The excitement around whether we are in a housing bubble, particularly in Sydney and Melbourne, 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.
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There's no housing bubble ... in some places
No, Australia isn't suffering a housing bubble. Sydney and to a lesser extent Melbourne might be, but the whole nation is starting to pay the price for it.
Does that mean you ignore what's happening in Sydney and Melbourne? Of course not. After all, Bureau of Statistics figures last month revealed that in the December quarter alone, across the eight major Australian cities, house prices increased by 8.98 per cent while apartments rose by 4 per cent. These are ridiculous gains on the back of already huge rises in recent years, which is exactly why many experts are talking about a bubble.
This can be paralysing for some investors, frightening for first-home buyers and cause you to consider cashing in your own property.
![As BrickX chief executive, Anthony Millet heads a fintech start-up that offers a different way to invest in residential ...](/web/20170428220216im_/http://www.theage.com.au/content/dam/images/g/s/g/9/d/5/image.related.articleLeadwide.620x349.gvr7e2.png/1493159122470.jpg)
It begs the question, what should you do? I think we need to go back to basics.
Don't spend more than you can afford
This should be obvious but unfortunately for many it's not. 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. This strips us of options. For example, the option to work part-time if you decide to have a child, the option to start a business or the option to take time off to look after a sick parent. If the suburb you want to purchase in is becoming unaffordable, it would be wise to look at nearby suburbs. 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. Or perhaps consider a tree change or a sea change where you can have more options, particularly if you're able to work from home.
Make sure you can afford to repay your mortgage at 8 per cent
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 that is guaranteeing them that information. I believe 8 per cent is a conservative interest rate on which to base your borrowing capability. If you're repaying your mortgage at 8 per cent and interest rates climb to 6 per cent you're not concerned. Sure, you're paying less off your principal but you can still afford further rises and you're still creating a buffer. It's frightening to me that nearly one in four owner-occupiers are paying their loans at interest-only rates. This means they don't have a buffer and they're susceptible to life events and interest rate increases.
Spread your risk
If you are still contemplating investing in property, perhaps to take advantage of negative gearing rules or the ability to purchase in your self-managed super fund (SMSF), 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 city or region drops in price, they're going to be affected more intensely. Instead, consider spreading your risk to other capital cities or regions (having completed your due diligence as to why you'd invest there) and make sure you can afford to repay at a higher interest rate.
Think creatively
If you're concerned you're being priced out of the market, you've done your research, you're happy with pricing your interest rate at 8 per cent and you're prepared to look at other suburbs but you're still nervous, then think creatively. Consider fintech solutions such as BrickX, which allows you to buy partial ownership of residential property, or look at buying a property with friends using structures such as a unit trust and owning the units in an SMSF, or perhaps consider whether you could add a granny flat or take in a long-term lodger instead.
The final word
It's madness to think property prices in Australia will never drop, especially when there's more than one factor that is inflating them. If governments change policy on SMSF borrowing, foreign investment, negative gearing or capital gains tax, we'd see an instant shrinkage so we need to be aware there is more than just population growth fuelling the demand. How we protect ourselves from a possible bubble burst is to follow the points above and purchase wisely so when interest rates start to rise or property prices drop we may not be happy but we're not going to be financially devastated.
Melissa Browne is CEO of accounting firm A&TA; and financial planning firm The Money Barre and author of Fabulous but Broke.