Finance advice

How will household debt and mortgage stress affect the investor?

jarrad tnThe ABS recently released a report entitled, “Trends in Household Debt.” It told how much household debt has increased in the last 25 years and provided some interesting comparisons and ratios. Here are the numbers followed by what they could mean to the property investor.

Blogger: Jarrad Mahon, Investors Edge Real Estate

Household Debt
Total household debt, at the end of 2013, was calculated at $1.84 trillion or $79,000 for every Australian citizen, adult or child. The rate of household debt rose before the Global Financial Crisis (GFC) but is now rising much more slowly, at 2% per year. This compares to nearly 10% per year from 2001 to 2007.

Debt to Asset Ratio
Household debt is currently at 20% of household assets, a slight drop from 21% in 2011. For comparison, this number was only 11% in September, 1988.

Debt to Income Ratio
The 2013 debt to income ratio was 180%. The good news is that debt and income are growing at a near-equal pace and have been since the GFC hit.

Interest to Income Ratio
In 1959, Australians had a 3% interest to income ratio. In 2008, the number was 12%. Now, it has dropped somewhat to 7%.

Debt Sustainability Factors
Five factors are extremely important when deciding whether current debt levels are sustainable. Here is a look at all five.

1. Interest Rates
Since 75% of all household debt is for mortgages, that is the most important number. Currently, thanks to RBA interest cuts, home loans are being written at around 5% interest rates. In December of 1990, the number was closer to 17%. We don’t expect them to stay at 5% for much longer.

2. Unemployment Rate
Currently, the unemployment rate is around 6%. It is expected to rise to 6.25% by the middle of 2015, according to the RBA.

3. Real Household Income
This is basically household income adjusted for inflation. It actually rose from mid-2007 to 2012 and has gone back down a little since then. If the Productivity Commission and the Australian Treasury are correct, growth should be slower over the next ten years.

4. Real Household Wealth
This number was at a record high before the GFC took a chunk out of so many people. But at $323,000 per person at the end of 2013, it is close to reaching record levels again.

5. Property Values
At the end of December 2013, the average property value in Australia was $539,400 for an all-time high. Expect more of the same as it is still rising.

How These Statistics Affect Property Investors
We are concerned that the amount of household debt is causing mortgage stress for so many, especially those that overcommit as first home buyers. We think that most property investors are remembering the lessons the GFC taught us and are not over extending, only starting projects they can finish and keeping a savings or equity buffer.

However, whenever interest rates start to rise again we will likely see more homes on the market and a very good opportunity for property investors.

No matter what the future holds, it can be said with relative certainty that anyone who purchases an investment property now and holds it for at least two property cycles will be happy they did.


About Jarrad Mahon
jarrad

Jarrad is the director of Investors Edge Real Estate.

Jarrad thrives on helping hundreds of investors every year formulate a clear plan to get the best returns from their PerthPerth, TAS Perth, WA property. This requires a carefully thought out and innovative approach to understand your situation and help you to make the right move at the right time.

His renowned personalised "Property Success Plan" takes you step by step through how to make thousands of extra dollars and avoid the costly mistakes that Jarrad has learnt the hard way by investing himself all around Australia.

Over the last five years he has used his engineering background to build and refine a unique property management, sales & investing process that is sure to impress while getting you real results.

A sales and marketing expert, Jarrad combines the latest technology and cutting edge sales strategies to sell homes across the whole of Perth metro area.

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  ["title"]=>
  string(72) "Mortgages in a tighter lending economy and why Brisbane is a good option"
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Tune in to the latest episode of Property Showcase, the podcast with the inside track on the products and businesses that will help turbocharge your portfolio, maximise returns and make your overall investment experience seamless and stress-free!

