Stand by for one of my most outrageously, ‘irresponsible’ pieces of ‘advice’ and it goes like this: “Being one of the 407,000 Sydneysiders, who are over-indebted might be one of the smartest things these people have ever done! Taking on too much debt can be the best way to build wealth!”
Fairfax’s Matt Wade has looked at the latest ABS numbers on income and spending and in the wake of the big surge in Sydney house prices, there are some 407,000 Sydney folk carrying too much debt. And I reckon a similar problem might be the case in Melbourne, where house prices have also gone bananas.
The typical over-borrowed Sydney resident has $765,400 in total property debt but in June this year the median house price in the Harbour city was, wait for it $1,000,500! This implies there are a lot of million dollar homes and given the numbers above, there’s a decent buffer for many of the indebted households in question — $234,600. So prices would have to fall by more than 20% before these people are in negative equity.
Sure, they’ll have to be careful about interest rate rises but that won’t happen before 2018. Even then, the smart money says rates won’t rise by much more than 2%. And if that happens, it’s more likely to be over three years.
And while wage rises aren’t great now, over that time it’s fairly likely that many sectors of the economy will be paying higher wages because the economy will be stronger, if you believe the Reserve Bank and Treasury.
The point should also be made that a lot of this uplift in indebtedness could be that because of people like me, Ross Greenwood, David Koch, Noel Whittaker and Paul Clitheroe, they’ve learnt about negative gearing, high tax bills and building wealth.
A lot of this debt would be what Robert Kiyosaki would call his Rich Dad Poor Dad people — men and women who have learnt from his famous book and other books (like my Beating Debt and Increasing Wealth), which said that debt can be good or bad.
‘Bad’ debt is debt that doesn’t come with a tax deduction but ‘good’ debt is what investors have learnt can reduce their tax bill and give them access to capital gains.
In 2013-14, the median house price was about $700,000, so there’s been a $300,000 gain for a typical, potentially over-indebted household. Those who had good debt have reduced their tax bill and used it to pay off their debts more easily.
Yep, these over-indebted numbers don’t tell you how many of the 407,000 Sydneysiders are Rich Dads and Rich Mums building wealth.
But it’s not just property investors who can use debt to build wealth.
My wife and I have often bought the worst house in the best street, borrowed a fair bit to renovate, then sold the property with no capital gains tax, so we could trade up. Sure, we could have been caught by rising interest rates but we always had a B-plan to cope with rising costs. Part of our main plan was to build up our business, which now employs a lot of people and has a listed fund on the stock market called the Switzer Dividend Growth Fund.
To build wealth above the normal, you sometimes have to do some things that are abnormal. If you do it with good knowledge about tax, servicing debt and with good advice/insights, you can really build wealth.
Sure, some of the 407,000 over-indebted Sydneysiders could get into trouble but it will more than likely be because they have a divorce, lose a job or have done something really silly.
Most of these 407,000 will one day have a house in a city where the median value will be $1.5 million and they’ll have little or no debt and will thank their lucky stars that they acted in accordance with the old footie war cry — “no guts, no glory!” I’d twist this to — “no insights and guts, no significant wealth.”