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Safe as Bricks & Mortar?

Real estate information provider RP Data released some interesting figures last week.

In the December 2012 quarter RP Data found that 12.5% of homes in Australia sold for less than their initial purchase price.

The worst areas were the Gold Coast and Sunshine Coast with 39.4% and 34.5% of homes sold below their purchase price.

Tasmania featured with 24.5% of homes in Mersey-Lyell and 20.2% in Northern Tasmania sold at a loss.

And these figures don’t include buying and selling costs.

On a capital city perspective, dwelling values are still 9.5% below their peak in Brisbane, 8.7% in Hobart, 8.6% in Darwin, 6.2% in Melbourne and 5.5% in Adelaide.

This raises the question about the old ‘safe as bricks and mortar’ theory amidst some current financing methods.

The ‘no risk’ idea of property fuelled the idea of borrowing 100% of the purchase price and using an interest only loan to lower repayments.

Credit Suisse have suggested over one third of Australian investor loans are interest-only.

No money down and interest only is assuming a huge amount of risk on the belief house prices will keep on rising and it’s a license to burn money if they don’t.

Unfortunately this isn’t readily obvious because there are no real time indicators of your overall costs and profit or loss.

I’m always reminded of the tax deduction when negative gearing property, but there’s no point investing for tax deductions.

Tax deductions are useless if you’ve paid out of your own pocket for what rent doesn’t cover and the property isn’t increasing in value.

According to the ATO in 2010-11, 72% of individuals with a loss making property were earning below $80,000 and the value of their yearly loss was $9,756.

That’s paying out an extra $187 a week to get a tax deduction at the end of the year.

In an environment without capital growth it’s a costly strategy and I’ll show how costly next week.

Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances.

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