Before the GFC, most Australians were living the high life with debt-laden credit cards and highly leveraged investments. As the mining boom spread an extraordinary level of wealth amongst the masses, more people were indulging in expensive cars, bigger houses and all the finer things in life.
Then it all changed. The GFC happened and our attitude to debt essentially did a 360 overnight.
By John McGrath
Over the past five years, Australians have been very focused on paying off debt. In terms of home loans, many people have continued repaying the same amount despite the reduction in interest rates. So much so that the Reserve Bank estimates that borrowers are now about 21 months ahead with their repayments on their loans, creating a lot of new equity.
So where to from here? Are we going to remain savers or will we start spending again?
Now that we’re starting to see a change in the global economy, combined with record low interest rates and a major share market surge, the signs are that Australians are starting to spend again – cautiously.
While it’s important not to forget the lessons of the GFC, I think we have a great opportunity before us to invest and build wealth for the future in the property market.
The old tradition of working hard all your life to pay off your one home has passed. People are realising that in order to live comfortably in retirement – a far longer period of life than ever before, we need to invest earlier in our lives to produce future wealth.
And what a time to do it! We’re already passed the bottom of the cycle in major markets like Sydney and Brisbane, so time is running out to take advantage of good value.
Many investors are realising that today’s market represents the perfect investor climate. Vacancy rates are low, rents are strong, affordability is good and you can lock in a home loan below 5% for two years or below 6% for up to 5 years or more. The country’s biggest mortgage broker, AFG reports that just under 30% of borrowers in March selected a fixed loan – the highest number since AFG began producing its monthly index 10 years ago.
AFG also reports that an extraordinary 47.4% of new borrowers in NSW in March were investors. But interestingly, they’re not necessarily using the equity they’ve gained through paying down debt to purchase today.
Alan Hemmings, the new General Manager of our mortgage broking division, Oxygen Home Loans, says the trend in buying through self-managed super may explain why such a high level of investor activity is not making a dent in people’s personal equity. This is great – but if people were to use both their super and their extra equity today, they could purchase 2 or 3 properties and really put themselves in front, as long as the repayments were affordable.
My advice? Don’t miss a fantastic opportunity to generate future wealth because you got burned in the GFC. Make sensible decisions and definitely keep a buffer in your budget for future interest rate rises, but go into the market with confidence today.
By John McGrath
