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Opinion is divided about whether or not Australian property prices are in 'bubble territory'. Regardless of your view the fact remains: if prices head south in 2015, a lot of investors could be in trouble.
Blogger: Richard Symes, CEO, Credit Repair Australia
The Reserve Bank of Australia (RBA) has released the minutes from this month’s policy meeting and it appears that there is a growing concern over soaring housing prices in Australia. The rapid increase in real estate prices over the past 18 months could potentially lead to a property bubble.
The RBA is not alone in hinting that bubble-like conditions could be forming in Australia’s housing market. According to the Basel-based Bank for International Settlements, Australia’s housing market is one of the world's most overvalued, when analysed against traditional metrics such as price against income and rental yield.
That said, not everyone believes that the real estate "sky is falling down" scenario is poised to occur. As news of the RBA’s concerns were released, Federal Treasurer Joe Hockey dismissed the talk of a dangerous surge in property prices, believing that the shortage of housing supply and benign household debt levels have fuelled rumours of a potential housing bubble. The Treasurer labelled the RBA claims as "lazy analysis", because fundamentally we don't have enough supply to meet demand. "That doesn't suggest there's a bubble; there might be a price increase of some substance, but you'd expect the market to react and produce some more housing."
However, if in 2015 the so-called property bubble was to burst, some real estate investors will be hit hard, as rental returns would likely drop yet mortgage repayments remain the same. It is important to know what you should do if meeting mortgage repayments became problematic. It's during those more turbulent circumstances that many people incur black marks on their credit reports, which can prevent future financing for up to seven years! We have three tips that could help:
1. Contact your lender
Too often, people in trouble simply fail to make a repayment or a series of repayments, perhaps thinking they will catch up later. However, a default may be recorded on their credit report as a result. Yet this could have been avoided by one simple phone call to their lender. Most lenders are willing to discuss new arrangements which can make it easier to meet repayments, for example, extending the term of the loan or applying a temporary payment freeze (moratorium) to help you catch-up.
2. Create a budget
So very simple, yet I'm always surprised by the number of people that don't have a clear budget. A budget allows you to analyse where your money is spent. Every purchase is tracked, allowing you to readily see where your major expenses are and identify where your biggest savings can occur. By setting up a budget you will be able to ascertain how much you can afford to repay and ultimately make better financial decisions.
3. Consider refinancing and/or consolidating debts
Getting smarter about your finances will offer you the best chance of maintaining a clean credit report if the property market was to take a turn for the worst. You may have many options around refinancing and could take advantage of more competitive rates in the market. If you are struggling to make repayments, consolidating your debts could ease some of this burden. Having one single repayment for all debts often makes it easier to manage and avoid incurring multiple late payment fees on various debts.
If you are thinking about buying a property, you need to be proactive in managing your finances, and considerate of external shocks that may occur, so you can be prepared and able to ride through the turbulent times.