Property Investing Under A Rising Interest Rate Environment

[Kennethkohsg]

Dear All,

1. From we have been seeing around the world over the last few months, interest rate is on the increase worldwide, given the US inflationary fears and continuing rise in oil prices, as a result of the various concerns about its continued steady oil supply including the recent Middle East Tensions.

2. Australia has previously operated under such an environment in the late 1980s whereby the interest rate has went up as high as 18%p.a-20%pa in 1989, followed by the 1991 prolonged Recession that we need to have, under Paul Keating's Prime Ministership.

3. As a result of this sudden huge increase in interest rate over the late 1980s, a number of the property investors could not properly service their interest loan repayment and consequently, a large number of the property investors lost their entire property portfolio as a result of the high interest rate charged on their housing loans.

4. Are we now entering into a similar rising interest rate environment such as during the mid 1980s with an expected interest peaking in 2009? If so why. If not, why not?

5. How will properties continue to perform such times and what are the safeguards that we need to consider and put in place to safely and prudently holding our existing/ever expanding property portofolio during these trying times?

6. Will this high interest rate envirnment be followed some 2-3 years later by another similar inevitable Recession (as in 1991)that Australia needs to have in 2011?... After all, Treasurer Peter Costello has hinted that the current business cycle peak has almost come to an end in 2006, amid the May 2006 interest rate increase by the forward-looking RBA?

7. What do members think and say,please.

8. We look forward to your kind contributions and a fruitful discussion on this new evolving topic.

9. Thank you.


regards,
Kenneth KOH

 

[Andrew_A]

1. Kudos for Ken 2. Interesting Questions

Some very good questions Ken.

No doubt many people have been not thinking financial winter while the sun has been shining I predict.

Who knows what the future holds for interest rates and the middle east, or anything for that matter?

Regarding those who do know, I think I see similarities in the financial world (which I'm a novice in) and the chess world (slightly less of a novice) whereby the strongest opinions would be formed by master players, convinced of the wisdom of their judgement based on their position on the sunny side of the bell curve of skill. The true champion players however almost invariably would be much slower to form definite judgements and very wary of predictions, based on an appreciation of complexity entirely hidden from the weaker masters. The champion players are more comfortable with the role of complexity and are often happy to say 'Well this might happen from this position, but's it's complex'.

I have recently read some very coherent and intelligent people demonstrate why stagflation and a 1970's environment is set to return, and why it's not. You can find evidence to support any opinion.

I have such a low LVR at the moment that Its probably a good thing if IR's start heading north for me as this will shake the weaker hands out of their IP's and allow some bargains to be picked up.

Have an investment plan, some contingency plans and think about what if scenarios and invest anyway!

 

[Delta]

There is an old saying about:

"A banker is someone who lends you an umbrella in good times and takes it back in bad times".

As and when bad times arrive, bankers will be acting differently. Mark my words - I was a banker.

 

[Kennethkohsg]

There is an old saying about:

"A banker is someone who lends you an umbrella in good times and takes it back in bad times".

As and when bad times arrive, bankers will be acting differently. Mark my words - I was a banker.

****************************************
Dear Delta,

1. I agree with you.

2. Ask the 3,700 property investors whose properties have been re-posssessed by their lending banks this year to date through the Victorian Supreme Court orders and I think they will all agree with you too.

3. Thus, make sure that we use the bank's umbrella to achieve our life-goals well and promptly return them when we have no further use for them before the actual bad times arrives.

4. In this respect, we must always be mindful to "MIND Your Own Business "(MYOB) and not the bank's business.

5. We make the llending banks as our effective property investing partners, rather than for the banks made us their effective business partners for themselves.

6. or your kind update, please.

