Reality TV…When the Bubble Bursts

RBA Governor Glenn Stevens must have secretly been pretty pleased with the results of The Block on Sunday.

That’s not to say he’s the type of guy to take pleasure in other people’s failure. It’s just that the less-than-stellar profits earned by some of the contestants on the show highlighted the risks involved in property more effectively than a hundred speeches from dusty economists.

So, with condolences to some of the contestants, here are a few things to keep in mind when it comes to bricks and mortar.

Properties can be hard to sell

Expectations for the current crop of Blockheads were sky high after the couples from the last series bagged an average profit of $581,625 each.

But this time, as it became clear that not all of the couples would be popping champagne after their auction results, Australia went into meltdown.

Surely the real estate agents must have messed up? Maybe Channel 9 didn’t promote the auction properly? Or was it the location that doomed them to failure? And why didn’t they invite more deep-pocketed Chinese investors on the day to prop up the sales?

Whatever it was, the truth is even in a booming market with a multi-million dollar marketing machine behind you, investing in property carries a huge amount of risk.

It’s an illiquid asset, which means that selling it at the price you want can prove difficult, and you never know what the market will be doing when time comes to sell.

Prices don’t always go up

House prices have jumped an average of 9.5 per cent over the last year across the five major capitals according to RP Data.

And a recent report from investment bank Credit Suisse found that Australia has become the wealthiest nation in the world thanks to the property boom we’ve enjoyed over the last couple of decades, with a median wealth of $225,440 USD per adult.

 

…But it seems like rents do: 10 Most Expensive Suburbs to Rent a Unit

 

Unfortunately, this can’t last forever. Economics tells us that when property prices are increasing faster than income growth, at some stage something has to give.

Whether that ‘give’ is the sound of a balloon popping or just gently letting out some air is difficult to say; the point is buying a property is not a license to print money.

Be careful borrowing at low-interest rates

The RBA has held interest rates at historically low levels of 2.5 per cent since August 2013, the longest period of stability for 10 years, and there are some very attractive rates on home loans floating around at the moment as a result.

But while these rates are great if you’re smart about how much you borrow, they’re not so great for borrowers taking on excessive amounts of debt.

When rates inevitably rise to more ‘normal’ levels, all those people who got over excited and geared up to their crinkled foreheads will be struggling to meet their increased mortgage repayments, which is bad news for everyone involved.

To avoid a potentially painful situation, the best bet is to always borrow within your means, and factor in a rate rise of at least 2 per cent before committing to a loan. Because, as Glenn Stevens could have told you from his couch on Sunday, a rate rise is coming.