Building Wealth in Uncertain Times

[ToGetProperty]

I am a long term member of this forum, but never visit this site since 2003.

On Oct 2008 when the interest rate dropped 1%, I came out to inspect and secured a property in Girraween with A$499K about $800/week rental return on the land of 1223 spare meters. It is only 5 minutes walk to Toongabbie station. During the negociation, I start to visit this site and feel huge pressures from the comments like 40% of price drop etc. I have own 8 houses in Sydney and never feel uncomfortable like this time. My financial broker told me that it is harder to get a loan as well. Everything is new and very strange to me. Well, I delayed to exchange the contract and getting more and mroe nervours after visiting this site and seeing so many negative views.

The house was settled at 19th Dec 2008. I don't really care what other say.

Today, I just found out that I don't need to put any money into my 9 houses in Sydney. This includes 30% of them being PI loan. 20% of them is still making very high loan repayment (about same loan repayment with 8% interest rate). I just started to do PI investment since year 2000 and stop at 2003, not very long though after considering 5 years of flat price.

Someone posts this scenarios:
0% interest rate, 8% unemployment rate, 40% price drop, etc.

I will say that I can retire immediately because I have very strong cash flow based on 0% or low interest rate.

The interest rate will be up in the future. When the interest rate starts to go up, the economy will be very strong and housing price in Sydney will be high enough so that I can offload some if I want to.

As a whole, I actually don't worry about Japan and USA. I think they never recover as strong as before. Australian economy will still come good because of China. Just image that there is another USA economy size (China) coming up in this world and they need our resources.

What we really need to concern is that "is this whole world economy going down?".

Am I right? I don't know.

 

[steveadl]

My point was as happened before the last turn around in rates a lot of people got spooked and fixed at the sign of a few increases and the banks fixed rate was a bit above the variable as it is now (except now its quite a bit).

Problem is rates didn't continue to increase, they turned around and went down and people got caught out paying quite a bit more then they should be paying now on variable.

I wouldn't exactly call that great risk management. Or cashflow management. Or very logical.

Don't agree with you there. If anything that's good risk management - yes in hindsight rates dropped and perhaps the economic messiah's could forsee that, but to the average investor who was staring down the barrel of increasing payments and possibly having their future plans in jeporday if rates continued to rise - fixing then was exactly that, risk management.

Now they may be fixed higher, yeah it sucks - but they're not losing their property as they may have if rates continued upwards. What would have been better risk management at the time if they were worried about continuing rate rises? What they did, or take no action, hang in there and hope for the best???

 

[yieldmatters]

That's what I did in this post.

i.e. 5% yield + 3% inflation rate growth = 8% pa return from property.

If we assume interest rates at 8% then it works given the impact of time value of money. i.e. That 8% expense cost depreciates in time value of money terms (given its on a fixed amount), yet your growth and rental yield are indexed to inflation.

Today's yields of 5% odd suggest this is not some arbitrary "peak" in prices, but a justified supported valuation given realistic long term average interest rates. Its not a bubble, its an appropriate equilibrium price. 5% is a very good yield!

Cheers,
Michael

thats right. assuming everything else remains the same in real terms then a yield equal to your real interest rate (interest rate less inflation) will mean you break even. (other costs and tax aside)

 

[sparky23]

Never heard that be agressive is bad for investments.
I think it is about emotions taking control of investing strategy instead of logic, homework and research, number crunching and risk management. I would ask a third party to analise and get an opinion on what went wrong and what went right.'
I wouldn't give any advice concluding "you have been to aggressive!", it just doesn't make sense to me.

'too much logic get you analise too much and not really acting that much, I think I have quite a logic mind but she definetly is very different then me, someone of us is lying (IMG:style_emoticons/default/glare.gif)'

Hey Boz just with regards to this post from you know where - definetly not me thats lying! LOL

 

[boz]

'too much logic get you analise too much and not really acting that much, I think I have quite a logic mind but she definetly is very different then me, someone of us is lying (IMG:style_emoticons/default/glare.gif)'

Hey Boz just with regards to this post from you know where - definetly not me thats lying! LOL

I agree with you, and I don't think you have been hiding any lie. However I don't think none can accuse me of lack of logic.
The possibility I can think of are 2:
one is that there are different logic in the universe...
second is that logic doesn't have much to do on how we are, how we act or what we say.
Still I find your posts interesting

 

[sparky23]

I didn't accuse anyone of lack of logic, I only mentioned it in my defence, I scored 100% in logical thinking with an agency a while ago which I was quite proud of and have found during my career paths it has served me well. These being Retail Management, Media Advertising Management and now Real estate with a little while in archaeology.

