It is easy to get carried away with the currently favorable property market conditions. Prices are lower now than they have been over the past 3-4 years with some areas dropping as much as 50% of their previous value. Interest rates are at historically low levels. If you are working you are probably doing better now than you have been for quite some time.
Long Term View
When making a property purchase decision one should keep in mind that the currently favorable market conditions are not necessarily going to remain this way indefinitely. Interest rates may come down further during 2013 and property prices are expected to remain stable. Some people will decide to jump into the property market head first and borrow as much as their bank will be prepared to lend them given the current interest rates. However one must always keep in mind that over the life of your home loan rates can go up and come down. If you borrow to the maximum today you may be unable to afford to maintain your home loan repayments when rates go up again…and they will. Rate fluctuation after all is just a matter of time.
Maintaining a conservative outlook is very important. Ask yourself whether you can still afford your home loan if rates return to the mid 8%…where they were only a few years ago. If the answer s no, it would be better to borrow less.
If you have bought your home 3 years ago you may be disappointed at the drop in property values and feel cheated by the fact that you are stuck in a higher mortgage and possible have no opportunity to refinance due to your lack of property equity. This can happen and having a long term view is the key. It may take another 5-10 years but the Australian property market will recover, but it certainly will. Property still represents a viable investment for the future.
Comparing Property Investment with Shares
Some experts trying to compare the performance of Australian share market with the performance of Australian property will claim that share market performs better in the long run. However most fail to take into account the question of gearing.
Buyers of property will generally borrow anywhere from 80% of the purchase price to 95% when buying their home or an investment. However when buying shares, given the volatility in the share market, few take the risk of borrowing.
If you hold a $500,000 property your personal contribution to this purchase may be $100,000. You could of course take your $100,000 and invest it in the share market instead of real-estate. Therefore what you should be comparing is how well your $500,000 house will perform both in terms of rental return and capital growth as compared to $100,000 invested over the same time in the share market.
Such a comparison is more realistic to what actually happens and will yield a very different result to comparing like with like.