How to protect yourself from the housing bubble
All the experts say we are now in a housing bubble.
Even the RBA say were in a housing bubble, and we need to be careful should property prices start to drop.
Whether we are in a housing bubble or not, how do you protect yourself if the housing bubble bursts?
Prices won’t always go up
It’s madness to think property prices in Australia will always go up. Banks have already made changes to property investor loans and we have seen a slow-down in the property market over the past few weeks.
And if governments change policy on foreign investment, negative gearing or capital gains tax, we will probably see a further slow-down in the property market.
Also, over the past few months bank interest rates have started to rise. Both fixed and variable interest rates on home loans, investment loans and business loans have all increased.
What’s happening in WA?
In Western Australia property prices have decreased while unemployment has increased at the same time. Many people are now struggling to stay on top of their finances.
Could this be the future of Sydney, Brisbane and Melbourne?
WA was once a booming resources hub, with thousands moving to areas around Perth from interstate and overseas to work. It had one of the strongest economies in the nation with housing prices on par and even higher than Sydney and Melbourne in the early 2000s.
Fast forward to 2017 and WA now has the weakest economy in the country, with a high unemployment rate and a collapsing property market.
What does this mean for you?
It’s important you put measures in-place now so you stay on top of your finances when interest rates increase further, or when property prices start to drop. Here’s some important tips for you.
Don’t spend more than you can afford
This should be obvious but unfortunately for many it’s not.
We can become caught up in the property hype. Sometimes we’re so desperate to purchase a property that we push the limit of what we’re able to comfortably repay. This strips us of options when things change in the future.
For example, the option to work part-time if you decide to have a child, the option to start a business, or the option to take time-off to look after a sick parent.
Also if the suburb you want to purchase in is becoming unaffordable, it would be wise to look at nearby suburbs. Or, consider renting in the suburb of your choice, and purchase an investment property in a suburb you can afford instead.
Repay your mortgage at 8 per cent
It’s best to use an interest rate of 8 per cent when calculating your borrowing capacity and mortgage repayments. If you’re repaying your mortgage at 8 per cent and interest rates climb to 6 per cent then you’re not concerned.
Sure, you’re paying less off your principal but you can still afford further rises and you’re still creating a buffer.
The buffer sits on your mortgage as payments in advance. You can use this when things change so you stay on top of your finances and not worry about the future.
Spread your risk
If you are still contemplating investing in property then consider spreading your risk.
Too many people buy where they know, which is usually around the suburbs in which they live. This means if their city or region drops in price, they’re going to be affected more.
Instead, consider spreading your risk to other capital cities or regions. And make sure you can afford to repay at the higher interest rate of 8 per cent. It’s always important to do your due diligence as to why you’d invest the area. A Buyers Agent can assist you with this.
How we help you
At Craig Tracey lending we go a few steps further to help you stay on top of your finances. We take time to listen and understand you and then we make sure your protected should property prices drop or interest rates go up.
We give you all the information you need in simple language that is easy to understand – we call it your “Borrowing Plan”. Your borrowing plan is personalised to your specific needs and shows you how to stay on top of your finances and not worry about the future.
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