Why a Property Crash isn’t Possible…It’s Inevitable

Imagine being a 30-something Melbournian. You’re married. You live in a nice central part of Melbourne. You’re currently renting. You have a young baby, or maybe two.  You’re in a high paying job. You did have two incomes but your wife (partner) is on maternity leave, so that’s less now each month.

As you’re just starting a family, you want to buy your own home. That’s what your parents did when you were new to the world. You grandparents did the same when your parents were babies too. There’s no reason why you shouldn’t have the opportunity to do the same.

Except you can’t afford a house anywhere near where you work or where your life currently exists. Instead you have to hike out to the far reaches of outer suburban Melbourne just to find something even remotely ‘affordable’.

But you do have a job that ‘pays good money’. That means in terms of servicing a home loan you’ll be OK — or at least you should be OK. Again, it’s all dependent on finding an affordable house.

You’re smart with your money. And initially you and your wife decide that you’ll set a budget of around $600,000 to find a home. You go to a few auctions around Melbourne. These auctions have either advertised the house around your budget, or the agent has said they’re in your price range when you call.

At the auction you quickly learn you’re just part of the road furniture. You’re only there to make up the numbers.

When it’s too expensive just increase your budget by 33%

The truth (something real estate agents rarely give) is that the house will sell for around 33% more than your budget. Of course the agents can just dismiss this ‘unexpected’ result as a bidding war. But the reality is the reserve was never around $600,000. And at the $800,000 price it sells for, you were out before you even got in.

After having this situation repeat itself several times you become disillusioned with the property market. Your only solution is to up the ante. You go back to the bank and set a new budget — this time at $800,000.

Let’s do some basic figures on what this really means.

At $600,000 you’d typically need a 10% deposit. That’s $60,000. Then you’ll have to pay a transfer fee and stamp duty. As a first homebuyer that adds up to $17,145.

Plus a few more legal and mortgage fees, and you’re all in for around $78,000.

If you rise to $800,000 it’s a different story. $80,000 in deposit. A whopping $43,070 in stamp duty plus the other fees. All up you’re looking at around $126,000 deposit.

Now that’s just to buy your first home. $126,000 to find a place that’s got more than two bedrooms, a bit of outside space and a semi-central location. And even then that’s all your money gone (if you even have $126,000), and you’re still in the hole to the bank for $720,000 for the next 30–35 years.

Many people they look at this situation and wonder why the property market is so ridiculous. Well the story above is a real one. Someone I personally know (I won’t name them) told me this is the situation they’re in.

As said, ‘If we even find somewhere and get in and get a mortgage, then it’s just heads down and struggle on.

This is the unfortunate situation young prospective home buyers find themselves in. But it could get a lot better for everyone…and then get devastatingly worse.

You would think they’d learn

This week Andrew Broad, Member for Mallee, made one of the most idiotic suggestions I’ve ever heard. As reported by the ABC Online,

Andrew Broad, the Member for Mallee, wants banks to forgo a deposit from first-home buyers who have a three-year rental history.

He argued if the mortgage repayments were roughly the same as the buyer’s rent, the bank should not need security.

Sounds like a grand idea right? If you can pay your rent consistently, then surely you can pay your mortgage. Makes perfect sense. Except for one glaring problem. Mr. Broad clearly has no concept of how markets work.

He’s probably one of those deluded people who assume that property always goes up in value. And that offering 0% deposit loans will solve the problems for first homeowners.

Well there you go. Properties for all.

Slight problem though. 0% deposits can actually lead to negative equity in a property. That means the value of the property is less than the value of the loan against it.

That’s a situation that banks aren’t comfortable with. They used to be, back in the glory days. Back when the economy was ticking along. Back when Australia was riding high on a commodities boom. Back before structured mortgage debt crippled the global banking system.

This isn’t the first instance of 0% loans. The UK banks handed them out for fun during the turn of the century. It was great at the time, when everyone thought things couldn’t ever get bad. And then things got bad.

When the debt crisis hit in 2008/09 banks realised that they were holding more debt than the values of the properties they were held against.

This was due to property prices falling 16.2% in 2008. And by early 2009 property prices were 20% down from their 2007 levels. People were forced to sell — it sent property prices into a black hole.

You’d think that those in power would learn from these examples. But clearly Mr. Broad struggles to see further than the back streets of Mallee.

The crash isn’t possible, it’s inevitable

Imagine if the property prices in Australia were to fall by 20%. Imagine what it would be like if you have bought a house in an overheated market, say for $800,000. Then only one year later you see it worth just $640,000.

And to make things worse, you still held a $720,000 mortgage, which the bank wanted back. They can force you to sell, or repossess the house. You’re now out of pocket your initial $126,000, and have nothing to show for it.

Sounds horrible. But that’s the situation real people found themselves in during 2008/09.

Australians think it won’t happen in the ‘lucky country’. But the environment is building to a point where not only is it possible, but inevitable. You think I’m joking? Well tomorrow I’ll explain exactly why the Aussie property market is building to an almighty collapse.

This won’t impact homeowners in their 60s and 70s too much. But it will be devastating to anyone that’s a recent first homebuyer. And it will be even worse for those who buy in the lead up to this impending crash.

Regards,
Sam


Sam Volkering is an Editor for Money Morning and is small-cap, cryptocurrency and technology expert.

He’s not interested in boring blue chip stocks. He’s after explosive investments; companies whose shares trade for cents on the dollar, cryptocurrencies that can deliver life-changing returns. He looks for the ‘edge of the bell curve’ opportunities that are often shunned by those in the financial services industry.

If you’d like to learn about the specific investments Sam is recommending in either small-cap stocks or cryptocurrencies, take a 30-day trial of his small-cap investment advisory Australian Small-Cap Investigator here, or a 30-day trial of his industry leading cryptocurrency service, Sam Volkering’s Secret Crypto Network here.

But that’s not where Sam’s talents end. Sam specialises in finding new, cutting edge tech and translating that research into how the future will look — and where the opportunities lie. It’s his job to trawl the world to find, analyse, research and recommend investments in the world’s most revolutionary companies.

He recommends the best ones he finds in his premium investment service, Revolutionary Tech Investor. Sam goes to the lengths of the globe and works 24/7 to get these opportunities to you before the mainstream catches on. Click here to take a 30-day no-obligation trial of Revolutionary Tech Investor today.

Websites and financial e-letters Sam writes for:


Money Morning Australia