through the first tough years. I will be quite happy if my boys live at home but buy an IP to get them in the market.

My first house I was earning a pittance, but I sacrificed and drove a crappy old car, didn’t spend much. I just believe that many people are not prepared to NOT go drinking on Friday night, or buy their clothes from Lifeline if they have to. I know many women who think nothing of spending $160 per month on their haircut and have their legs waxed each month (and some whose daughters are already getting used to this!!).

My point, I suppose, is that any time I have wanted something badly enough, I have made it happen and have done so through all sorts of economic scenarios.

Could I suggest you lose the sarcasm.

Wylie

Rent instead! Hehe… I can’t give anybody personal recommendation on what they should do. I can point to a few factors I might be considering if I was in your shoes.

• Rent vs Buy? At the moment it is so much cheaper to rent than buy that from a purely financial perspective it makes far more sense to rent and save the difference. Of course owning your own home is not purely a financial decision, but when purchasing something that is likely to be your highest expense for many years, this cannot be ignored.
• Big vs Small? Should you get the biggest mortgage you can to buy the biggest house you can afford, or a cheaper house that suits your needs? This depends on your outlook. If you think the market is going to track sideways for a few years, a smaller mortgage will save a fortune in interest payments and it will be easier to make extra payments, thus further reducing interest costs. The smaller house will enable you to build equity regardless of the market. If you think house prices are going to move significantly higher in the next few years, get the biggest and best located house you can. If you think they’ll fall, but really still want to buy, again, buy a smaller house then trade up to a more expensive one after the correction. Assuming all housing suffers an equal % decline, declining house prices make it easier to move up the ladder since the rungs are squeezed together, while appreciating house prices make it harder.
• Double-Dutch? Do you have friends in a similar situation who are also looking to buy? If so, consider buying a house each, then renting from each-other (at the lower end of ‘market priced rent’). In a few years once the helpful effect of the negative gearing is trailing off, swap into your own houses. This is seriously a no-brainer, but does hold potential pitfalls.

Sure. At the moment though, despite contrary reports in the media, new housing is being constructed (supply) at a rate that is easily meeting the needs of our growing population (demand). On the broadest measure (nation-wide), supply and demand are in balance.

While there may be regional imbalances if new dwellings are not being built in areas where new household formation is taking place (demand exceeding supply), this would only support higher prices at a local level. Providing the broad equation balances, this support would be offset by lower prices in another area where the houses were being built.

This may be one factor in the apparent “two-speed property markets” that exist in most capitals. Another factor worth considering is the type of buyers in the high-speed suburbs, for example:

A $300,000 house in a blue-collar suburb is purchased by a family with an annual income of $80,000. A $750,000 house in a white-collar suburb is purchased by a DINK couple with a combined income of $250,000. The ‘cheaper’ house would cost >$750,000 over 30 years with $0 deposit and be a constant struggle and source of stress for the family. The DINK couple could easily bring a $200,000 deposit and pay out the loan in 7 years for a total cost of $850,000. This is part of the “two-speed” puzzle – depending on the buyer, purchasing in down-and-out suburbs can be more expensive than exclusive suburbs! The DINK couple only need their house value to rise by 12%, while the family need theirs to rise by 150% to be ahead after interest costs!

And finally, you’ve referred to an “inevitable correction”, something I wholly agree with. However, I don’t claim to be smart enough to predict exactly when or what form this correction will take, only that it will happen, (might even be as I write) and that it will be very significant, far eclipsing the 1990s bust, and perhaps more like the 1890s…

Hope this has given you some chaff to chew.
Cheers, F.[cowboy2]

The average punter is still optimistic and still spending over here. That’s precisely the problem.

Cheers,
Marc.
[email protected]

“we get sent lemons; it’s up to us to make lemonade”