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Financial Happenings Blog
Monday, July 31 2006

It is no wonder that house prices have increased sharply over the past 7 years.

Firstly, the Government re-introduced first home owner grants to help people purchase property.  This was, in part, to encourage participation in the property market after the introduction of the GST.  And it worked.  People who had previously struggled to save a deposit how had a big kick start in the form of a Government hand out.  So it was time to go house shopping.

Lending institutions started to make it easier and easier for people to borrow money.  No long was a 10% deposit required, a 5% deposit was enough.  More recently we have seen the introduction of no deposit home loans.  Once again, a bunch of people who would previously not been able to afford property decided that it is time to go house shopping.

Now we are just emerging from a period of very low interest rates.  The low interest rates meant that people could borrow more money than previously, and the memories of nearly 20% interest rates from 15 years ago don't seem important.  Once again, with interest rates so low people decided that it is the time to go house shopping.

Finally, all of these factors combined to produced record growth in the price of houses over the past seven years.  This perpetuates the myth that house prices only go up over time.  Not true, of course.  Witness the 30% drop in house prices at the start of the 1990's.  Recent house price rises and the often repeated myth that house prices only go up in value, often repeated by real estate agents who may have a conflict of interest there, meant that it seemed to be a great time to buy property and watch in go up in price - time to go house shopping.

And now we are looking at 40 year home loans.  Let us keep in mind that the people who offer these home loans have one thing in mind.  They want to keep consumers in debt for as long as possible.  After all, that is how they make their money.  Exhibit A - redraw style homeloans.  Even though the aim of the consumer is to own their home, redraw home loans have been a great product for lenders, with people continuing to draw money out of their home loan so that, at the end of the day, they stay in debt longer.'

40 year home loans should come with a warning:  '40 Years is the Average Working Life of an Individual.  In fact, many young people have a desire to retire prior to completing a 40 year working life.  To do this you will have to build some wealth yourself.  Taking a 40 year home loan and dedicating part of your income for the next 40 years to pay off your home will not help you achieve this.'

Posted by: Scott Francis AT 07:00 pm   |  Permalink   |  Email
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