[octodog]

House prices increasing are "good" for homeowners because you can potentially tap into the equity to leverage for another investment. The typical play in modern Australia is to buy an investment property and then use negative gearing to reduce your personal income tax bill.

Continually "upgrading" your primary place of residence is not something that anyone does. Unless you live in the ACT you would be forced to pay stamp duty again too.

[dools]

Yeah but you can only do that if you can borrow more money. You have to show capacity to pay even if you’re using equity as collateral and expect rental income.

I think maybe the “use equity to buy investment properties” advice was popular when lending was super loose prior to the GFC and maybe some dodgy brothers mortgage brokers are still getting them through but without an increase in income you can’t just ratchet up your leverage (at least not anymore, I know 10-15 years ago everyone said that you could do this but I didn’t own a house at the time so I don’t know if it’s actually true or just hype sold by investment gurus flogging overpriced Gold Coast apartments).

[octodog]

That's true, you're completely correct that income is still a constraint.

However, there are a few other factors that can increase borrowing capacity significantly. First, personal incomes tend to increase over the course of your lifetime as you get promotions. Second, when in a falling interest rate environment your borrowing capacity is increasing at the same time property prices are being pumped up. This is exactly the time when people tap into that equity. Third, you can get a slightly better rate at lower LVRs, which can help a little bit as well. Finally, a lot of the people who use this strategy have very high incomes to begin with and their borrowing is constrained by their available capital, not their incomes. This is why every neurosurgeon has a negatively geared property by the time they reach 30.

The reason this has been a popular strategy for a long time is that interest rates have been falling for the last 30 years. It's not so attractive right now as interest rates are increasing.