How Aussie Property Could Turn on Investors Very Badly

It looks like the Aussie housing industry is following Phil Anderson’s script rather well. He predicted a 14 year boom in house prices here in the Markets and Money recently. And house prices are surging.

Home loan comparison website Finder.com reckons applications for loans are about to surge 70% based on how many people are searching for related terms in Google. That would put even more upward pressure on prices.

But if it’s just debt that’s bidding up prices, isn’t that a bad thing for everyone except the banks and the government? Higher prices mean borrowers get the same house with more debt and more taxes. And with more debt comes more interest. Of course, the seller does well. But only if they don’t jump back onto the property ladder at a higher rung.

Tim Lawless from RP Data reckons things are getting speculative in the housing market: ‘It’s being driven very much by investment…Whereas first-growth phase back in 2009 was very much driven by first home buyers, it’s very different in this cycle and it’s very much speculative. About 40 per cent of purchases in Sydney are investment properties.

Being a renter, we like housing investors. They create more competition for renters to choose. But we’re worried because property can turn on investors very badly. Around two thirds of distressed property sales over the last three months came from Queensland, where house prices did take a hit during the financial crisis. That shows what could happen on a national level if things go wrong.

Of course, when you borrow to invest, you leverage your gains. A 5% increase in house prices could mean a 100% return on your deposit. But a 5% drop could wipe out your deposit entirely, and from there on in you’re losing more money than you invested and paying interest for the privilege.

Even if there is a 14 year housing boom, we’d rather sleep at night.

Regards,

Nick Hubble+
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From the Archives…

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The Unintended Consequences Brewing Thanks to the Federal Reserve
24-09-2013 – Greg Canavan

The Market’s Declining Response To ‘Open Mouth’ Operations
23-09-2013 – Dan Denning


Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.


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