I wasn’t always interested in investing but through my analysis of money it became apparent that it’s highly necessary. One thing that was repeated ad nauseam was that “no one will take care of your money better than you” and indeed that is true. Sure, you might find someone who takes care of it properly (if you’re lucky!) but they will still charge you handsomely for their services costing you dearly over the decades. And that’s if you get lucky! The unlucky version is a myriad of sob stories by would be “smart investors” that get duped out of their life’s savings one way or another. Hello pyramid schemes! It’s very sad that others prey on the uninformed or more often elderly, but there is no point in ignoring it. When it comes to an asset as valuable as your life savings I’m sorry, but the only person you should trust is yourself.

Would you give a stranger or even a good friend $1,000 and blindly trust that they will pay you back (with profits!)? I think most people would at the very least hesitate and this is just $1,000 we’re talking about here. The stakes are often far higher when we’re talking about your life savings often running into the hundreds of thousands and even millions. Self management of your most long term developed asset needs to be a priority and you need to fully understand what you’re investing in, why and the pros and cons of it all.

But I am drifting off course here.

Although I didn’t originally like investing I read up on it regularly, we also practice it substantially now that we are mortgage free. It’s been a refreshingly new part of our lives and it’s still exciting (at least to me) on a weekly basis even though it’s been almost a year now and our strategy requires essentially no involvement whatsoever (did I mention I am a proponent for automation? ). As a result of all this reading and knowledge gained I often get asked about the subject and, due to the insanity level hysteria that is the Australian populations interest in property, how it all relates to “buying an investment property“, “upgrading our house” or other variations that involve spending huge sums on property.

A big part of my investment research was in fact studying previous and current housing bubbles and to my knowledge they mostly seem to all suffer the same fate. The boom times come and housing becomes more and more valuable. Eventually everyone kind of “knows” that housing is too expensive but usually the government or regulatory bodies don’t want to do anything about it because “things are fine”.



This-Is-Fine

An amusing trend just prior to the huge housing crash in Ireland was the significant uptick in “housing” related TV shows that came out from the media. Renovating shows, building reality shows, investing shows all related to the property asset class and coined as “property porn“. This just piled on top of the numerous news pieces, journal pieces and announcements from government that “everything is fine” and that you should “make the leap“.

While it’s different for each housing bubble throughout history, the common theme is that over a varying degree of time, the economy in question grows ever weaker and more stressed as housing increases in prices, home owners struggle more and more to pay their mortgages, businesses also begin to struggle due to home owners now having fewer disposable income to spend on things and so on. The money is literally sucked out of the active economy and stuck into bricks and mortar. The flow of money through business after business slowly dries up more and more as the housing prices inflate like a lactose intolerant person at a milk chugging contest.

Finally a financial shock (usually the ever elusive black swan!) punctures the bubble. This can be an internal or external force, interest rates can jump up for some reason, another GFC could occur, a huge company could falter or be caught up in a scandle or any other number of reasons can happen but usually the government is powerless to stop this and it takes a heavy toll on the countries finances. Given our significant dependence on China I believe this is one of the most likely shock sources out there.

Normally economies can handle this shock but everything is puffed up to its max and already stressed out. House prices take a hit which triggers people to sell, which triggers bigger hits, which effects construction prospects of new homes, which displaces more jobs, which adds to public opinion that the party is over, which triggers even bigger hits and on and on. Eventually housing prices dip below the intrinsic value of the properties and people begin to start buying due to them now being bargains. From here the asset class slowly begins to recover from its huge drop.

Not all bubbles end this way of course. Japan has been famously deflating over many years now rather than suffering a single big crash but even then it was quite a drop. The big question though is how the banks will handle it all. Our big four banks are hugely invested in both owner-occupied and investment home loans and if prices fall enough and too many people default things might get quite dicey. I think it’s safe to say they’re all too big to let fail so who knows what lengths the government (read: taxpayers) would go to in order to bail them out. They could even going Cyprus style and authorise a bail in.

I could also be completely wrong about this all. Perhaps Melbourne, Sydney and even Brisbane have all reached a new property paradigm, propelling them into other incredibly high property price areas like Paris, New York, Tokyo and their other ilk. I’m also reminded of an old quote I once read somewhere…

The optimists are wrong. The pessimists are also wrong too. Reality tends to end up being somewhere in the middle.

So maybe we will have a housing crash soon. But maybe it will only be a small one, taking property prices down 10-30% before people jump right back in because they truly believe that the houses and their surrounding amenities, life style and atmosphere is worth that (slightly less than) super high price. No one can say, but for now I stick to my own investment gut which is that assets that have just gone up hugely in price over many, many years don’t usually make good long term investments because you’ve already missed the boat.

Better to choose a different one.

Note: Due to the nature of this post I’d like to stress that this is not intended to be specific investment advice for you. These are musings and my own opinions. Please do your own due diligence and consult an expert or research the matter thoroughly and come to your own conclusions.



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Alex Shoolman

How To Pay Off A Mortgage Early - What if you could be mortgage free in under 10 years, automatically and without cutting back on the things you love?
Editor in Chief at Alex Shoolman - Learn how to improve your life with technology, see where it's going in the future and how you can take advantage of it.
Editor in Chief at Mutilate The Mortgage - We help people go from "no idea" to mortgage free in under 10 years.

  • RGV

    Very good post…

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