Growing up my mother never let me have bubble gum. She reasoned while blowing bubbles could be a lot of fun, there was always the sticky aftermath to contend with when the bubble burst.
Apologies to the real estate aficionados, but today I’m talking housing bubbles and their sticky aftermath.
Like any distinct investment (I’ll call housing an investment because it has seemingly shifted from shelter to asset class) it can go up, sideways, and yes – down.
How is this relevant to us?
International investment managers have devoted plenty of time to Australian housing lately, the consensus being? We’re overvalued.
Renowned bubble expert, Jeremy Grantham, of investment firm GMO, suggests Australian housing is 42% above historical trends.
A sobering thought, especially when earlier this year a Fujistu Consulting survey found 45% of First Home Buyers were behind on their mortgage payments.
I wonder how many of those first home buyers were blinded by emotion, forgetting the enormity of the commitment?
As a market heats up, buyers fearful of missing out will leapfrog each other to buy in, potentially overpaying.
As the market has now cooled some first home buyers have experienced declines in value.
No problem if they don’t have to sell, but watch out if there’s further interest rate rises.
Forced sales can turn sentiment and deflate a market, sellers will leapfrog each other to sell and minimise losses.
To avoid financial hardship, a person should purchase a house when they’re ready. Not when scared by media, or bribed by government!
A healthy deposit, not paying more than you can afford, understanding your job security and allowing for the worst case interest rate scenario are part of a sensible strategy.
Finally, there’s a myth housing doubles every 7 years.
In 1890, the average home was $1446. If it doubled every 7 years, by 2009 the average home should have been worth $189 million!
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs. We might be Australia’s best financial adviser. Want to learn more about the value of financial advice?
