Yep! That’s right.
I was shocked when I saw this chart.
It stopped me dead in my tracks and got me thinking seriously about where we’re at right now in the real estate cycle.
Now, to get the impact of this, think back several years ago when the press would absolutely hammer this like there’s no tomorrow.
The affordability rate of real estate as a percentage of the average income.
I don’t know if you remember, but when the figure was getting up to 35%, they were calling the top of the market. So what that means is that it takes 35% of the average income to service an average mortgage.
The theory being that when it pushes higher than 40%, people simply can’t afford to spend money servicing a mortgage.
Now that to me makes a lot of sense and it does have an impact on when the market is likely to cool off in certain segments.
That also explains why at the height of booms, the top-end of the market seems to kick o in a big way and completely ignore the basic affordability issues.
Of course the guys at the top end are making more, so they can spend more. In some cases the percentage can be relative – the figures just change.
OK, enough of the basic… That’s what they are. If you don’t understand afforability in respect to investing, now is a good time to get clear on it.
This is what bowled me over.
Guess what the affordability is, let’s say for a place like Sydney…
At it’s peak, it was pushing 40%… (Don’t worry, most other states were pretty similar)
…Now, it’s in the low 20’s.
Do you know what that means?
No, I’m really serious – are you clear as to what that represents?
Here’s what it means… The average person can afford to spend more money and service a higher debt than what they’re currently paying for.
The bridge between the low-20’s and the high-30’s with respect to affordability is perhaps the biggest profit opportunity that I’ve seen in real estate for 15 year. The last time I saw such a differential in numbers was 1994.
That’s when I bought my second-ever real estate property for $94,000 in Brunswick, Melbourne. The price of that property stayed steady for a year, but by 1998 it was worth $215,000.
Timing and understanding the science behind property investing, and let me tell you that there is a science, can be very profitable.
So, where did I see the chart?
Well, I was at the back of the room at one of Dymphna Boholt’s recent seminars.
Depending on where you live in Australia, you still have time to get advanced real estate education from a leading expert for virtually nothing.
Affordability is going to go back into the high 30’s… and that will be the end of this property cycle. Right now you’ve got no excuse to sit on the fence and not take your fair share out of the next upward property cycle.