7. Thank you.

regards,
Kenneth KOH

 

[Tim]

Kenneth,

I am not sure we are likely to experience interest rate rises in proportions we had in the late 80's due to the following:

1) Monetary policy has targetted inflation in the 2-3% for many OECD countries so counter measures seem more responsive and timely and therefore less likely to let inflation get out of control

2) The current affordability of housing currently means that interest rates not much higher than we have now are consistent with the high rates in the 80's in terms of their affect on affordability

3) Higher inflation rates tend to correspond with higher interest rates which tend to correspond with higher growth rates of housing according to the Somer's book 'More Wealth from Residential Property' such that these 3 variables tend to work together to form relatively consistently to produce continuous long term growth in property regardless

4) It would appear that one of largest inflationary effects currently is oil, I don't expect oil prices to drop anytime soon back to more reasonable levels because of the cited costs of production, therefore I expect that inflationary pressures will continue on rates. Having said that, some commentators are suggesting that increases in oil will negate the need for another rate rise as opposed to increasing the need for a rate rise

5) It all seems to make out a good case for having access to cash reserves and diversifying unless you know exactly what market you are operating in and can reasonably predict what is going to happen

Cheers,

Tim

 

[plumtree]

There certainly is a strong indication that we will face a period of inflation and the price of oil is not the only reason for this! It is a huge factor,of course, but other elements are 'kicking in'. There is a skills shortfall developing world-wide which will be nearly impossible to offset and this will develop a wage demand/increase. The Baby-Boomer factor will contribute to service demand that will be hard to fill and will add to the inflationary trend through increased wage demands. These Baby-Boomers who are equity rich will find it difficult to pay for the things they need even though they have the money to do so!

 

[grossreal]

Hi Kennethkohsg
Interesting post.
One thing I will say is you do need to have a balances portfolio and that balance must allow you to adjust to changing factors not all these can be worked out but just like you hedge in shares or options you must do the same with property.
To hedge with property
Is to use split loans and have the ability to draw down on those loans for a considerable amount of time or sell down stock, or for that matter use a another income straem to assist your property part of your investment.
for those that are highly geared into property as I am then you still must put this hedging in place.
Here is alot of things that adjust daily and affect markets and your structure must allow for these movements and as an investor you need to be very vigulent of your exposure to one particular market and invest accordingly.
I have a dabble in share,property,finance lending and currently looking at mezz( why mezz very simply as you are looking at the market change I look at the same picture and unlike Andrew_A I see bargains to be made in lending mezz to problem projects at very healthy returns).
One persons problem is anothers profit.
I use the split loan vacility that lenders give you to get cashed up very quickly alot faster then a lender will process lending so you can take advantage of market movement very quickly.
And there is a very old saying the quick or the dead and this is the case in investing.
Currently we have a flat market but if and when interest move and unlike yourself I don't see them moving for some time.
Then you must have in place a system or structure that will close off your exposure, hedging and give you cash flow( as most lender will be very uneasy about lending with rates rising) to take advantage of opportunities that will present them selves.
The other thing that I would advise is to get your self in with a group of like minded investors.

 

[Kennethkohsg]

Currently we have a flat market but if and when interest move and unlike yourself I don't see them moving for some time.
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Dear Grossreal,

1. Thank you for sharing your various funds management strategies with us.

2. I need some time to digest through them and I will provide you with my own feedback/ further queries where applicable in due course.

3. In the meantime, I like to further understand your perspective and present views regarding the interest rate movement, as posted above.

4. Why do you see a flat market with no interest rate movement when most of the bank economists are all forecasting a 0.25% interest rate to be further implemented in September 2006 in Australia if not as early as in August 2006?

5. Does it has to do with Ben Bernake's comments to the Senate this morning that the American Federal Reserve is likely to "pause" the interest rate for the time being while remaining vigiliant to fight against the inflationary concerns in USA?

6. Why do you not think that we are likely to move into an era of increasing interest rate environment like in the mid 1980s?

7. Looking forward to understanding and learning further fromn your views, please.

8. Thank you.

regards,
Kenneth KOH

 

[Kennethkohsg]

I have recently read some very coherent and intelligent people demonstrate why stagflation and a 1970's environment is set to return, and why it's not. You can find evidence to support any opinion.

Have an investment plan, some contingency plans and think about what if scenarios and invest anyway!

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Dear Andrew,

1. While I can agree with you, I am also interested in reading up and understand the various arguments why and why not the stagflation and 1970's environment is set to return.

2. I'm sure other members would e equally interested too.

3. Care to share us the said articles which you were referring to and their URL links, please so that we mya be better educated and stayed better informed about current trends?

4. For your kind update, please.

5. Thank you.

regards,
Kenneth KOH