There was an interesting coincidence of news stories last week. One was telling us that first home buyers are encouraged by low interest rates to enter the housing market (http://www.news.com.au/business/money/story/0,28323,25833231-5013951,00.html). The second was Kevin Rudd warning us that interest rates are likely to be heading upwards fast in the future (http://www.news.com.au/perthnow/story/0,21598,25840282-5017962,00.html).
This seems eerily similar to the practises that caused the global financial crisis in the first place. Namely, low "teaser" interest rates to encourage people to enter the market, followed by a ramping up of interest rates down the track.
There is an unfortunate tendency for people in this country to borrow as much as they possibly can when buying a house. Unfortunately these people will not be able to afford their loans any more when interest rates start moving up again. We could very well be facing our own subprime meltdown.
This just highlights the problems posed by government intervention into the markets. While they may be well intentioned, and appear to be effective initially, there is a good chance they will cause even bigger problems down the track.
If you think property is a good investment right now, think again.
Monday, July 27, 2009
Sunday, April 12, 2009
Why Now Is The Worst Possible Time To Be A First Home Buyer
I am concerned at the number of people that are becoming first home buyers at the moment.
There is a popular myth floating around that now is a good time to be a first home buyer. This could not be more wrong.
The additional first home buyer's grant is pushing up house prices to an artificial level. As soon as this is taken away house prices will fall by at least as much as the fall in the grant. In fact house prices will probably fall more because the grant encourages people to take on more debt than they otherwise would have / could have.
House prices are still at bubble levels. This bubble will have to pop or deflate at some point. All the other bubbles have collapsed; commodity prices, shares, etc. House prices always have to be relative to income levels. Suggestions that house prices can go up or even be maintained at a time when personal incomes are going down do not make sense. The money to pay off home loans has to come from somewhere. That somewhere is personal incomes. When people are losing their jobs, taking pay cuts, and working fewer hours, it is inevitable that they will earn less. This will eventually flow through to house prices.
The long term average ratio of house prices to annual income is about 3.5 to 4 times. At the moment house prices are about 7 times income. To put this into perspective: If you buy a house today for $450,000, the price
that you would have paid for it 15-20 years ago is: $450,000 / 7 x 3.5 = $224,999. That means you are overpaying by a whopping $225,001! Plus you are paying interest on that overpayment. Over the life of the loan your $224,001 overpayment will almost double with interest. Think of what you could do with that much money. You could go travelling around the world for years! You could pursue that passion you always wanted to pursue, but decided not to because it was too risky. Well you can do it! Don't buy an overpriced house. Save your money now, retire earlier, and travel around the world and pursue that passion.
Now is the WORST POSSIBLE TIME to become a first home buyer! Do not burden the rest of your life with a massive debt that will ruin your lifestyle.
All the best,
Ay Jay
There is a popular myth floating around that now is a good time to be a first home buyer. This could not be more wrong.
The additional first home buyer's grant is pushing up house prices to an artificial level. As soon as this is taken away house prices will fall by at least as much as the fall in the grant. In fact house prices will probably fall more because the grant encourages people to take on more debt than they otherwise would have / could have.
House prices are still at bubble levels. This bubble will have to pop or deflate at some point. All the other bubbles have collapsed; commodity prices, shares, etc. House prices always have to be relative to income levels. Suggestions that house prices can go up or even be maintained at a time when personal incomes are going down do not make sense. The money to pay off home loans has to come from somewhere. That somewhere is personal incomes. When people are losing their jobs, taking pay cuts, and working fewer hours, it is inevitable that they will earn less. This will eventually flow through to house prices.
The long term average ratio of house prices to annual income is about 3.5 to 4 times. At the moment house prices are about 7 times income. To put this into perspective: If you buy a house today for $450,000, the price
that you would have paid for it 15-20 years ago is: $450,000 / 7 x 3.5 = $224,999. That means you are overpaying by a whopping $225,001! Plus you are paying interest on that overpayment. Over the life of the loan your $224,001 overpayment will almost double with interest. Think of what you could do with that much money. You could go travelling around the world for years! You could pursue that passion you always wanted to pursue, but decided not to because it was too risky. Well you can do it! Don't buy an overpriced house. Save your money now, retire earlier, and travel around the world and pursue that passion.
Now is the WORST POSSIBLE TIME to become a first home buyer! Do not burden the rest of your life with a massive debt that will ruin your lifestyle.
All the best,
Ay Jay
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