Mum and dad investors have Australia teetering on the edge of a housing crash, report warns

Your red and green lines represent a promise made every year by the next greater fool that over 30 years they will pay an increasing multiple of their take home pay for a house. 8 times savings at last point of your graph. For property investors to make capital gains while negatively geared on interest only that means this multiple has to keep on increasing.

So I ask you, when is the point reached that property becomes unnafordable even at the lowest interest rates. Do you realise that at inflation running at 3% property prices must rise by your interest rate plus inflation so assume 7% not including rent income.

But let's assume Sydney median today of 1.2 million and assume growth of 3% and interest rates of 4% on a p and i and you live in it.

Will Sydney median be 1.4 million in about 5 years time?

Will Sydney median be 1.6 million in about 10 years time?

Will Sydney median be 1.9 million in about 15 years time?

Will Sydney median be 2.1 million in about 20 years time?

Will Sydney median be 2.5 million in about 25 years time?

Will Sydney median be 2.9 million in about 30 years time?

Because after 30 years the property will have cost you at least $2.1 million
And the real value of that initial capital of 1.2 million is now $494k due to inflation. Your profit is then upon selling a paltry at best $100k


Let's assume interest rates rise to 7% but capital gains growth stays at our assumed 3%
You will have made zero money in selling it in fact you will have lost money because the property would cost you 2.9 million in p and I and the inflation erosion of the value of the 2.1 million has been eroded away.

It doesn't even make sense to buy a house if there is only 3% growth and interest rates exceed 8 % if wages stagnate as they have for a long period .

 

Try sell a property in Port Hedland for the amount you paid for it in 2011 and then let's talk liquidity and value of a house.

In 2011 nobody wanted to sell me a house in Port Hedland for $500k. They wanted a million. Today they will chuck in a horde of hula girls to do the deal for $350k

 

Here is a quote from Simon in another thread

"the RBA, in its semi-annual financial stability review in April, noted about a third of mortgage holders have either no buffer or the capacity to meet less than one month’s repayments."​

One way to read this is that 30% of mortgage holders do not have a month buffer.

Another way to read this is that 70% of mortgage holders have at least one month buffer or more of mortgage payments.

The majority of mortgage holders have a cash buffer. Even Simon knows this.

 

6523.0 - Household Income and Wealth, Australia, 2015-16

ABS: HOUSEHOLD DEBT AND OVER-INDEBTEDNESS IN AUSTRALIA


KEY FINDINGS

• In 2015-16, based on the ratio of debt to either income or assets, around three-in-ten households (29%) were classified as ‘over-indebted’.

• Debt growth has outpaced that of incomes and assets during the same period, helping to drive the proportion of households who are over-indebted up from 21% in 2003-04 to 29% in 2015-16.

• Owners with a mortgage were the most likely households to be over-indebted (47%) based on tenure type. Households with a reference person aged between 25-34 years (33%) and 35-44 years (34%) are among those most likely to be over-indebted based on age group. Of those households with a property debt, 62% of 25-34 year olds and 51% of 35-44 year olds were over-indebted.

• High income households were also more likely to be over-indebted. One quarter of the households in the top income quintile were over-indebted compared to one-in-six (16%) low income households (in the bottom 20%).

• Sydney and Melbourne had the highest number of over-indebted household at 407,000 and 419,600 households, respectively. Over-indebted Sydney households who held property debt owed $269,000 more on average than over-indebted Melbourne households who held property debt.

• Average home loans for over-indebted households were over four times the size of home loans held by other households carrying debt ($286,400 compared to $59,500), and other property loans were over 11 times the size on average ($219,800 compared to $18,500).

• Most over-indebted households (77%) lacked sufficient ‘liquid‘ assets to cover a quarter of the value of their debts. Liquid assets are assets which can be easily converted to cash and include bank accounts, shares, own businesses, and superannuation (age permitting). Lack of liquid assets may place over-indebted households at risk of defaulting on their loans if their incomes are not sufficient to meet repayments.

​

 

Unfortunately Recessions last a lot longer than 1 month.

 

The fact that being argued is whether people holding loans and people holding cash are two entirely different groups of people or whether there is some crossover. Let's consider:

"Most over-indebted households (77%) lacked sufficient ‘liquid‘ assets to cover a quarter of the value of their debts."​

The corollary of the statement is that 23% of over-indebted households have sufficient liquid assets to cover a quarter of the value of their debts. This proves undoubtedly that there is a crossover between people holding debts and people holding cash and they are not at all two completely different groups of people as claimed.

 

Firstly most of the guests at my local RSL own their own homes.

I would have thought that 80% of Australians own everything and the lowest 20% own nothing.
Or 80% of Australians own 99% and the lowest 20% own 1%. That will account for the pensioners who live in an inherited home or a fully paid off home they bought 60 years ago.

I cant be bothered finding a stat to back this up.

 

Only a 1/4 of what they owe?

 

@Ald started a discussion by posting the following

Is it different people though? or is there a crossover?

This directly goes against the claim that "In reality it's different people" holding savings than holding debt. In fact there is a crossover with 23% of over-indebted households holding both debt and savings.

 

Thanks @AlexV_Sydney. So definitely a crossover. Gees, that less than one month is very high though. I definitely don't like that. 48+ is surprisingly high but I guess I shouldn't be that surprised since I am in that category.

 

I'm there as well.
btw, if you know the total number of loans and avg repayment ($2.5K) then you can estimate the savings of ~80% loan owners (to know the share of that $1T savings)

 

It looks really unevenly distributed, which is not surprising. What it means is if there was a depression, some people would get really rich, some would go broke and some in the middle would just struggle.

 

How will people get Rich?

 

There is risk in all business. If one employs a multi-pronged strategy of buying value, adding value and holding in good OO areas then their chances of doing well in the medium to longer terms is excellent.

Granted, many dont do that well but I don't believe it's the assets fault, so to speak, but rather many investor's approach and expectations . Also keep in mind that real estate is generally really a long term game . So its very possible that most average investors do very mediocre for 5 years or so before they see their assets take off if they have got their DD and asset selection right, at that beginning .

 

Be the one out of Sync..... also +like

 

"at least seven billion-dollar families, worth a total of $31.9 billion, owe their fortunes to young businesses that stared during the Great Depression."

****** In Recession: The Richest Families Whose Businesses Started During the Great Depression

 

So again how do you get rich during a Depression not when do you start a Business?

 

Also from your Link:

If the Banks go under here so does the savings!

 

What savings?