Monday, May 7, 2012

Perth's Next Property Victims

See article below published in the Australian 2nd May 2012

"We have the house we can't afford"

Is this what is sustaining the Perth property market? 
Mum & Dad investors struggling to hold on to their investment property.
Unsuccessfully attempting  to sell  as they struggle with mortgage payments & CPI increases.
Fingers crossed interest rate cuts will offer some relief or salvation.

If ever anyone needs a sign that now is the time to get out surely this couple is it.

Don't think they are unique there are thousands of investors just like them desperate to offload dud property investments unable to find a "Greater Fool:" to offload it on to. 

Just don't be the fool to catch that falling knife.

Waking at 4am & getting home & 6pm "Living the Ozzie Dream"

Struggling to pay electricity bills & buy kids clothing, this couple are about to get this years Property Insurance ,Shire & Water rates for 2 properties which will amount to around $8,000. Where are they going to find this?

Forced to return to work "Early" after the birth of their second child just to make the mortgage payments.
Yet they show they have their heads in the sand by saying "I wouldn't say we are living week - week"

Now when you read the article below keep in mind this couple has a $480,000 mortgage against their Tapping Property.

They built this house on a $250K block so lets say at the time of their mortgage it was valued at $530K (10% Deposit)

In the Lord's street in Tapping a number of houses have sold recently so we can get a gauge of values in their street. Note I have only selected the 4 x 2 homes on same size block etc to make a fair comparison.

#5 first sold in Oct 2007 for $482K it then sold again Nov 2011 for $490,000

#7 Tried to sell for six months but was taken off the market after they could not get $445,000

#10 First listed for sale at $495K June 2010 it stayed on the market for 15 months before selling in Aug 2011 for $470,000

#14 First listed @ $520K March 2011 before sells @ $440,000 October 2011

What the Lord's don't realise is that they are trapped paying off a loan of $480,000 on a house that is worth around $450,000 (FYI #14 is opposite their home & sold for $440k Oct 2011)


  1. Interesting. Assuming a 6.1% interest rate (that's if the bank passes on "most" of the cut), their repayments are $4751 per month - assuming a 30 year mortgage. Their combined post tax income (I assume neither has a HECS debt) is $122,500. So the repayments are 46.5% of their nett income! BUT, as the Balga house is an investment property, you'd assume that it is rented out. Using the 30% rule, the "affordability limit" would be $36,750 per year, or $3062.50 per month. That is what they'd be paying on a debt of $505,368 @ 6.1% interest. So if they can offload the Balga house for $279k, they'd bring their housing costs down to a manageable level. Assuming Mrs Lord doesn't have anymore kids until Mr's pay rises appreciably.

    But aren't we in the midst of a rental crisis which is forcing rents up so far and fast that people will be falling over themselves to buy an investment property for the rental returns? Didn't Mike and others tell us that most rentals are not "almost positively geared"? If the rent on the Balga house covered the mortgage, even closely, they wouldn't now be in housing stress, as the debt against the Tapping home should be within their means to cover without hardship. I think it shows that rents, at least in areas like Balga, aren't the great path to financial independence, in the short to medium term at least, that some try to make them out to be.

  2. Bought in Balga 6 years ago for $135k. They could probably have been mortgage free had they stayed. Not the greatest of areas but they could have been reaping the benefits now.

  3. Basically they mortgaged their existing place, and used that money as the deposit on the new house. This is how some people claim to put 40% deposits on investment properties, and so claim they're "positively geared" as only 60% of the purchase price is debt secured against the property in question. It is also a case that this kind of "investment" really does require significant capital gains, as the buyer needs hefty increases in equity to be able to borrow the additional sums needed. But it's a bit of a smoke and mirrors trick to pretend that they're "positively geared" on their new purchase, as all it does is increase the debt and interest on their existing portfolio. No wonder these people are so desperate to talk up the market, and grasp at any straws to suggest it's "gunna boom".

  4. Perhaps one of those on the Perth Now site predicting a "housing price boom" will buy the Balga house. They're sure to get a great deal from the Lord's who are keen to paydown some of their debt.

  5. I hope they're not claiming 100% of the interest on the $304k loan as a tax deduction, otherwise they could be in for a nasty bill if they're ever audited.

  6. DMc, why not? Our Travs has 100% offset his property loans (so he tells us) but apparently is claiming negative gearing! Although he also says his property is all positively geared. Mike also seems to hint at that, although in his case it seems that he claims "positive gearing" on the basis that he has a deposit of 40% on his properties! Of course he neglects to say that the other 40% is by borrowing against the rest of his portfolio, leaving 100% borrowed funds invested. But where does that leave them in their taxation reconciliations?

    1. Why would you want to owe $480k on the family home. Not many tax benefits to this?

    2. Anonymous, I'm only going by what Mike says about himself. He claims that he earns only about $74k per year. Yet he buys at least one property per year (in 2008 he bought two!). He then brags how they're just about all "positively geared" and then it emerged that he only borrowed 60% of the principle, with a 40% deposit! Now how do you think a man manages to buy a new property each year with a 40% deposit when he only has a salary of $74k? Remember most of his portfolio was acquired since 2007, so it isn't as if he bought "cheap" places a decade back and is now getting rents several times greater than the repayments to use his rental income as the source to save up a 40% deposit!

