property - very scary stuff!, page-41

re: property -even homer simson has one Well I am all for making money from property, but be very lucky to make money now.
I sold my last property early last year and have saved a bunch, not only from falling prices but its heaps cheaper to rent than buy, I hope to buy again when the talk around dinner tables is about how bad an investment property is, dont know how long this will take, maybe 12 months or maybe 4 years but Im happy to wait and will save a bucketload in the meantime.

Just a bit of maths...

If you're a typical investor then you have a 90% or even 95% mortgage. Certainly at least 80%.

Now, if you bought near the peak then in Sydney you paid typically about $580K. The value today is about $495K according to recent media reports and what is being said is that they will come down another 10$ OVER THE NEXT YEAR WITH ONGOING FALLS AFTER THAT. So by this time next year that property is worth a bit under $450K with more falls to come.

But at 90% the original mortgage was $522K and the interest on that is around $35000 per year depending on the bank and type of loan. So over the past two years you have paid $70,000 in interest on an asset that has lost about $85,000 in value. The rent received would be typically about half the interest payment so all up you have a loss of capital plus interest (minus rent) of about $120,000 so far. And with more falls to come you're likely to lose another $85,000 or so over the next 12 months.

The big problem here, of course, is that you only had a 10% ($58,000) deposit to start with. ALL of that money has now been lost and the losses are continuing to mount. With rent insufficient to cover mortgage payments these investors are depending on their day jobs to pay the mortgage. All it takes is loss of that job and the banks WILL foreclose thus forcing a sale at a massive loss. With losses in 12 months time in the order of $200,000 in this example and the fact that many investors have multiple properties it would seem that bankruptcy is the likely outcome.

Even if you bought at half the peak price, $290K, by this time next year you will have lost about 70% of your profits to interest and falling value (after taking rent into account) and more losses are expected for a few years to come. And that's without interest rate rises. And what about repairs to the property - anyone who has owned a house knows that sooner or later something needs fixing. And what about times when there are no tennants? And insurance, rates...

Due to the leverage (borrowed money) and interest paid plus the costs of actually owning the house the falls in value are likely to be a fatal blow to many. Even owner-occupiers are literally trapped with more debt than the house is worth and (possibly) rising interest rates on that debt.