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To hear more about these services, make sure to tune in to this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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Son Pham is the accredited Head of Mortgages at Rethink Financing\/Rethink Investing. He has over 6 years\u2019 experience writing loans, over 12 years in the wealth management industry working for the likes of CBA, AMP and private practice and he is also a licenced financial planner (AFSL 326450). He has multiple investment properties that are cash flow positive which help pay his mortgage on his home and fund his lifestyle.<\/p>\r\n

Son is able to write all types of residential and commercial property loans.<\/p>\r\n

In this episode of Property Showcase, head of mortgages at Rethink investing Son Pham joins host Tim Neary to unpack how an investor should approach getting a mortgage in place with banks tightening down on serviceability.<\/p>\r\n

Hear from\u00a0Son\u00a0about:\u00a0<\/p>\r\n

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  • The pitfalls that he has seen people get into<\/li>\r\n
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    In this episode of Property Showcase, director of investment services for Open Corp Michael Beresford,\u00a0joins\u00a0editor of Real Estate, Tim Neary to share why he disagrees that the cooling market means that the best times are behind us.<\/p>\r\n

    In this episode, hear from\u00a0Michael\u00a0about:\u00a0<\/p>\r\n

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Mortgages in a tighter lending economy and why Brisbane is a good option
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Will Magee has had ambitions to enter into the Australian property market for quite some time, but it has been more than just finances holding him back.  Having been granted permanent residency just two weeks ago, Will is wasting no time and is now in the process of signing papers and finding his first investment property.

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In this episode of the Smart Property Investment Show, Will joins host Phil Tarrant to share why he is purchasing his first property in partnership with his brother, discuss the complications that can arise from such a strategy, and unpack the ongoing plan for building a joint property portfolio with his brother.

Will will also share how they approached saving for their first property, why he is taking out the mortgage in his name exclusively, and share their savings plan for the year ahead.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

From property in Australia to a ski lodge in Japan
Mortgage Trusts, an alternative first step for property investors
Should a real estate title be in one person’s name only?

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A property investment plan years in the making
object(stdClass)#1203 (52) {
  ["id"]=>
  string(5) "18287"
  ["title"]=>
  string(75) "Regional Victoria showing up Melbourne in price performance, new data finds"
  ["alias"]=>
  string(74) "regional-victoria-showing-up-melbourne-in-price-performance-new-data-finds"
  ["introtext"]=>
  string(139) "

Median house prices in regional Victoria outperformed that of Melbourne in the June quarter, the latest REIV figures reveal. 

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Median house prices in the regions rose 4.0 per cent to $419,500 but in Melbourne they dipped by 0.6 of a percentage point to $840,000.

The result in Melbourne was due to a 0.8 of a percentage point fall in prices achieved at auction; this was despite a lift of 2.3 per cent in private sales.

Inner Melbourne suffered due to auction prices, where median prices fell by 4.9 per cent to $1,459,000 but it was middle Melbourne that was hardest hit, with a 5.4 per cent drop to $974,500.

Outer Melbourne had a good quarter with the median rising by 0.5 of a percentage point to $681,000.

Apartment prices in regional Victoria grew by 3.7 per cent to $304,500 while the metro media was up by 0.5 of a percentage point to $604,000.

REIV President Richard Simpson said that despite fewer sales, many sectors of the market were performing well.

“2017 was a bumper year and while the trendline has flattened, despite the fall in median house prices in the June quarter, median prices are still up this calendar year for both houses and units, in Melbourne and in the regions,” Mr Simpson said. 

In particular there was been strong growth in regional centres which is probably due to the first-home buyers’ concessions said Mr Simpsons.

“The first-home buyers’ concession has been a boon for regional areas. A new entrant to the property market buying a house at the regional median will pay no stamp duty, while a first home buyer of an apartment in Melbourne at the median price would pay stamp duty of nearly $25,000,” he said.

Mr Simpson said that more prospective buyers are looking towards regional Victoria which is also having an effect in Melbourne.

“Melbourne’s outer perimeter continues to grow. Small increases in the June quarter mean that the median prices for both houses and units have risen over 10.5 per cent from a year ago.

Mr Simpson said moving forward that vendors need more realistic expectations as the highs of 2017 are now over.

“Negative chatter about the future of the sector coupled with stronger lending controls by financial institutions has created some uncertainty and vendors need to be realistic with their price expectations,” Mr Simpson said.

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Regional Victoria showing up Melbourne in price performance, new data finds

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