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Nothing Short Of A World War Or Great Depression Will Change Things

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Brian Dalley
Brian Dalley

Nothing short of a World War, Great Depression, total or near destruction will see real estate cycles track as they have over the past years and heaven forbid either happening any time soon.

Recently that statement was challenged by a University student, mind still full of textbook ideologies determined to prove the theories she had learnt right.

As the system that monitors and controls cycles was tampered with five or six years ago it is going to take us some time to weather the storm and further turbulence yet to hit.

Five to six years ago a cycle had come to an end, it was time to take a break from soaring property prices to allow incomes to increase so further growth would be affordable.

It was time for the market to take a breather but it didn’t, and this is where it got all pear shaped and came unstuck. The system was tampered with and then became prone to failure.  Lenders changed their lending criteria to keep loaning money, borrowers kept borrowing, and no one wanted the party to end.

Humans are like that, unpredictable, speculative and inquisitive we generally are out to better ourselves and in doing so often forget there is cost associated with growth.

Property prices kept on increasing, and increasing, and increasing, times were that good you didn’t even need a deposit to purchase a ½ million dollar house. If you were self employed you didn’t even need to prove your income, simply tell the lender you could afford it and a million dollar house was all yours.

My point to Fay, cycles have been about peeks and troughs, where what we should be looking at is sustainable growth, not the crash burn and rebuild cycles. And thankfully no, a world war or a great depression isn’t required if we take heed of what has recently rocked the world but if we don’t; they could very well become a reality.

Seriously, we really do need to start learning from the past as this isn’t the first time we have been rocked by a financial disaster. Although the last was initiated in a different industry, [.com] the fundamentals where the same.

I think the old system that monitored and controlled real estate that inherently was based on a seven-year cycle worked fine and should be used as the model moving forward. First we need to start with little if any growth then in two or three years ease back into growth mode.

This is a better option than the alternative – the War the Depression, wipe everything out and start to rebuild from the ground up. Sounds a little dramatic, but some are doing just that and if we don’t make changes [now] I am afraid it will become a reality for many more.

When I question people how much they want to borrow 80 to 90% reply with,

“That is why we got you here, to find out what the bank will lend us.”

I can do that for them, however I point out there is another side to the coin, how much do [you] think you can afford to borrow.

Yes it’s not only the Reserved Bank and the Lenders that must take responsible for righting the wrong the Borrower must also take on some of the responsibility.

So then, is now a good time to invest in real estate, prices are low, interest rates are responsible and values are in line with building costs?

Yes, if you can afford too, there will probably not ever be a better time. Just remember, interest rates will increase so pay down as much debt as possible whilst rates are low. Capital gain will happen over time but at a much slower pace so don’t rely on that as a get out of jail card and all should turn out fine.

Brian Dalley is a leading Property Consultant | former NZMBA Mortgage Broker, and Real Estate Agent.  You can read more of his views and opinions on his website

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