As Safe as Houses?

One can never be sure about exactly what will catch the public eye. However, there are some odds-on issues almost guaranteed to attract attention. Any headline promising weight loss secrets or effortless money-making tips are perennial favourites.

Personally, I am attracted to success stories, whether in business, personal finances, sport or lifestyle. There is something inspiring about people who have attained personal freedom through hard work. So it was with great interest I picked up a copy of Australian Property magazine that featured ‘tomorrow’s millionaires’ on the cover. Inside promised to detail how the young guns of property had amassed a fortune at a very young age.

The headline act was a young man aged 24 who had ‘$1 million worth of property to his name’ in only two and a half years. His first property was purchased for $310,000 with the help of the increased first home owners grant, and is now worth $440,000. He has since bought two other properties, cumulatively valuing his empire at $1.04 million. With debts of around $930,000, this young man has personal equity of a little over $110,000 – not a bad start for such a young man. Or is it?

At this stage, our role model would be worth more had he simply held on to his first property which has increased in value. He also would have a fraction of the debt that he now must service through his rental income. These rents amount to around 40 per cent of the near $75,000 annual interest bill which you can add to the outgoings and maintenance costs. My guess is that this young man has to find nearly $1,000 per week before tax benefits to fund his new found success.

I sincerely hope it all works out for this ambitious investor. Yet in a time of falling property prices and rising interest rates this young chap could be in for a few sleepless nights ahead.

Remarkably, there are still people who maintain you cannot lose money in property and thus feel no qualms about borrowing enormous sums on the assumption that property is a ‘sure bet’. Nothing could be further from the truth.

History is littered with the business corpses of property moguls who overextended themselves believing that property prices are a one way ticket to riches. The United States is the most recent international example of how damaging a deflating property bubble can be to an overleveraged economy.

At home we have our own examples. Queensland’s Gold Coast is estimated to have a five year oversupply of apartments and experts maintain that sale prices have halved over the past couple of years.

Recent newspaper reports suggest that a large portion of buyers seduced by the government’s generous and quite foolish increased first home owner grants are now experiencing mortgage stress. This is causing many to attempt to sell their homes in an already soft market.

Of course, individuals should be aware of the risks as well as the potential rewards attached to any major purchase – whether for investment or personal use. However, when government programs seek to encourage people to undertake big ticket purchases without spelling out the potential pitfalls, the ultimate result is unlikely to be a pleasant one.

This is a lesson many first home buyers are now learning first hand.

Great! You’ve successfully signed up.

Welcome back! You've successfully signed in.

You've successfully subscribed to Confidential Daily.

Success! Check your email for magic link to sign-in.

Success! Your billing info has been updated.

Your billing was not updated.