IP warning



From: KJL .

Relative newbie who reads rather than posts, so be gentle.

On a TV news article on the recent interest rate cut, I saw a warning that some government authority (ACCC?) was concerned about the growing number of people using the equity in their homes to buy IPs, but I didn't catch much. Did anyone else see this or anythoing in greater detail?

Extending the topic, I know the views that as long as it's the right type of IP then there's a reduced chance of a problem, but does anyone (maybe those who've been around the IP game for a while, if I can put it like that) have any opinions as to whether there's a bubble which is going to burst?

It seems like every man and his dog are investing in IP or just about to, and it also seems obvious to me that we can't all have 3 or 4 IPs as there'd be no-one to live in them!

Or maybe those who've been around aren't in any special position on this one (no offence intended) as IPs are more popular now than they've ever been in the past. I just don't want me (or anyone else) to find themself in an IP version of the tech wreck, sat facing a couple of mortgages and with no-one to pay them.

Just some thoughts for discussion.

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Reply: 1
From: Anonymous


The tech wreck type falls in price will not happen in property. This is an absolute statement of fact.

However the issue with property is massive amount of leverage that is possible. A fall of 10% in a given share price happens every day and is par for the course. A fall of 10% in property is a disaster if you have 110% finance and were hoping to maximize your capital gain to repeat the process.

Property often falls in price with the initial round of interest rate rises so your serviceability falls too. The rise in rates affects credit cards as well so your tenants are feeling the pinch and looking to rent cheaper properties. They move out, you have a vacancy factor and drop your rent to kill it. This impacts on the property value and your serviceability again.

As you see a lot of factors interplay.

Less than 1% of the population has 3 or more IP's so don't sweat that one.

Anyway there are a lot of things to consider and as you started by referring to shares-

1. You make your money when you buy
2. Buy low and sell high

What does that tell you?
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Reply: 1.1
From: See Change


The point about Line of Credits is spot on . The biggest cause of bankruptcy is personal debt. In the past this has come in the form of personal loans and credit cards.

The next wave of personal bankruptcy s with be directly as a result of Line of Credits.

The banks are happy to lend because it is secured by equity in your house.

Most people do not have the discipline to pay them off. They will use it to borrow for a new car / stereo as well as their "new IP's" . I'd have a bet most people only pay the minimum monthly payment required. Sure there are people who will use them responsibly but for most it will be used as a "Super charged Credit Card" with a BIG limit . Over the next few years many people will go to the wall as a result of these.

My bet is that will many cheap bargains around in IP's for those who are patient over the next few years.

safe investing see change
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Reply: 1.1.1
From: Anonymous

Personal debit is amazing.

83% of people taking up the 1,2 or 3 year interest free periods on consumer goods roll over at the end of the free period. They then pay 28% or more in interest for the remaining term usually 4,3,or 2 years!

Oh, and they pay 30% as a deposit, and that deposit is usually paid by credit card, so do the numbers.

The roll over figures are probably similar for credit card debt. What is the percentage of people who pay off their cards every month?
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Reply: 1.2
From: H T

Most people are "gunnas"
Im gunna mow the lawn
Im gunna go back to uni
Im gunna buy and ip
Stkildas gunna win the flag (bloody saints)

Dont worry about everyone getting in on the ip bandwagon, as i believe you really only hear about people investing in property when you, yourself take an interest. It surprising what you filter out if your not interested in the subject.

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Reply: 2
From: Nigel W

and the vast masses who have worshipped at the mocassin'd feet of certain property gurus will either be gunna's (but they're really positive and will soon gunna be living their DREAM life with their DREAM car/beach home/girl/boy etc)

or they will fall the hardest as int. rates rise and demand drops.

s'cuse my cynicism.

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Reply: 2.1
From: Sergey Golovin

As far equites and gearing goes - what else can you do? If you do not have equites and gearing (finance) available to you what's left, savings and salary? Wonder how far will you go with it.

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Reply: 3
From: John P

And just a note on tenants Kevin. As Jan Somers states in one of her books;

"Tenants have been around since TIME ETERNAL"

That is not about to change.
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Reply: 3.1
From: Anonymous

'Tis true, tenants have been around a long time and they are more influenced by the shifts in economic circumstance than most. So when the tide turns they feel it first.
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Reply: 1.1.2
From: Rolf Latham


I agree and disagree. You have hit one of my favourite subjects.

Surprisingly, "most" people are quite ok with Mortgage reduction plans incorporating using offsets and/or All in on Line of Credit Accounts.

As always there will be the smaller % of the population that can not use such products sucessfully. I say can not because for a lot of these people their inability to handle credit is a form of illness. So what can we as a society do - make these products unaivalable to these types of people - cant do that this would be disrimination.

Often it is more than obvious to the eperienced when you have a client that can not handle easy credit. The signs are like flashing red lights at a railway crossing. In those instances I recommend against a LOC facility for such clients. People that know me are aware that I generally prefer offset accounts anyway, usually due to the lower cost, and easier management.

If all financial institutions were to take a long term approach with their clients then the abuse of such credit would be far less prevalent, however to most instituions a sale is a sale is a sale and partially at least thats where the problem lies.

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Reply: 3.1.1
From: Glenn Mott

Friends of mine thought I was being extreme 5 years ago when I cut up my credit card (paying it off shortly afterward and switching to bpay to pay bills), switched off the mobile phone (call me at home or work if you want to contact me) and started paying cash for everything that did not produce income. This has freed enough cashflow to purchase 2 small properties.

I have counselled some friends (non property owners) about good debt/bad debt and encouraged them to follow the same path, which will lead them out of their current position. However, the marketing campaigns by the banks/telcos/retail chains is very good and has had little effect. The future is becoming clearer to me with every passing year.

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Reply: 1.1.3
From: Anonymous

Hi Anon,

You statement of fact reads like fiction. Learn from history. Also, if any loan becomes unserviceable it is a tech wreck to you. More advice and less broad inaccurate statements please.
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From: Anonymous

Hello Anon, in response to your critique I suggest you read the post again. You were too smart by half I think, or perhaps you went off half cocked because something I wrote got under your skin.

The post was in part a warning about leverage but unfortunately that escaped you. The tech wreck had falls of 50 - 80% in the value of the stocks. Ever seen that kind of fall in property??

The point about leverage is that it works both ways, it amplifies your gains AND your losses. If you need it spelt out for you, please be polite and concise and I will answer accordingly.

Incidentally I have learnt from history and am not too proud to say that I am still learning. When you stop learning you are dead, or may as well be :)
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Reply: 2.1.1
From: Anonymous

Hi Nigel,

You are excused.

There are 2 of us.

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