My 2c on 'Doom and Gloom'!
Hi everyone,
I just couldn't help it! Here's part of a PM I sent to a forum member recently, thought I may as well post it here too since it was so long:
"...At the end of the day, the best investment vehicle for me today, and the one I know and understand the most is residential property. I read people talking about the 'cash cycle' (whatever this is!), but I'd much rather invest my money into leveraged property than cash, regardless of what your guesses are regarding the immediate future of the property market or the economy, eg. crashes or recessions. Further, people seem to persist in likening a potential property 'crash' to a sharemarket 'crash', but these are and behave completely differently.
In the long-term, and probably even the medium-term, property values of well chosen and located property surely can only go up? As I've said before, residential property to me is all about good selection, irrespective of 'market conditions', 'fundamentals', or timing the boom.
The way I see it, in the short-term, if property price increases slow down, then it just means that my next property valuation might not be much higher than the previous one. If there's a chance that my next property valuation could be even less than the previous one due to a 'crash', then it's so simple - I just won't re-value the property! That's what makes property different to shares, which are continually valued on stock exchanges. Also, the chances of a 'margin call' on your property loan would seem pretty low in Australia today.
Also, if property price increases slow down, it will also mean that I will need to be able to service my negative gearing losses for longer without getting much capital growth in the short-term. But, if you have a secure job and income stream and are not over-committed then this shouldn't be an issue.
There’s always insurances available that can protect you here too. Life insurance (in case you die ), total and permanent disability insurance, trauma insurance and/or income protection insurance. If these don’t apply, having at least a couple of months’ worth of your JOB income or loan interest payments in cash savings, or available in a redraw/LOC facility will help reduce the risk.
The next question is, what if interest rates rise? I think we make too big a deal of this one too. The rise in interest rates may have an impact on property values, but as I mentioned in the previous paragraphs, this shouldn't concern you too much. Furthermore, it could present good buying opportunities for you.
Following on from this, what about the impact of interest rates on your serviceability? Well, if you had $1 million of property loans, and there was all of a sudden a whopping 2% interest rate rise (and remember, the RBA has been increasing the benchmark rate at just 0.25% at one time), what does this mean? This is an extra $20,000 in interest payments p/a. If this unlikely scenario were to eventuate, and you didn't have the cash to pay it then it’s harder, but those who’ve already been investing in property for a few years should have some equity sitting in a redraw/LOC facility to cover this amount anyway, certainly for the short term.
I think the people who should be most concerned about a 'property crash' or a 'credit crunch' are those people who today, as part of their active investment strategy, are:
(1) Capitalising interest on IP loans
(2) Living off equity
If you're not doing this today, and have reasonable cash buffers and conservative LVR's, then in the short-term I think you can ignore a lot of the 'noise' you're hearing on the forum here, and in the media.
Another point is people commenting on overseas countries, economies and property markets eg. Japan and the US, and then saying that if it happened there, it could possibly happen in Australia too. I think that's a bit ridiculous. The nature of residential property as an investment vehicle in each of these countries are completely different, and this comparison is worthless.
Residential property is LOCAL, not GLOBAL! It's about searching for properties on realestate.com.au, domain.com.au or in your local paper and going out and physically seeing properties and comparing them to each other to get your estimate of their value. It's about finding the best property you can afford to buy today in the best suburb and the best location, without over-committing yourself with one purchase. It's about talking with agents, vendors, brokers, banks, property manager etc...and arguing and negotiating for the price, terms and conditions you want and securing the best deal for yourself.
This is what I've done all year, and all the short-term 'noise' that's been going on in the background has not made ANY difference. If I had listened to all this noise, I would have lost enormous amounts of equity this year!
Ignore the short-term ‘noise’ and focus on building wealth with a medium and long-term perspective. Residential property investment is really not that complicated... "
GSJ
Hi everyone,
I just couldn't help it! Here's part of a PM I sent to a forum member recently, thought I may as well post it here too since it was so long:
"...At the end of the day, the best investment vehicle for me today, and the one I know and understand the most is residential property. I read people talking about the 'cash cycle' (whatever this is!), but I'd much rather invest my money into leveraged property than cash, regardless of what your guesses are regarding the immediate future of the property market or the economy, eg. crashes or recessions. Further, people seem to persist in likening a potential property 'crash' to a sharemarket 'crash', but these are and behave completely differently.
In the long-term, and probably even the medium-term, property values of well chosen and located property surely can only go up? As I've said before, residential property to me is all about good selection, irrespective of 'market conditions', 'fundamentals', or timing the boom.
The way I see it, in the short-term, if property price increases slow down, then it just means that my next property valuation might not be much higher than the previous one. If there's a chance that my next property valuation could be even less than the previous one due to a 'crash', then it's so simple - I just won't re-value the property! That's what makes property different to shares, which are continually valued on stock exchanges. Also, the chances of a 'margin call' on your property loan would seem pretty low in Australia today.
Also, if property price increases slow down, it will also mean that I will need to be able to service my negative gearing losses for longer without getting much capital growth in the short-term. But, if you have a secure job and income stream and are not over-committed then this shouldn't be an issue.
There’s always insurances available that can protect you here too. Life insurance (in case you die
), total and permanent disability insurance, trauma insurance and/or income protection insurance. If these don’t apply, having at least a couple of months’ worth of your JOB income or loan interest payments in cash savings, or available in a redraw/LOC facility will help reduce the risk.The next question is, what if interest rates rise? I think we make too big a deal of this one too. The rise in interest rates may have an impact on property values, but as I mentioned in the previous paragraphs, this shouldn't concern you too much. Furthermore, it could present good buying opportunities for you.
Following on from this, what about the impact of interest rates on your serviceability? Well, if you had $1 million of property loans, and there was all of a sudden a whopping 2% interest rate rise (and remember, the RBA has been increasing the benchmark rate at just 0.25% at one time), what does this mean? This is an extra $20,000 in interest payments p/a. If this unlikely scenario were to eventuate, and you didn't have the cash to pay it then it’s harder, but those who’ve already been investing in property for a few years should have some equity sitting in a redraw/LOC facility to cover this amount anyway, certainly for the short term.
I think the people who should be most concerned about a 'property crash' or a 'credit crunch' are those people who today, as part of their active investment strategy, are:
(1) Capitalising interest on IP loans
(2) Living off equity
If you're not doing this today, and have reasonable cash buffers and conservative LVR's, then in the short-term I think you can ignore a lot of the 'noise' you're hearing on the forum here, and in the media.
Another point is people commenting on overseas countries, economies and property markets eg. Japan and the US, and then saying that if it happened there, it could possibly happen in Australia too. I think that's a bit ridiculous. The nature of residential property as an investment vehicle in each of these countries are completely different, and this comparison is worthless.
Residential property is LOCAL, not GLOBAL! It's about searching for properties on realestate.com.au, domain.com.au or in your local paper and going out and physically seeing properties and comparing them to each other to get your estimate of their value. It's about finding the best property you can afford to buy today in the best suburb and the best location, without over-committing yourself with one purchase. It's about talking with agents, vendors, brokers, banks, property manager etc...and arguing and negotiating for the price, terms and conditions you want and securing the best deal for yourself.
This is what I've done all year, and all the short-term 'noise' that's been going on in the background has not made ANY difference. If I had listened to all this noise, I would have lost enormous amounts of equity this year!
Ignore the short-term ‘noise’ and focus on building wealth with a medium and long-term perspective. Residential property investment is really not that complicated...
"GSJ
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