The steps to watch for in the coming Australian housing correction

Tough. Look to the outer suburbs my friends…decent 3 or 4 bedder for that price. On land. Cast your net wider than the 'trendy' inner suburbs where every man, woman and their dog wants to live. Furthermore, nowhere in that article (as far as my bespectacled eyes can see) does it state the journalist was considering to buy a $500K 1 bedder apartment in Surry Hills.

Anyway, there were more crucial points I wanted to outline before. I'm still amazed at how much they were wiling to loan out in that example, because using me as a real life example, that wasn't what I experienced at all. Furthermore, to max out borrowings with a bank without a back up plan is sheer madness.

Indeed, stability of employment would be a big factor. Just to state, I'm a veterinarian who had then been working for a major charity organisation for 3 years, where they haven't historically fired anybody. We had plenty of business right through the GFC. Our company's annual report demonstrates rising income and donations every year. If this isn't a 'stable' job, I don't know what is. The figures in that article are just…'way out there'.

Not saying that they didn't happen (because it very well could have), but I would be very careful about what I read in the media. For a bank to leave $900 in a mortgagor's budget for living expenses is ridiculous, regardless of how stable the job. In my case (speaking from experience), they worked in over $14K in annual expenses for me, a single, considering living with parents and not even paying for 'boarding', no debt, a car owned outright, plus a consistent savings record with the same bank to prove I have never spent anywhere near $14K annually. We actually do not know the circumstances that the journalist quoted to the bank which led to a pre-approval for that sum of money, hence it could very well be out of context.

One of the big reasons for my initial post was to urge would-be homebuyers to be very careful when working out their figures. That would be the take-home message. $900 a month for living expenses should bring on alarm bells already. Flirting with the extremes is akin to playing with fire. You'll be burnt, and badly burnt for the life of that mortgage. One of the things I've learnt in my short life thus far is this: check and double check everything again. Sleep on it. Review it again. Repeat process till comfortable and dead sure.

Yes, maxing out on debt maximises potential in a rising market. But it also maximises the risk. Is the mortgagor truly comfortable and aware of that risk? I'd be very happy for this big crash/ correction to come, because it'd separate the boys from the men…the people who did their thinking and those who didn't. It'd bring all the dirty laundry into public and it'd be wonderfully ugly.

I'm looking forward to it.

OK. Let's study these figures. Firstly, we should compare 'median' mortgage with 'median' household income, not 'average' mortgage versus 'median' income. 'Average' and 'median' are not the same things.

Secondly, taking these figures on board, let's examine to see if it's feasible. That is, is it possible for a single person on $55K annual salary to own a negatively-geared property without living on cardboard and grass for the life of the mortgage. Correct me if any of the calculations below are incorrect, after all, I'm not an accountant and hate working with numbers. These calculations also do make some assumptions of course.

An individual on a salary of $55,000 pa would have a marginal tax rate of 30%. He/ she would be taxed $4,650 plus 30c to the $1 over $37,000. This works out to tax of $10,050 pa. That leaves $44,950 after tax.

Let's say this individual takes an unreasonably high loan of $400,000 to buy a property, considering today's calculations at NAB would only allow for a loan of $311,600 at this salary, at a rate of 7.29% (which I know you can get today at Homeside and fix it for 3 years, and this rate being neither very expensive nor very cheap). The sale price of the property is $500,000 (for 80% LVR) and generates $370 a week in rent for a woeful yield of 3.85% (easily achievable, just look around at real estate websites at properties for rent).

Discounting for a moment, rates, rental agent's fees, repairs etc for the sake of simplicity:

Loan repayments on property at 7.29% interest rate pa (interest only): $29,160
Rent generated by property pa: $19,240
Shortfall: $9,920

A heavily negatively-geared property costing the owner just over $190 a week, before tax breaks.

So, subtract the $9,920 shortfall from $44,950 after tax salary and that leaves the owner with $35,030 to survive on. That's roughly $3,000 a month for living expenses for a single person, in this example. And this example assumes no tax breaks from negative gearing. Under today's tax conditions, this owner could expect over $3,100 to fall back into his/ her lap after getting a tax refund on this property. Consider also that if this owner had a 100% offset account associated with the mortgage, he/ she would be making interest repayments smaller than that above, because any money in the offset account serves to effectively reduce the principle amount and hence reduce interest.

