Real estate investors warned about borrowing

By ANNE GIBSON

Property investment advocate Dolf de Roos has joined Reserve Bank Governor Dr Alan Bollard in warning investors about going too deep into debt.

De Roos, who lives in the United States but is coming here to stage seminars this month, said he was concerned about people borrowing too much.

"Many may leverage themselves too far to cope with any evening out of property prices and inevitable rises in interest rates that are bound to come," he said.

He said it might seem ironic for a property investment specialist to warn against the very vehicle he made his money from, but said people risked surrendering good investments at a loss or at reduced prices to escape from a difficult financial position.

In his book Real Estate Riches published in 2001, de Roos notes that it is possible to get more than 90 per cent of a property purchase price from a bank "and it may surprise you to know that you can get mortgages for more than 90 per cent".

"When you buy property, you generally have banks and other lending institutions falling over themselves to give you money."

But de Roos said last week that he had seen many property booms and busts and knew the fundamentals to good investment.

Most people could cope with a change of circumstances on their family home, but property bought for investment was another matter, he said.

His comments followed warnings this year from Bollard of the dangers of household debt in relation to income, which has soared to record levels, leaving people potentially exposed to a fall in house prices.

But BNZ chief economist Tony Alexander said he doubted that people would take any notice of the warnings.

"They didn't take any notice of [former Reserve Bank Governor] Dr Don Brash in the previous cycle," he said, referring to caution sounded in the last boom during the mid-1990s before prices fell.

The many television programmes encouraging people to do up houses, advertising for property investment seminars, low interest rates, high migration and job security were all fuelling the boom, Alexander said.

Most banks had a rule of thumb which they followed that people should use no more than one-third of their income to pay off mortgages or service debt, he said.