    3. To me it's pretty clear that Mike "remortgages", or draws down the equity (whichever terminology you prefer) on his existing houses, including the main residence, to get the 40% deposit. You need to remember that in order to get the low doc loan (which he'd need since his overall mortgage payments would be way in excess of his actual income from being a "mid-level public servant" as he describes himself), the bank will only loan you 60% LVR, which means that only 60% of the purchase price is a debt secured against that particular property. To get the remainder, Mike would surely have to borrow against the "equity" in his other properties. His entire strategy is dependent upon his properties constantly being revalued upwards. This bloke has also "advised" taking out "interest only loans", so you're not "tied into" making particular principle payments. It's actually a "strategy" that used to be included in the "how to" books on property investment, and is entirely based upon capital gains - the rents and negative gearing merely "help" to defray the investment cost. It's supposed to work thus: you buy a place worth $100k with a $20k deposit. In 1 year, the value is up 10%, so it's now worth $110k. But as the debt is still the same, your "equity" is now $30k! So you've had a 50% increase in the value of your investment, not including the costs such as interest. So you don't pay off the principle as it is more of your money you're chucking in, and it would reduce the "performance" of the investment. Either you sell the property when it's made enough money, and just keep the "equity", or you pay it off by selling another investment property, or eventually the rents rise enough to exceed the negative gearing ratio - in which case you borrow more and buy another property. And so it goes. It's fairly clear that this is what Mike does (or says he does), and the same probably goes for many of the Perth Now "property gurus" like Dogman, Matthew, and perhaps even Blonde Girl. The concept is that you build up a lot of assets, and then you're ready to get off the merry-go-round, you sell a few of them, pay down your debts, and have a huge pool of cash and maybe rents to live on. BUT the whole thing depends upon steadily rising property values. So they are happy to talk up the market, support stories telling of "shortages" etc and, of course, oppose things like the government releasing sufficient amounts of new land (with the needed infrastructure like rail connections) to lower the exorbitant cost of land in Perth - or enacting policies on developers like Satterley and Peet and Co to prevent them sitting on land and dripfeeding the market. The State could, for example, require the developers to make all blocks available for sale within 5 years or have to sell them back to the government at cost price. The truth is that this is the sort of thing people like Mike would dread. It's called being overcommitted. Still, government policy has favoured such people for the last decade at least, and probably much longer if the truth be known. So why wouldn't they think the authorities will come to the rescue now? I'm just amazed that we get "lefties" whinging on about "evil billionaires" like Gina Rinehart who have little effect on most people's lives, and how the MRRT is needed to "tax them" (even though it's mining projects, not individuals like Rinehart who'll pay, and construction workers, designers etc who'll be hurt with reduced job opportunities), yet they're quite happy for the property racket, which has priced many out of one of the necessities of life to not be "hit" with such taxation. Go figure.

    4. Anyway, it’s a question of “managing debts”. If the asset value rises faster than the debt loading, all is well, but such an investor needs significant capital gains – rising rents won’t cut it. The investors who are doing well out of rents are those who bought most of their properties prior to the boom and have little debt. I notice Mike is, again, carping on about Landgate and the “rise” since September 2011. What he doesn’t say is that those figures he quotes shows the median has been steady pretty much since November. That’s 6 months of 0% growth, with a couple of dips and recoveries. But I think we can see why he’s so desperate to paint a rosy picture, even to the point of being misleading. It is possible to suggest that the decline may have abated, but it certainly isn’t the “boom” he talks of.

      Travs himself is a bit more of an enigma. But he talks up the market in the Mike manner (although he uses far fewer facts, and just tells us how well off he is, and how it’s “all about the rents” until he has a “whiff” of capital gains, in which case it’s suddenly all about that. I think it’s pretty clear that Travs, in the past at least, used to “draw down equity” to buy new property – but according to him he isn’t buying anymore, just wandering around aimlessly with his “camera and clipboard”! The point is that unless you’ve got a solid outside income, either from a well paid job/career, or a successful business, and you’re building wealth largely off of building a property portfolio, the “portfolio” is built by continually borrowing against any increase in the value of your existing stock. I’m pretty sure that Travs did this at some point, if he isn’t completely full of it that is!

  7. I'm not going to comment on Travs or Mike - I don't know their full situations. But for the subjects of the article above, their borrowings secured against the rental property are greater than the original purchase price (even if fees and stamp duty, etc. are included). This implies that at least some of the borrowings secured against the rental were used to buy their new home; interest due to that portion of the loan is not tax deductible.

    An example from the ATO website which almost exactly matches this situation:

    Example: Interest incurred on a mortgage for a new home
    Zac and Lucy take out a $400,000 loan secured against their existing property to purchase a new home on the other side of town.
    Rather than sell their previous home they decide to rent it out.
    They have a mortgage of $25,000 remaining on their existing home which is added to the $400,000 loan under a loan facility with sub-accounts - that is, the two loans are managed separately but are secured by the one property.
    Zac and Lucy can claim an interest deduction against the $25,000 loan for their previous home, as it is now rented out.
    They cannot claim an interest deduction against the $400,000 loan used to purchase their new home as it is not being used to produce income even though the loan is secured against their rental property.

  8. Do you monitor older posts?

  9. Love the blog mate... Whens the next update ?

  10. when is the next blog man.

  11. This comment has been removed by a blog administrator.

  12. Look out NF - this gutless wonder Matthew has set up his own 'property' website and blog. He has turned into the troll and hater he claims to defend. What a joke. There is nothing on there at all of any substance in relation to Perth property. It is just a bunch of property trolls all crawling up each others backside. Check it out. It is all the sad and lonely trolls from PerthNow. They get stuck into you but are even worse. Hypocrites.

    1. where is this page? Prices have to fall, who can afford these exorbitent costs for a roof? Not anyone I know. Not Fooled you are spot on. Might rise this year, might rise next year, but the balance must be restored soon

  13. Good old Matthew from Wilson. Such diatribe and bad language to match the bogan address and living standards. Your folks much be real proud. White trash.