Since the early 90's House prices have grown on average by 9% year on year. Purchasing real estate has, no doubt, been historically a solid investment. My concern is that I constantly here people making investment decisions on the assumptions that this type of growth will endlessly extend into the future. The question is; is this 9% year on year growth sustainable or have we seen the back of the last great property boom?
By using greater proportions of our take home pay to service bigger mortgages we have been able fuel strong real estate markets. If wages and houses keep growing at their observed long term growth rates we will be paying, in less than 10 years, a multiple of 15 times our average annual wage. This is simply unrealistic. In terms of debt servicing, assuming today's average of Loan to valuation Ratio (LVR) of 60%, those taking out new loans will be using about 70% of their before tax income to service their loan. Simply, this means that there will be nothing left over to pay for anything else let alone food. That's what I call, really living beyond your means.
Personal debt in Australia has been growing at over 16% year on year since the 70's. This is a dramatically higher growth rate than wages obviously. Logic would have it that this type of debt growth will slow down at some stage. Growing debt has obviously funded Australia's rapidly growing real estate markets, albeit unsustainably, given that we will be fast approaching peak debt.
Without exponentially growing debt, home buyers will have to look elsewhere if we are to fund 9% year on year growth in housing prices. Perhaps innovative lending products like shared equity mortgages will step in to provide more buying power. In this case, home buyers will have to come to terms with never owning 100% of the Australian dream but rather sharing that with Macquarie Bank for instance.
If sharing our homes with our lenders doesn't gain widespread acceptance then, perhaps we should expect property growth in the future, to be more in line with wages growth. If so Australia's last great property boom has already been and gone!
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Posted by Michael McNamara
May 24, 2007 3:47 PM
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Hey all,
Would love your opinions on the above blog by Micheal. If the above is the case then why would anyone invest in property. Why would things just change and has he even taken into account inflation and higher wage increases. I am not sure but none the less this reflect a worrying thought
By using greater proportions of our take home pay to service bigger mortgages we have been able fuel strong real estate markets. If wages and houses keep growing at their observed long term growth rates we will be paying, in less than 10 years, a multiple of 15 times our average annual wage. This is simply unrealistic. In terms of debt servicing, assuming today's average of Loan to valuation Ratio (LVR) of 60%, those taking out new loans will be using about 70% of their before tax income to service their loan. Simply, this means that there will be nothing left over to pay for anything else let alone food. That's what I call, really living beyond your means.
Personal debt in Australia has been growing at over 16% year on year since the 70's. This is a dramatically higher growth rate than wages obviously. Logic would have it that this type of debt growth will slow down at some stage. Growing debt has obviously funded Australia's rapidly growing real estate markets, albeit unsustainably, given that we will be fast approaching peak debt.
Without exponentially growing debt, home buyers will have to look elsewhere if we are to fund 9% year on year growth in housing prices. Perhaps innovative lending products like shared equity mortgages will step in to provide more buying power. In this case, home buyers will have to come to terms with never owning 100% of the Australian dream but rather sharing that with Macquarie Bank for instance.
If sharing our homes with our lenders doesn't gain widespread acceptance then, perhaps we should expect property growth in the future, to be more in line with wages growth. If so Australia's last great property boom has already been and gone!
[email protected]
Posted by Michael McNamara
May 24, 2007 3:47 PM
_________-------------____________----------------___________----------
Hey all,
Would love your opinions on the above blog by Micheal. If the above is the case then why would anyone invest in property. Why would things just change and has he even taken into account inflation and higher wage increases. I am not sure but none the less this reflect a worrying thought