Is it feasible then, for such an individual to own a negatively geared property? I think so. A person willing to buy a property and rent it out, and rent themselves can definitely make it work. If however, the said person prefers to pay off a massive mortgage on their own home PLUS own an investment property, things become very tight and only marginally 'do-able'. But that's a personal choice. I'd rather rent and have an investment property, rather than live in my own home and NOT have an investment property, although the bottom-line is the same: you get to control one property.

A person doesn't need to be rich or have six-figure salary to have an investment property. The point that 75% of negative gearing landlords have annual salary of less than $80K is moot. More important is sitting down and working out the figures to see if it CAN be done. And this example shows that a person on $55K can do it.

Haha, call it the culling of the weak, if you'd like.

Does anyone wake up to Kris Sayce from MONEY MORNING?
I think the people he hates most in this world are Property Spruikers and his angle on the market is an interesting one.

http://www.moneymorning.com.au/20110511/where-is-the-%E2%80%9Cpoint-of-control%E2%80%9D-for-aussie-housing.html#more-5138

If he wasn't an advisor for shares and wealth management, he'd make a great stand up comic.

Ian
http://theblockblog.com
Free Property Investment Info Tool and Resouces for Investors with a Sense of Humour

So, basically, Ozzie mortgages have been bundled more or less like American ones before the subprime hit.

Mortgage insurers think the assets are worth less than what the banks want to think they are worth – meaning its only a matter of time before the banks let homeowners know their houses aren't worth as much as they think they are.

At the same time, all our big 4 banks get credit downgrades. Seems like the world knows more about our banks and housing market than we are willing to admit to ourselves.

What I find interesting about our big 4, though, is the current interplay between them. CBA and Westpac are more leveraged in housing than the other 2, so a moderate housing downturn (say less than 15%) may actually work in NAB/ANZs favour. A larger downturn will be bad for all.

It's so great to see this talk about the crash becoming more prominent in forums like this one. Awareness of the bubble is really seeping into the brains of the masses. IMO the biggest driver of house prices is sentiment, when consumers are confident they’ll bid up prices to crazy levels irrespective of fundamentals, but now the tides turning, panic is setting in and they’ll all run for the exits at the same time, especially the overleveraged profligate wastrels holding multiple “investment” properties.

I can smell the fear. It’s palpable on the Australian Property Forum where the desperate bulls and spruikers are frantically posting threads trying to disparage the bearish message…

APF – Check out the bearish sentiment in all threads!

Sorry bulls and spruikers but the party is over and you know it. No more endless capital gains, no more rents through the roof, no more easy credit, no more lo w interest rates, no more mass immigration. No more stimulus. Nothing left to keep in air in the bubble. The govt is out of ammo. The RBA wants the bubble to deflate. Bulls… you’re on your own. If you sell now, you just might get out of this with your shirt!

Zoran.

Nah, not the smart and reasonable ones anyway. We have our own quite place now.

Well said emptyvessel. It does seem that all the negative thinking bears want to do is stand on their corner soapbox and become pompous, pious, pontificating 'I know everything' preaching buffoons because most simply are jealous they haven't the balls to do it themselves. Cutting down tall poppies will always be the preferred route of the weak and fearful.

And so the debate rages on. You know, there was an irritating voice that started to play in my head. It sang annoyingly,

'Would you like to take a survey??!!'

A survey that reveals the following:

– Are you a bear, bull or a 50-50?
– How many properties do you control?
– If you control properties (whether your own home or an investment property), how many do you own 'outright' (ie. unencumbered)?
– Amongst the properties that you control, what are the approximate dates of purchase?
– Last question: do you NOT control any property now and wish you did?

Not an exhaustive list of questions, but a good start. If we ever started something like this, it would be very revealing. The opinions of people on threads such as this are usually very much divided. That's because these opinions stem from a thought process based on their current situation. I suspect that, in the end, the property market will do whatever it wants, despite what any individual might say. 'Getting it right' is nothing to brag about, whichever way things turn out to be. That's because if a person 'gets it right', he/ she does so by chance.

People who are reliably able to pick a trend shouldn't be wasting their time here, or on television talk shows. They'd be out there spending all their time making billions of dollars.