The honeymoon is over for the wannabe investors who thought that...

The honeymoon is over for the wannabe investors who thought that the appreciation they have seen in their properties will continue for some time yet......to them, they believe that property always goes up. Why do they believe that? Because they have only been involved in one boom cycle and fail to understand the fundamentals of what they perceive to be a fail safe investment.

Before I proceed, I want all to take note that I am not saying that property is a bad investment for those with a long term view. One must also recognise when the right time to buy or sell is. If you take a long term view, 15 to 20 years plus, then yes, it can form a part of any ones diversified portfolio. What I am saying is that the gains that have been seen in the last few years are over for some time.

Infact, we have already seen the peak in late 2003 and since then prices have stagnated or dropped. Contrary to what you hear, that is, people saying that their properties have continued to appreciate somewhat since then, most of this talk is based on valuations rather than selling price. These two can be quite different sometimes, particularly in a lackluster market. There are also the cases you hear of "my property has been shelted and not gone down"....it has in real terms.

From my point of view, I think the property cycle should have peaked in 2000-2001. The signs were already there that housing was become unaffordable, as you will see later on. The boom continued for some time yet after that for varying reasons such as:

- people sought a safe haven after the tech crash
- interest rates were perceived to be relatively low
- the first home owners grant kicked in
- everyones next door neighbour and mates were buying
- banks started to lend more than their traditional 80%
- non bank lenders were flourishing and lending up to 100%
- TV started to bombard us with property shows
- real estate agents got smarter and infiltrated the minds of their followers with the "this property will be worth 20% more next month" and "housing has never been more affordable" rubbish

There are many more reasons why housing has appreciated to such ridiculous levels, but the key factor in all the above is that none of them are fundamental in nature......they are all psychological.

If you were to sum it up in one word however, I suppose "greed" is just as good as any other description.

Let's have a look at some of the figures.

I would like to thank malmanu for posting the following link a few days ago:

http://www.demographia.com/dhi-200502.htm

A very interesting read, particularly when comparing with other countries.

The only problem I see with this study is that it is a today's comparison and can't really be compared to figures in the past. This is obviously because of interest rate variations, average weekly earnings and tax rates.

The following analysis is based on net average weekly earnings and interest rates which were current at the time the data was used.

Average Home Loan:
1989 - $45000
1996 - $100000
2000 - $132000
2005 - $210000

Net Average Weekly Earnings:
1989 - $387
1996 - $512
2000 - $610
2005 - $729

Major Bank Interest Rates:
1989 - 18%
1996 - 8%
2000 - 8%
2005 - 7.32%

Loan Term: 25 years

Weekly Repayments:
1989 - $157
1996 - $178
2000 - $235
2005 - $353

Debt Servicing Ratio (ratio of repayments to NAWE):
1989 - 41%
1996 - 35%
2000 - 39%
2005 - 48%

This to me does not look like housing is affardable right now. Notice how in 2000 the debt servicing ratio was closely approaching what it was in 1989. It would have achieved this target by 2001.

It should also be noted that for every 0.25% increase in interest rates the debt servicing ratio increases by 1%.

Fancy paying half your take home pay on the mortgage. I guess it's about lifestyle with flash cars, holidays and a huge mortgage.

Next time someone tells you that property is the best current investment or that housing has never been more affordable, ask them to provide you with data that backs up their claims instead of the hype they believe in. Better still, write down the figures above and shove it in front of the real estate agents face when they are making their spill prior to the auction. Ask them to read it out in front of everyone....what are your chances?....lol

I thought that interest rates were at all time lows? Isn't that what governs affordability?.....lol. As I keep repeating, it is not the nominal interest rates that count, it's the differential that matters along with home loan size.

The housing boom to continue???......not for some time yet I'm afraid.