I was discussing with a friend recently, his situation, as his marriage is breaking up& they are in the process of either selling the house, or one buying the other out. The value of the house appears to be around $400k. He had been approached by a finance broker, who would happily arrange a loan for $200k to buy his wife out, but it is going to cost him around $750 a fortnight & that's just the interest. For someone who lives from one pay to the next, that's a huge burden for virtually no gain.The other issue is that he hates renting - he says it's dead money.

 

So I suggested some alternatives.

 

Sure, take out a loan, but make it for $250k, & use the house as security. Then rent the place out. Immediately, he has activated tax benefits. EVERYTHING that he pays out for the house after that is tax deductible - interest payments, rates, land tax, & any renovations needed. He also now has a cash buffer of $50k for tough times. And he also has $150k in equity to pursue further investments. Then I suggested that he rent a nice house or unit, big enough to have somewhere for the kids to stay as necessary, that he can enjoy living in. Even if it's for a year or two, until the older kids decide that they want to move out anyway.

 

So he could take what is an emotionally disastrous time & at least turn it into a financial opportunity. This time, at least, he listened to me.

 

Positive Real Estate reports:

 

Australia's housing affordability crisis is expected to dramatically worsen during the next five years, with property prices forecast to rise by as much as 40 per cent.  Economic forecaster BIS Shrapnel says housing affordability, already at record lows, will decline even further in the years ahead as demand continues to outstrip supply.

 

BIS Shrapnel director and chief economist Frank Gelber said an annual construction shortfall of 30,000 dwellings was set to double to 60,000 by June this year and rise to 129,000 by June 2009.  The shortfall in supply will put further upward pressure on rents and house prices, further exacerbating the affordability problem caused by the house price boom of 2002-03. At that time, official interest rates were at 4.25 per cent but have since risen to a 12-year high of 7.25 per cent.

 

Mr Gelber says the current environment of rising interest rates has compounded the problem, with people choosing to wait before buying or building property. This also meant that when interest rates stopped rising or eventually started to fall, there would likely be a surge in demand for housing which could result in another price explosion. "We've got rising interest rates suppressing any upswing in demand for housing ... and we need to wait now before that demand comes through," Mr Gelber said. "But when it does, it will be very strong."