No-one will ever accuse me of being boring no matter how much they may mock and resort to the gutter.

Anyway enough here this is not a thread to be hijacked!

 

[evand]

I could suggest that not getting spooked at arise in rates and fixing is worse risk management then staying on variable. As i mentioned previously variable rates average over time and that average is usually very favorable.

I see that as better risk management. People fix too soon through fear and the banks know it.

But as always, its different strokes for different blokes and we all have different opinions.

Don't agree with you there. If anything that's good risk management - yes in hindsight rates dropped and perhaps the economic messiah's could forsee that, but to the average investor who was staring down the barrel of increasing payments and possibly having their future plans in jeporday if rates continued to rise - fixing then was exactly that, risk management.

Now they may be fixed higher, yeah it sucks - but they're not losing their property as they may have if rates continued upwards. What would have been better risk management at the time if they were worried about continuing rate rises? What they did, or take no action, hang in there and hope for the best???

 

[steveadl]

Evan, it's not about being spooked. If you're figures tell you that you can't afford rates to rise much more, the best risk management would be to fix them. Remember we're talking about people dealing with:

Aug 08: RBA + 25 basis points
Nov 08: RBA + 25 basis points
Feb 08: RBA + 25 basis points
Mar 08: RBA + 25 basis points
Throughout 08: + 50 basis points for people with the big 4.
Throughout 08: + 100 basis points or more for those outside the big 4.
Banks continually warning how they will be passing on more than the RBA.

I'm not saying you're wrong about sticking to variable - overall stats have shown you are better off, but that doesn't mean people can't go to the wall in the interim when the rates are at the higher end.

This is why I find it bizarre you seem to think better risk management in the above scenario would have been to stick to variable. Even the people who fixed back then could now say in hindsight they should have stayed on variable as they would have pulled through - but was it worth taking the chance of having to face the consequence of being wrong at the time?

Would you have advised someone who was worried about the prospect of higher rates in Jan 08 causing them financial hardship/forced sale, that the best risk management for them at that time was "she'll be right - you're better off on variable in the long run"???

 

[evand]

Ok, i see your point Steve. I'm not into negative gearing so it never worried me if rates go up, i know they ill go back down again. If they dont i'm in a financial position to handle it and accept not everyone is.

But i still think a lot of people fix when they shouldn't. Way too many in my opinion. Its often false economy and false risk management.

Do most people understand what the spread between variable and fixed means? And use that as a guide when or when not to fix?

Evan, it's not about being spooked. If you're figures tell you that you can't afford rates to rise much more, the best risk management would be to fix them. Remember we're talking about people dealing with:

Aug 08: RBA + 25 basis points
Nov 08: RBA + 25 basis points
Feb 08: RBA + 25 basis points
Mar 08: RBA + 25 basis points
Throughout 08: + 50 basis points for people with the big 4.
Throughout 08: + 100 basis points or more for those outside the big 4.
Banks continually warning how they will be passing on more than the RBA.

I'm not saying you're wrong about sticking to variable - overall stats have shown you are better off, but that doesn't mean people can't go to the wall in the interim when the rates are at the higher end.

This is why I find it bizarre you seem to think better risk management in the above scenario would have been to stick to variable. Even the people who fixed back then could now say in hindsight they should have stayed on variable as they would have pulled through - but was it worth taking the chance of having to face the consequence of being wrong at the time?

Would you have advised someone who was worried about the prospect of higher rates in Jan 08 causing them financial hardship/forced sale, that the best risk management for them at that time was "she'll be right - you're better off on variable in the long run"???

 

[steveadl]

Ok, i see your point Steve. I'm not into negative gearing so it never worried me if rates go up, i know they ill go back down again. If they dont i'm in a financial position to handle it and accept not everyone is.

