Forum Archive Index - February 2003

["Allan Potts" <ajp7079@excite.com>]

Dear Michael,

I will attempt to shed some light on your question and puzzlement, but of 
necessity it will have to be from the perspective of a life spent watching, 
buying and investing in real property in Southern California.  Having said 
that, from what I've been reading in the NZ press and investment articles, the 
difference is only one of degree.

The rules you state as rules of thumb, are just that.  Over here it was said 
that 25% of you gross salary was the limit that should be spent on housing, 
whether it be rent or debt service.

These are basically good rules, time tested, FOR STABLE PERIODS OF HOUSING 
PRICES.  When housing rices started to skyrocket in Southern California those 
rules went out the window.  (You note a similar thing happening in NZ)  The 
reason is that by reading about the large amounts of property price 
appreciation and hearing it by word of mouth around the water cooler and at 
cocktail parties, it looks as if the way to get rich is to buy the best house 
you can sacrificing just about everything else to go way beyond the prudent 
limits.  When the value of you dwelling goes up to trade up to an even bigger 
and better house.  At some   point if you don't get greedy, you can even 
refinance and  pull some cash out of the inflated values that have occurred.

Sooner or later, however, and it may take years, the worm turns and can eat you 
alive.  Example:  You've and everyone else ha been making so much money on 
paper that you go out and buy a house for $500,000.00 with a 90% loan to value. 
 You now owe $450,000 on you little castle.  The cycle ends, (and it always 
does) and your $500,000 house can now only be sold for $300,000.  Hey, wait a 
minute, we still owe $449,000.  Maybe you have a business reversal, or lose 
your high paying job and can no longer afford the debt service.  Best offer you 
get for the house you can no longer afford is $300,000, but you owe the bank 
$449,000.  Opps!!!  Then the downward spiral starts like a whirlpool in the 
ocean.

Yes, I've seen this happen.  I've seen multi-millionaires go down the drain, 
including the loss of their businesses, houses and cars.

Those rules of thumb are good one's for first time buyers in stable real  
property markets.  One can make a good deal of money stretching the rules in 
the beginning or middle of a real estate boom, (read bubble) but you better not 
still be gambling when the music stops and there is only one chair for 50 
people.

The people you see who are buying houses well beyond their means, will do well 
as prices soar, (so did the NASDAQ dot com investors) but will suffer an awful 
hangover if they don't get out in time.

I hope this answers your question or at least sheds a l Iittle light on what is 
happening in NZ right now.  Here in Southern California we are currently 
witnessing yet another real property bubble.  It will come to a bad end, just 
as the last one did in the 1980 to 1988 period.  Use a good thing in 
moderation, stretch a little, just make sure the bubble is not about to pop.  
(There are signs, just as there are in she sharemarket, goldmarket, tulip 
market etc, etc, etc.

Allan 




 --- On Tue 02/25, =?iso-8859-1?q?michael=20gore?=  michgore@yahoo.com  wrote:
From: =?iso-8859-1?q?michael=20gore?= [mailto: michgore@yahoo.com]
To: sharechat@sharechat.co.nz
Date: Tue, 25 Feb 2003 20:04:39 +0000 (GMT)
Subject: [sharechat] Housing

My apologioes for this off topic message but I know
some of you are interested in housing.  My parents are
fond of saying that a general rule is that you should
spend a third of your take home pay on accomodation,
i.e. mortgage or rent.  I recently heard someone say
that it is a good idea to spend no more than 2.5 to 3
times your gross annual salary on a home.  These two
ways of looking at things would work out about the
same perhaps.  The way my parents talk I have the
impression that these are or were general rules of
thumb that were "common knowledge".  The problem is
that when I look around I see people buying houses and
from the sale price I work out approximately what
their salary must be if they are following the rule of
thumb and well - there's just no way!!  I read Brian
Gaynor's article in the Herald this morning (see
Sharechat Daily news links) and noted the huge
increases in house prices that he documents and I
wonder if someone's wages must be going up a lot
faster than mine!!  Or are these "rules of thumb" just
not that relevant.
Can anyone help clear this up for me?
Thanks,
Michael  

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