HOW TO PROTECT YOURSELF
FROM A PROPERTY BUBBLE
Written by Melissa Browne
The excitement around whether we are in a housing bubble is reaching fever pitch. With weekend auction outcomes listed like horse racing results and monthly house prices continuing to climb, it’s all contributing to mounting tension around when and if the bubble is going to burst.
But here’s the thing, picking whether we are in a bubble, how big the bubble is and when it might eventually pop is akin to picking who will win race two at Nowra this weekend. We can read the form and we can have an educated opinion but unless Winx takes the track, we can’t be sure of the result.
Which can be paralysing for some investors, frightening for first home buyers and cause you to consider cashing in your own property. Which is why I think we need to go back to basics.
Don’t spend more than you can afford.
This should be obvious but unfortunately it’s not. That’s because we can become caught up in the hype and we’re so desperate to purchase that we push the limit of what we’re able to comfortably repay which strips us of options. Or consider renting in the suburb of your choice (where it’s sometimes cheaper than a mortgage repayment) and purchasing an investment property in a suburb you can afford instead.
Make sure you can afford to repay your mortgage at 8 percent.
When I suggest this to clients they often scoff and tell me interest rates will never reach 8 per cent again. Really? I’d love access to their crystal ball which is guaranteeing them that information! Whereas I believe 8 per cent is a conservative interest rate to base your borrowing capability. It’s the minimum rate most of us should be basing our mortgage repayments on.
Spread your risk.
If you are still contemplating investing in property (which is many of us) and if you want to take advantage of negative gearing rules or the ability to purchase in your Self Managed Superannuation Fund then consider spreading your risk. Too many people buy where they know which is around the suburbs in which they live. This means if their region drops in price then they’re going to be affected more intensely.
Consider fintech solutions such as BrickX which allows you to buy bricks in houses, look at purchasing a property with friends using structures such as a Unit Trust and owning the Units in a Self Managed Super Fund or perhaps consider whether you could add a granny flat or take in a long term lodger instead.
Property can still be a great long term investment as part of a diversified portfolio. It’s simply important to understand the risks, prepare for a longer time frame and make sure you can continue to hold if interest rates go up.
About the Author: Melissa Browne is CEO of accounting firm A&TA and financial planning firm The Money Barre. Her latest book Unf*ck your Finances released in Jan 2018.
You can contact Melissa on her email or learn more about A&TA or The Money Barre.