Last time I leave the computer unattended and allow my 4yo to run around and delete my proposed reply to Copydog.
To cut to the chase, buying property is for the long-term, is not for the faint-hearted, and requires the same type of due diligence /research as is required in every other endeavour.
Copydog's client has either received poor advice (bankruptcy has a real stigma attached to it, and the consequences are permanent), was investing in a marginal proposition at best, or lacked the necessary income /capacity with which to service the loan.
On a 5y PI basis, @8.5%, the required repayments would have been $1846pm, vs $1115 (over 10y), or $886 (over 15y). @7.5%, the repayments would have been $1803, $1068, or $834.
Assuming, I(only), the required repayments would have been $562pm (@7.5%), and $637pm (@8.5%).
I deliberately avoided using the prevailing mortgage rates of between 5.7 -6.55%, to demonstrate the financial realities of a riskier client profile (albeit, still sub-10%).
Elsewhere, I agree that the rates of 10 -12% are behind us (unless induced by a sharp external shock which would be difficult given that our first response mechanism would again be felt through adjustments to the exchange rate).
But, as for Copydog's suggestion about arguing that comparable home loan affordability has had much to do with lower interest rates, I agree that this is partially so.
Home loan affordability is determined by many characteristics, including the following: 1) income capacity (current and future); 2) deposit power; 3) availability of funding /lending resources (previously rationed till the mid-80s; invariably of a fixed rate nature only, but now variable, fixed, or blended; dependent upon a longstanding customer relationship with the banks; etc); 4) property price; 5) the rate of interest applying; 6) length of loan (including flexibility of accelerated payments, frequency of payment, early repayment, etc); and (amongst others) 7) the valuation multiples applied to determining property values (previously limited to <60% of property value which translated to 40 -45% of true underlying value, vs a 80%+ value today, translating to a 70%+ underlying value).
As for underlying property values, the Australian market was sub-optimal to the global market through the last 100 years. Rationing of resources, restrictions on access /supply, regulation of rates, and inflexibility of structure, all contributed to this. In reality, the mid-90s surge in property values has merely brought Australian prices closer to a global pricing standard. Yes, with recent pent up heat, but off a much lower base, than is globally apparent.
As for property prices falling in the future, the days of rapid growth (generally) may be behind us (for now), but falls of 20 -40% will not occur. UBS Warburg doesn't think so (April 2003), the Commonwealth Bank doesn't think so (January 2003), the HIA doesn't think so (March 2003), and JP Morgan is neutral on this.
Nationally, we have >7.7m dwellings (owner-occupied, 2nd homes, and rented), of which ~7.1m dwellings were occupied at end 2001.
Whilst rental vacancy rates have, in the last 18 months moved to 4%+ (vs a historical trend of 2.5 -3%), owner-occupied vacancy rates have fallen to 5% (vs a historical trend of >6%). Slackness in the rental market has been counter-balanced by increasing tightness in the owner-occupied market. In 2003, this trend is continuing, whilst rental vacancy rates are likely to peak during Q3, 2003 before drifting back to the long-term trend line by 2005.
As for renting @2% of current property values, this suggests a rental rate of $150pw (assuming Sydney), or $120pw (assuming Melbourne). I do not know where such rates are possible, except perhaps in the outer suburbs (where property values are much lower), or in share accommodation situations.
As you have suggested cdchi1, people should not be in property without first having done the homework, the preparation, and the planning (business, investment and exit). Property, as it always has been, is not for the fainthearted.
