When toilet paper FOMO is applied to the housing market

Congratulations Australia, you’ve delivered a self-fulfilled prophecy that house prices would increase throughout 2021.

And increase they did. At the fastest rate in Australian history.

At a time when interest rates are the lowest they have ever been.

In spectacular fashion, when the FOMO mentality that was applied to toilet paper at the start of COVID is applied to the Australian housing market, people go crazy and buy up big.

Unfortunately, when the market softens and interest rates rise, you’ll be completely in the shit.

When the following happens, it’s obvious that the rate of growth is dangerous:

• Real estate agents telling prospective buyers to submit offers without building and pest audits or finance clauses, otherwise their offer will be rejected
  

• Real estate agents encouraging buyers to waive the cooling off period
  

• Buying properties sight unseen
  

• People borrowing at 6 times their before tax income

Unfortunately, almost all of the above is required to buy a house at the moment.

It does feel that a perfect storm is brewing.

When combined with decreased government assistance (the winding back of COVID handouts)…the obvious answer is that businesses will need to reduce their costs to survive. And generally, the biggest cost to a business owner is wages.

When half your staff don’t want to return to the office, will your boss renew their commercial property lease in full, or try to rent a smaller space? That landlord that was use to collecting their rent each month is now not collecting at all, or at least collecting a smaller amount. That hurts his family budget.

When you move 1.5hours from work and your boss says you need to return to the office, will that regional location still be attractive to you?

Quite frankly, I’m surprised that people were willing to make such major lifestyle changes and take on such large financial commitments, at a time when the financial certainty of the economy is so unassured.

Interest rates may or may not remain at record lows. But remember this, the RBA does not control the interest rate you pay to your bank - the banks may increase rates without the RBA doing so.

The RBA has said that they won’t increase rates until 2024. Another interpretation is that you have three years before interest rates increase. Most expect that once interest rates increase, house prices will soften.

The word mortgage literally means ‘to death’. This short term craziness, needs to be tempered with the fact that you need to weather the mortgage for the next 30 years.

If you buy at the top of the market and interest rates start to increase, that’s going to hurt. A lot.

At the moment, there appears to be a divide in opinion.

There are those with a vested interest, continuing to pump the market. The media, banks, buyers agents and real estate agents can’t do enough to build the hype.

On the other hand, there are many seasoned investors, taking a step back, looking at the current situation and asking themselves WTF?!?!

When it is regularly acknowledged that the average Australian family cannot fund an unexpected expense of $1,000, how will they cope when the interest rate on their ginormous mortgage increases?

It is disappointing that so much focus has been placed on the housing boom.

Disappointing that the people hyping the market aren’t acknowledging the upcoming issues - too much household debt, the risk to the financial system if interest rates increase, the complete lack of housing affordability, and a complete wealth divide between the haves and have nots.

When prices are increasing at such a rate, it’s hard to take a step back and sit on the sidelines. But I imagine this is how it felt just before the GFC.

I don’t believe that is where we are right now, but I imagine it must have felt the same.