Hi Macca et al
I'd be interested in some of Michael's recipes for Brown Rice. Rice is carbohydrate and beans protein and I need to be careful about any excess carbo intake (damn the waistline) so maybe a hybrid blend is called for.
As Michael said, his ball's are as good as yours and mine too I think, crystal ones that is, and I think Macca is asking what we see in our respective balls as the similarities or differences between the late 80's and the last several years. A hybrid blend won't work here.
In the 80's, I recall that the stock market in Australia as well as around the world was climbing with the bulls gaining momentum, pushing the market up way beyond a realistic level. The "money market urgers" were saying keep going and it was not until later in the time scale that the more sensible issued warnings.
The New York market was going gangbusters, UK, Europe and Asia following. Japan was trying hard to control the trouble with the Japanese Banking industry and major companies (Japanese auto industry) borrowing beyond their asset backing.
Australia was similar. Remember that Australia constitutes only about 2% or so of the world stock/money market so our influence was and is minor. Bur still Australian banks threw money around like the proverbial drunken sailor and loaned money to the Bonds, O'Connells, Skases and others of this country to several times their asset backing. That is, LVR's of 200%, 300% even 400%. You and I could only borrow maybe 95% max then and now. Just what got into the banks heads? Greed I suppose and it is still there as we study the annual returns today.
Investors were pouring money into the stock market more so than into the property market, residential or commercial.
Confidence excessive, inflation rampant, investing unwise to stupid, savings down, bad debt increasing. Pressure on property and gold bullion had to follow. Interest rates were applied by the Reserve Bank but could not control inflation so up went the rates further until 18% was reached for normal banking rates. At one stage, I borrowed at 25% for five months to get out of a difficulty. That hurts.
Part of the upward property pressure was read by wiser stock market investors who saw the signs, heard the experts warnings and realised that the market could not sustain the bull run, sold their stocks at full price and pulled out and sat there all cashed up.
A little story.
One of my clients, who was caught in the Foreign currency borrowings scandal as urged by the banks, was unable to meet the rising interest payments (in foreighn currency) and was really being pressured by his bank. the Australian dollar exchange rate went the wrong way and was crippling him. He had fought the rising rates for over twelve months and did almost everything to pacify his bank. Which Bank? One day he sat opposite me in the office and gently cried as he begged us to sell his commercial property investments before the banks took him to the cleaners. It was hard to know where to look. He owed about $3M and had worked hard for every cent of assets he had. I am not being sarcastic, I genuinely felt for him.
When the crash came that fateful week, it really was too late for those still in the market, but many panicked and sold what stocks they had at reduced prices (the wrong time). And the market fell further. Panic. The correct thing to do then was to sit the crash out.
Investorswho bailed out now had to find an alternative and property was that alternative. So property was in demand, easy to sell, prices rose.
With the rising rates we were able to sell the above client's properties two months later. After outstanding debts were met, mortgages paid out, he was left with $2.5M. In my innocence I asked what he intended to do with the balance.
Well he took his settlement money, walked across the road to the opposition bank and placed it on fixed deposit for 5 years at 16% and then brought back a case of chilled export Moet et Chandon complete with wine waiter and two waitresses (sexist) with enough food for the office. $2.5M @ 16% is $400,000 pa or $2M total. Kept him rolling until 1995.
The point is that the stock market led the upward gallop, the rise in inflation and the subsequent interest rate rise, here and around the world. Property had to follow.
Come forward a decade to the late 1990's. Economy buoyant, stock market strong, property rising. Olympic 2000 had a stupid and unecessary affect on the Sydney market. Inflation pressures apparent, so the Fed. Reserve applied some brakes by increasing interest rates. Now Australia was out of balance with SYD leading the way and the rest of Australia NOT under the same pressure but the Feds had to do something to slow down SYD.
It worked and then the stock markets around the world started their slow but steady decline from 2000 onwards. Not all stocks at first but the market generally has declined for ALL of this year. The same old "money market urgers" were out in force saying it is only temporary and the market will turn. It didn't, so they then started this story of "property boom, property bubble" it is all going to "burst" etc., and urging people to stick with the market with dire warnings of remember the property "crash" of the late 80's.
The position is the REVERSE of the 80's. There has just been a steady decline in the stock market and people have once again used property as the hedge and no amount of talking by the urgers will turn it around.
What of the future? Let me polish my crystal ball and tell you what I see.
Rub rub, polish polish. The crystal ball is fairly clear and I see that the property market has softened and may decline a little BUT there will not be a crash, or bust, or collapse. There may be a little decline in places until rental yields and prices stabilise near to 5% return on investment. SYD is the largest market in Australia and is currently returning about 4%, MEL a little less at 3.5% and other places up and down on this. This stabilising and rent levelling will take up to two years which means in real terms a decline in values. BNE is the exception. It started rising 6 months ago and rental yields are around 5.75% and going strongly. I see good returns in BNE for the next two years or so.
More rub, more polish. The crystal ball has some cloud hanging over the stock market which is still unsteady. We have seen a progressive decline in the market for all this year with a little upward movement this past couple of weeks, BUT it is a dead cat bounce and the market will still decline a little further. Even the urgers are quiet. Maybe still some profit for short stock traders. I see that it will be well into next year before new life appears on the trading floor.
The crystal ball sees uncertainty and doubt in the Aust. Federal Reserve Boardroom. They would like to slow the property market and this good but the market will not slow for a while yet. Maybe not until the first quarter of next year. Interest rates will be under great pressure from many quarters. There is sufficient worry in investors minds to produce a lack of confidence and this will hold things back a little. The biggest worry is O/S markets. They are still poor, worse than the ASX and showing little sign of recovery. Even DR Greenspan of the USA Fed Reserve has expressed some reservations. I must chat with him sometime.
Rubbing, rubbing. Aus. interest rates will hold for the balance of this year and may even decline a little, say 25 points, by early next year. I don't see a big increase following. The current drought has as yet to really bite the economy and we have difficulty forecasting interest movements but interest rates will be modest. No 18% on even the most distant horizon. Current inflation is modest so no great interest rate pressure.
The crystal ball sees some opportunities for the investor. Investors who are prepared to look more carefully at the opportunities when presented and who don't over extend now, or if they do then only for a short while. As rent levels move and change the fickle tenant may want to debate rent levels and even move from your castle. A replacement tenant will be harder to find, more discerning and will want bargain basement rent. The crystal Ball says be cautious, look after the tenant and don't try and screw for the last dollar or it might be the last dollar for a month or two.
If you negatively gear, that's OK but try and have a minimal negative cash flow or none at all and get into a position which is as near to balanced as possible. A positive cash flow now will not be positive if you lose the tenant for any extended period.
All this crystal ball rubbing has made me sweat. Well I've stuck my neck out. Right out, but if it opens up any debate, that can only be good for all of us and hopefully we may all learn something, all of us even if its Brown Rice and Baked Bean Recipes. I invite your comments, any at all. I am brave but please be gentle with me.
Regards
Ross