But i still think a lot of people fix when they shouldn't. Way too many in my opinion. Its often false economy and false risk management.

Do most people understand what the spread between variable and fixed means? And use that as a guide when or when not to fix?

Doesn't necessarily need to be negatively geared either Evan. They could initially be positively geared or CF+, but the rates would have been rising much faster than rents could.

That situation isn't as much of a problem for people such as ourselves who have a more flexible cashflow position, but to a person/couple on two fixed job incomes which isn't necessarily increasing - it's a much bigger effect. Hence where they would need the more cautious approach to risk management.

But I also see your point about too many people in the market fixing. I'm holding off for the moment, but always keep my eye on it.

 

[Token Funder]

Doesn't necessarily need to be negatively geared either Evan. They could initially be positively geared or CF+, but the rates would have been rising much faster than rents could.

That situation isn't as much of a problem for people such as ourselves who have a more flexible cashflow position, but to a person/couple on two fixed job incomes which isn't necessarily increasing - it's a much bigger effect. Hence where they would need the more cautious approach to risk management.

But I also see your point about too many people in the market fixing. I'm holding off for the moment, but always keep my eye on it.

The risk mitigation provided to borrowers by fixed rates is obvious from the lender's perspective.

Fixed rates have lower default rates.

Always have, always will.

 

[JIT]

The risk mitigation provided to borrowers by fixed rates is obvious from the lender's perspective.

Fixed rates have lower default rates.

Always have, always will.

If you had most of your IP borrowings at lowish long-term fixed rates, do you think lenders would perceive you as relatively lower risk...and thus be more inclined to provide you with new borrowings in the future?

 

[Token Funder]

If you had most of your IP borrowings at lowish long-term fixed rates, do you think lenders would perceive you as relatively lower risk...and thus be more inclined to provide you with new borrowings in the future?

Credit assessment regimes aren't that clever at the moment, though it's an interesting point. You could make the case that a borrower with a predisposition for fixed rates over the long term is more cautious and focussed on cash-flow management than others.

You'd need more independent sources of info than is currently available but with the forthcoming changes to the Privacy Act allowing a few steps towards positive credit reporting, it is certainly a possibility.

I'll put on it my wish list.

Right now the best thing to do is (a) protect your credit report at all costs (b) show good job/income security

 

[JIT]

Credit assessment regimes aren't that clever at the moment, though it's an interesting point. You could make the case that a borrower with a predisposition for fixed rates over the long term is more cautious and focussed on cash-flow management than others.

You'd need more independent sources of info than is currently available but with the forthcoming changes to the Privacy Act allowing a few steps towards positive credit reporting, it is certainly a possibility.

I'll put on it my wish list.

Right now the best thing to do is (a) protect your credit report at all costs (b) show good job/income security

Thanks, I'll add that to my wish list too!

 

[Ms Jade]

If you had most of your IP borrowings at lowish long-term fixed rates, do you think lenders would perceive you as relatively lower risk...and thus be more inclined to provide you with new borrowings in the future?

I wish this was true too. About 5 years ago we had trouble getting funding for a large loan with high LVR. We pointed out that despite this transaction looking high risk, most of our other loans were fixed for 5 yrs so it showed that we were inherently conservative. I don't think they bought it, LOL.

 

[TheAnalyst]

Sad but true.
Those of us with sound risk management strategies will just have to keep plodding on while the rest continue to try to "bet" with the banks on rate movements.

Hi, Rob,

Are you the guy on the recent Property magzine who bought several properties over last few years?

 

[Rob Williams]

Hi, Rob,

Are you the guy on the recent Property magzine who bought several properties over last few years?

You will have to ask my agent
Yeah. That was me.

 

[crc_error]

I dont have the property magazine Rob, can you give us a summary of the article?

 

[steveadl]

Hi, Rob,

Are you the guy on the recent Property magzine who bought several properties over last few years?

I hear he's taking speaking engagements at $1,000p/h - all going to his head.

 

[steveadl]

I dont have the property magazine Rob, can you give us a summary of the article?

See my comment above, it'll cost ya!