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RE: [sharechat] Housing Food for thought

From: "michael gore" <>
Date: Wed, 26 Feb 2003 21:31:07 +1300

Thanks to those who replied to my housing question, this was nicely said

-----Original Message-----
[]On Behalf Of Allan Potts
Sent: Wednesday, February 26, 2003 1:18 PM
Subject: RE: [sharechat] Housing Food for thought

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?=  wrote: From: =?iso-8859-1?q?michael=20gore?= [mailto:] To: 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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