Ticking time bomb

Originally posted by sl74 ↑

It really amazes me how people are placing their whole future at risk by purchasing such overpriced property, especially in Sydney.

The amount of debt you have to take on just to buy a house in Sydney is truly terrifying, even from an investment point of view.

This begs the question have people pondered what if Interest Rates rise? The media and real estate agents focus on supply and demand that is true to a certain point, however the biggest factor that determines property prices is Interest Rates.

I have seen this first hand when I was buying my property in 2008 and Interest Rates were almost 9%, people were fearful to bid and I was lucky to purchase a property for the same amount a similar property next door to me sold for in 2001!!

Once the Interest Rate cycle turns, and it will turn, then you will see a wave of defaults and people will be losing their homes. I guess its human nature, money is cheap to borrow so we borrow as much as we can to buy that house we have always wanted or that investment property that gives us a 3% return. Problem is that house is not yours until you have the deeds which could take 30 years or never judging by the way prices are going. So in effect you are renting your home from the bank charged as Interest until it is paid off.

Australia is like an animal in the middle of the road at night looking into a trucks headlights as it approaches, that truck people is the debt truck that will economically pound us and we won't even know what happened.

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I would agree that Sydney prices are up there and units will probably come under pressure in the next year or two .

However , you make a couple of other points that are interesting .

You mentioned that you paid the same price in 2008 that your neighbours paid in 2001 . People forget that Sydney real estate was very flat through that period and I think it's likely to repeat that cycle . Just like the previous period , prices may not increase for another seven years . So , short of some big hiccup , I think it's business as usual . People always over extend themselves . The banks have recently taken steps to reign some of unit stuff . Fortunately that has been done well before there is an uptick in interest rates .

Interest rates are likely to stay low for a while longer so while people have big payments , they shouldn't be under pressure in the short term . Also , for those people like yourself that bought in the last few years , your interest rates have dropped quite a bit . I hope all those people are smart enough to take advantage of that little bonus . There should be many of those people that are actually well ahead of their payment schedule .

If you have bought an apartment in the last few months then you are probably at the top of the cycle . Not the first time it's happened and definitely won't be the last . But , unlike shares where a property is a long term investment for most people , the cycle becomes less important . The important thing is that you have the capacity to make the payments .

That's an interesting statement you make about the bank owning your house . Of course you are right about that , it's nothing new . I hope you haven't just figured that out after buying your house 8 years ago ? Even if you never pay your house off , in the end you will have accumulated wealth provided it has increased in value . If it doesn't increase in value then you have effectively been renting it .

That isn't a new concept .