Friday, 7 September 2007

Who Says Property Only Goes Up?

One of the main problems with property I think is the lack of diversification. If you buy only one house, you are only looking at one geographic location and one asset class. I have noticed property investors tend not to think about concepts like diversification. They usually just throw around cool words like "equity" and "deworsification." To get more diversification I suggest only putting a portion, say 30% of your money into property. I read the following at Vanguard:
Home sweet debt

Equity in your home is one of the most valuable assets that Australians have.
Around 60% of the average Australian's wealth is tied to the value of their home so it is incredibly important in terms of the average person's financial security.

And in recent years products have been developed to help put that asset to work - mortgages offering revolving lines of credit have become commonplace while new products like reverse mortgages offer new ways of unlocking the capital in your home.

But the collapse on the US sub-prime mortgage market raises some interesting questions about the use of home equity.

One of the underlying beliefs in using your home equity is that the value of the home will continue - over time - to rise. So leveraging the capital tied up in your house can be a very effective way of building wealth using a competitive borrowing interest rate and the potential for the growth of the assets bought with the home equity funds.

But as the US mortgage crisis - and subsequent fall in house prices across most major US cities reminds us - at times markets can fall sharply and turn conventional wisdom on its head and that is when the underlying assumptions that justified the borrowing decision is shown to be flawed.

More at

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