Fantastic article by Steve Keen

[bene313]

Thanks for posting IV, good article.

I must be a little different because the artical actually gave me some confidence.

I dont really care what happens with short to medium term house values.
Its the weekly cost to the hip pocket that can screw me( and others)

Its clear that relatively small interest movements can have the desired effect these days so 10+ % interest rates are unlikely while we owe as much as we do.
And any significant weakening in the economy or property market from here will likely lead to a rate drop so thats a cashflow improvement.

I dont have rose coloured glasses on or anything. Just looking at my own situation and working on that.

It didn't really give me a whole lot of confidence.

I read Keen as saying that in order for the economy to improve, consumer spending to resume, we will need to deleverage and reduce our (private) debt to more acceptable levels. But this actually has an adverse effect on the economy in the first place... it's like the entire country should be saving, but if that happens personal incomes will drop making saving more difficult. A downward spiral.

In this case, indeed all we have to look forward to are the rate drops.

 

[MarkandTina]

In the 90's all the talk was of banana republics, now all the talk is just about bananas.

I look forward to seeing rates and inflation dropping in 6 months time (assuming no more serious cyclones).

 

[HiEquity]

But now is not the season for debt leverage.

I disagree entirely.

I can still remember the days when interest rate risk was a massive component of property investing. I was stress testing my portfolio for IRs of 18% etc as we saw in the early 90s on the basis that the risk of a repeat seemed very real and this is what all the books said to do.

Mr Keen has outlined very effectively why that risk is much lower now. IRs anywhere near that magnitude would collapse the economy due to the degree of leverage that is now out there. IR risk has therefore reduced considerably. For me, it's hard to envisage IRs would be required any higher than 10% to stall the economy.

Yet net yields of 10% are available from property investments right now (yes - generally CIPs rather than RIPs). So we have a combination of a massive reduction in interest rate risk (one of the major risks of property investing), combined with the knowledge that the RBA would rather let inflation (rents) edge up than risk stalling the economy due to all the leverage. To me that all says that it's the ideal time to leverage up into assets that put cash in your pocket every year. With banks not allowing any new supply to be built, there is only one direction for rents.

Of course, asset selection is critical to all this. You can't buy just any old property and expect it to be a great idea but then you never could IME. But, in my view, for the right asset, now is the perfect time to leverage up. The risk has never been lower - either from the supply of new properties, low inflation or from interest rates. The CGs will eventually come - for a property that puts cash in my pocket anyway, I don't mind waiting for that...

Mr Keen is obviously turned on by delivering "insightful" economic analysis but his track record shows he is woeful at identifying opportunities for wealth creation. It's up to us to take the next step...

 

[Aaron_C]

I disagree entirely.

I can still remember the days when interest rate risk was a massive component of property investing. I was stress testing my portfolio for IRs of 18% etc as we saw in the early 90s on the basis that the risk of a repeat seemed very real and this is what all the books said to do.

Mr Keen has outlined very effectively why that risk is much lower now. IRs anywhere near that magnitude would collapse the economy due to the degree of leverage that is now out there. IR risk has therefore reduced considerably. For me, it's hard to envisage IRs would be required any higher than 10% to stall the economy.

Yet net yields of 10% are available from property investments right now (yes - generally CIPs rather than RIPs). So we have a combination of a massive reduction in interest rate risk (one of the major risks of property investing), combined with the knowledge that the RBA would rather let inflation (rents) edge up than risk stalling the economy due to all the leverage. To me that all says that it's the ideal time to leverage up into assets that put cash in your pocket every year. With banks not allowing any new supply to be built, there is only one direction for rents.

Of course, asset selection is critical to all this. You can't buy just any old property and expect it to be a great idea but then you never could IME. But, in my view, for the right asset, now is the perfect time to leverage up. The risk has never been lower - either from the supply of new properties, low inflation or from interest rates. The CGs will eventually come - for a property that puts cash in my pocket anyway, I don't mind waiting for that...

Mr Keen is obviously turned on by delivering "insightful" economic analysis but his track record shows he is woeful at identifying opportunities for wealth creation. It's up to us to take the next step...

Honestly the only good thing I see to possibly leverage up on now is development sites (picking off distressed sellers/mortgagee sales)

 

[HiEquity]

Honestly the only good thing I see to possibly leverage up on now is development sites (picking off distressed sellers/mortgagee sales)

I can see how people may make money out of this but it's not my cup of tea due to the holding costs and lack of cashflow. Not to mention the lack of construction finance.

People on this forum have been posting up circa 10% net yield CIP deals (for example) for some time now. The following features occur to me:

- They would immediately increase your net income through leverage, with a circa 8% IR on the debt.
- Likely high inflation (as Mr Keen says) will deflate the real value of the debt.
- Likely high inflation (as Mr Keen says) will steadily increase rents.
- There is now a much lower risk of IRs rising substantially (as Mr Keen says).
- There is a much lower risk of competition from any new supply being built down the road (as Mr Keen says) from your property.
- Banks are still lending on existing properties with strong cashflows.
- It's a buyer's market in many areas right now.

The only missing ingredient for a property investor in the short to medium term is capital gain but at 10% yields, one would have to assume capital values would have to at least keep pace with increasing rents. In any case, if you wait for all the stars to align, you'll never do anything.

Obviously none of this applies to your average RIP with a 5% gross yield - in that instance you're just losing money with no CGs to offset it as yields slowly rise - hence the comment about asset selection.

Opportunity abounds and in my view it's a great time to leverage up into the right asset.

 

[Ausprop]

I agree with the last sentence. I certainly would not be highly geared right now with so much uncertainty world-wide.

property is a long term illiquid product, to which you are trying to match short term sentiment

 

[Aaron_C]

property is a long term illiquid product, to which you are trying to match short term sentiment

I disagree with that - property is always about ensuring that whatever you buy can be liquidated for a decent price if you so needed to (for whatever reason). This is regardless of whether it is short or long term. Particularly so in the current environment where it is harder to obtain finance - your potential resell market falls and so does your liquidity (and possibly) price.

 

[Deltaberry]

The Taylor Rule? The moment I saw that I stopped reading the article...

Ever seen the Fisher Rule. According to this rule when interest rates go up, currency should go down to maintain PPP.

If you listened to Taylor or Fisher, my friend, you'll still be living under the bridge (ps: not in a house)

 

[locko24]

Mr Keen has outlined very effectively why that risk is much lower now. IRs anywhere near that magnitude would collapse the economy due to the degree of leverage that is now out there. IR risk has therefore reduced considerably. For me, it's hard to envisage IRs would be required any higher than 10% to stall the economy.

That's the main thing i took from the article!