The husband (like all good dominant alpha males with a strong case of denial) advised that given that they had not accumulated anything other than their house, would be able to sell that to fund their retirement.

This always concerns me when I hear it for a couple of reasons:

1)      Yes you can sell your house – but you will still need to live somewhere and very few people want to move from where they are comfortable to a smaller house in a less affluent suburb;

2)      There is a social stigma to doing this – “It doesn’t bother me,” they say – 10 years before they have to, but when they do have to, they cannot move.  Actually it also amazes me when people say they can live quite frugally if they have to but have a house full of plasma televisions;

3)      Downsizing for many people is a smaller property – but usually at the same price; and

4)      I am yet to actually witness a family selling their house to fund their retirement – have seen a few have to sell their house because they hit hard times or the breadwinner died, but that is a story for another day.

So it is with interest that I again read that market commentators say that our housing market is one of the 2 most overvalued in the world and needs to fall by 42% to reach its long term price ratio compared with family incomes – I have mentioned this a number of times in the past, see the following link : http://www.thebfsreport.com.au/featured/house-prices-again-is-it-a-bubble-or-not/

Or see also http://www.thebfsreport.com.au/retirement-planning/your-house-or-your-superannuation/

But I do think that Australians need to be aware of housing trends, particularly if they do think it will be the mainstay of their retirement income – have a look at this article, the link is attached and let me know what you think: http://www.theaustralian.com.au/business/housing-market-a-time-bomb-says-investment-legend/story-e6frg8zx-1225880119320

PS – The couple won’t be clients; they didn’t pass my screening tests.

If you do have any questions about this or would like to know more about us, please email me at paul@bronsonfs.com.au or visit us at www.bronsonfs.com.au

Please Note:

This publication has been prepared to provide you with general information only. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision, you need to consider (with or without the assistance of an adviser) whether this information is appropriate to your needs, objectives and circumstances. This information is provided for persons in Australia only and is not provided for the use of any person who is in any other country.

One said to the other that he was surprised to see his land had gone down in value over the year.  The other agreed, saying that he had read in the papers forecasts of houses being worth millions of dollars in 20 years, or some such stuff.

I do actually recall the forecasting that was mentioned – its a bit misleading, but many people do believe whats written in the newspaper.

Consider the following (it is past of a newsletter I send to my clients every month and was written about a month ago).

The House Price Saga.

 This seems to be the number topic again, so I will chip in for my 2 cents worth – again.

 This year we are again in a time when first home owners will not again be able to afford a new home – last year they could, but not this year.

 An article appeared in the Sunday Mail on February 21 in the Smart Money Section regarding home prices.

 I have done a table below that summarizes some of the salient points of the article:

What does this mean – well in 1960, the average house was 3.38 times the average income, now it is 8.34 times. 

 Or if you like to look at it this way, house prices have increased since 1960 at 8.83% per annum and wages have increased at 6.88% per annum since 1960 – this is not a cause for alarm, however since 2000, house prices have increased by 15.84% – more than twice the 50 year average, while wages have increased by 4.11% – less than half the 50 year average.

 Interestingly interest rates were at their lowest over that time in 1960 – at 5%.  We are at the second lowest level now at 6.64% (although not for much longer) and repayments are at 29% of income – the only time they were higher was during the recession we had to have when house prices were at 3.56 times annual earnings.

 Does this matter to you – well given that nearly all Australians have their wealth concentrated in their houses, yes it does matter.

 Affordability is not an issue so long as rates stay low – rates stay low when the economy is not performing.

 What are our headlines saying at the moment? That we have dodged the recession bullet, interest rates will rise and prosperity is on the way.

 Also the other question is can house prices keep increasing at the rates they have in the past 10 years, or will they revert to normal – or dare I say it, less than the long run return.

 Its possible that returns will be lower in the longer term as we do have a rapidly ageing population – in short more old people than young people – young people buy more houses than older people.  With less young people (unless we have rapid increases in migration) demand for housing will probably subside, as a result prices will decrease also.

What will support the growth in housing returns – shortage of supply – although I can’t see that happening.  A rapid increase in wages – not if the Reserve Bank have their way.  Or finally an asset bubble where prices are artificially increased through measures such as the first home owners grant.

 I am not sure, perhaps you have a view, I am willing to listen to any thoughts you may have.

 But what I will say is that coupled with the inadequate level of savings that many Australians have (and that is all savings) and the increasing taxes or decreasing level of services our governments will be able to provide as a result of the money spent on preventing our recession that forgot to turn up, there are going to be a lot of Australians that hit retirement – the longest holiday of your life with very little money – hope they all have a contingency plan.

Please Note:

This publication has been prepared to provide you with general information only. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision, you need to consider (with or without the assistance of an adviser) whether this information is appropriate to your needs, objectives and circumstances. This information is provided for persons in Australia only and is not provided for the use of any person who is in any other country.

The story was about the spate of mortgage foreclosures in the US and how that is going to hit our shores in the next year or two and that house prices could fall by 50% according to a leading (their description not mine) academic.

Now I am fairly conversant with the “Subprime crisis”, and most of you know basically it was loans to people with no jobs, incomes or ability to repay and surprise, surprise, they are defaulting on mortgages they could not afford.

Now that this is flowing through the markets, many experts are not surprised that this is happening and are telling us it is a portent of doom.

But let’s take a slightly different view.

If this does hit Australia, how bad is it? Well as far as I can see we don’t have the same loans with the same types of interest rate resets that the US has – maybe that might shield us. The story about the Australian family was very sad, but from what the reporter said, this person also had a nasty accident that left him unable to earn an income for 3 months and in all honesty no income for 3 months will probably do more damage to a family than all the interest rate rises we have seen (and herein lies a very important message for all Australians – talk to your financial adviser about your income protection insurance).

None of our kids can afford to buy homes and are doomed to be renters all their lives according to the press and anecdotes – maybe a 50% fall in home prices might help allowing those with good incomes and savings ability the opportunity to now purchase homes that were previously over priced to them – one of the people interviewed on the show said he wished he had the cash to buy a large number of homes – to him it was a great opportunity.

Is this the silver lining to this cloud, maybe there is hope for your children after all, even if it means your neighbor will be homeless.

This publication has been prepared to provide you with general information only. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person.

Before making an investment decision, you need to consider (with or without the assistance of an adviser) whether this information is appropriate to your needs, objectives and circumstances. This information is provided for persons in Australia only and is not provided for the use of any person who is in any other country.