A few years ago I was having a discussion about real estate with a work colleague. I ventured the opinion that it just didn't seem sustainable for house prices to continue to rise, year after year, at rates higher than inflation, without something bad happening.
How exactly are you going to pay for your house when it costs 7 times your yearly earnings instead of 3? Yes, you may get higher wages or have 2 incomes, but eventually you have to hit a peak, where prices either stagnate or decline.
While this seemed to make sense, my friend insisted that housing always goes up and that if you stay in the market you're sure to make a profit. Maybe she was advising some of those bankers in the USA who said "well housing has always gone up, therefore it's ALWAYS going to go up".
Click on the link to read a very interesting article about the asset bubble in the United States and how the problems that have occurred so far are merely the first act, rather than the conclusion. While potentially scary stuff, there's also lots of positives. After all, if prices come back to realistic levels it suddenly allows lots of people back into the market, people who were priced out by speculators, investors and sheep following the flock baaing about "you have to buy before it's too late".
I'm not sure that things are quite so bad in Australia, although there lots of people with lots of debt (credit cards, store credit, cars) that is basically worthless. If something goes down in value over time, whether it be an LCD TV or a new Hyundai than it's not an asset, it's a liability, so if you're writing these things down on your list of assets, dream on. An item is not worth what you paid for it, it's worth what you can sell it for, that's how you determine value. So all those people with lots of debt and no assets are in trouble.
Also in trouble are those people with highly leveraged assets (investment properties and the like), however, if they can hang on in the long term they should be alright. We still have a housing and a rental shortage and low interest rates make it easier to meet payments.
The big problem in Australian investment real estate, the 500 pound gorilla in the room, is in fact capital gain. All those investors who have their properties negatively geared (recieve a tax benefit) in the hopes of making their money back through capital gain in a couple of years, are in deep do-do. I would suggest there'll be no appreciable rises in the market for quite a while and potentially a lot more falls. When those investors realize the tax hole they've dug themselves into they may try and divest themselves of their properties, further lowering prices.
It's all very interesting, for those who care about such things.
For those who don't, here's a funny picture.
cheers
Harry
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