This article short-lists potential losers from a housing bubble burst. It concludes that the losers will be anyone who’s forced to sell when they fail to service mortgage or any kind of debts (either personal or business). Those who have bought at the peak of the boom with a large mortgage will fall hardest and deepest.
The article also outlines potential winners from the property crash. These winners broadly cover anyone who can ride out the crash without having to sell, when they already own properties. Top winners will be those who hold no properties during the crash, but prepared and are able to get on the property ladder when the market is about to rebound.
I largely agree with the article’s analyses and conclusions on the winners and losers. However I do not quite agree on the following 2 points:-
1 Winners – ride out the crash without having to sell
Here the “winners” cover most of owner-occupiers who live in their properties, bought their properties at or above equilibrium price, AND are able to service the mortgage during downtime.
Properties for self-residence are not assets because they do not generate incomes. The premiums (above the equilibrium price) plus the interest on the loan they took out have time value of money and constitute opportunity cost. When the market crashes it means the economy goes south, job cuts will be common. If employment income is the only income source for these home owners and the only way to service the mortgage, you can imagine how risky the situation may become.
When the market recovers and these home owners still hold on, the best result is they just “break-even”, not win anything until the point they sell their properties at a premium, which is ideally more than that of their next home properties. If they do not sell, they don’t have gains, and thus no win.
2 Top Winners – able to buy low when the market is at bottom
Again this depends whether these “winners” are home-owners, investors or traders.
For home-owners, their goal is to own a home at a huge discount, along with cheap mortgage payments. Are they winners? Yes and No. It’s a Yes because they can achieve huge cost savings for buying a liability like this; it’s a No because debt is still a debt.
For investors, their winning goal is to own an asset at a huge discount, generates incomes that cover well beyond the costs, along with potential of capital gains (at the point when they sell or refinance)
For traders, their winning goal is buy low and sell high, they won’t care about the rental incomes and outgoings as much as investors.
And here I can say the “Top Winners” will be either investors or traders.
This article, like anyone else, does not predict or forecast when the crash will come; rather it just simply outlines the outcomes when the burst happens.
Many people have been conditioned that their own home is an asset. Many XYZ and millennial generations have been brain-washed that their home property is an investment that they should fight hard for. Many have borrowed from their parents or love ones to buy properties even though the price is at least 10 times of their annual pre-tax incomes.
Furthermore, many home owners think themselves are property investors. Many economists, accountants and financial professionals mistaken investors with traders. Only later these people find out that the so-called capital gains are only on the paper. While traders take profit and go away with real cash, investors and home owners was misled to believe that they are rich when their property price rise in value, but the truth is they are only “paper rich”.
If they were financially literate, these people would think hard before they make buying or selling decisions. They may realise that there are abundant of options for them to choose. Home ownership is not a life goal. Climbing up property ladder is not the only way to be financially successful.
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