What would Ian and Jan do in November 2008?

[WinstonWolfe]

Considering many think the world is going through an economic crisis unseen since the 1930's, it would be interesting to hear Ian and Jan Somers perspective on property investment now and into the near future.

If I read their books properly, their mantra is buy when you can afford to and hold forever.

With the dual edged sword of falling interest rates but possibly falling property prices, and a fast softening economy, would they recommend
- sell off of dogs
- deleverage somewhat (along the lines of lowering LVRs on a margin loan)
- buying in the next 2 mths or waiting for prices to soften further.


There certainly was never a credit crisis as severe during the time Jan wrote her books. It seems to me the case to buy now (if you can afford it) has has the advantage that borrowing might get tougher in the future. But that has to be traded off against the very real possibility of prices decreasing signficantly. Afterall, if most find it tougher to borrow, then prices have to decrease.

 

[Peter Parker]

There certainly was never a credit crisis as severe during the time Jan wrote her books.

Was credit really easier to get in the 1950s, 60s, 70s and 80s than now?

These were the years when:

- Single women could hardly get credit
- Non-bank lending such as vendor finance and (later) building societies was popular due to difficulty with bank credit
- The income of a working wife wasn't counted (as she might have a baby and quit work)
- Banks charged higher interest on investment properties than one's own home
- Interest rates were regulated, so the main 'tightness' came about by restricting supply of credit (as opposed to using pricing - ie higher interest rates - to dampen demand)

If banks say you can only have 50% LVR, borrow no more than 3 times gross income and rent must cover all IP costs then I'll agree credit is tight. But I think there's a way to go before we're at this stage.

As for what Ian & Jan would do, my guess is it would be pretty much buying as usual, but maybe concentrating on cheaper areas with higher than average yields (their 3 to 5 rating properties). Unless they wanted to splash out on a PPOR in a prestige suburb which might be obtainable for a good price.

And they might also derive some comfort from Warren Buffet who despaired during the late 1960s boom (when he couldn't find anything of good value to buy) but used the slump to buy good value assets that had been unfairly marked down by poor market sentiment.

Peter

 

[WinstonWolfe]

Was credit really easier to get in the 1950s, 60s, 70s and 80s than now?
Peter

I mean the credit crisis that is causing the world economy to slow at an unprecedented rate, not the unfolding local tightening of credit.

In the 50s,60s,70s, and 80s, median prices weren't 6-9x the median wage.

 

[plusnq]

Hi WW

I am a bit confused by something you wrote (might be all the paint fumes atm).

We have had a credit crisis and now libor and TED spreads are falling and cash is starting to flow (although not to basketcases such as Allco and ABC) so if the crisis not a tightening of local credit then wouldn't the improvement in credit condition over time help rather than hinder?

Cheers

Shane

 

[WinstonWolfe]

so if the crisis not a tightening of local credit then wouldn't the improvement in credit condition over time help rather than hinder?

Shane

- why are non bank lenders still exiting the market?

- current property prices are at levels that required loose credit. Credit continues to tighten via lo doc availability and conditions (lower LVRs), more conservative property valuation/revaluations, mortgage insurer risk analysis, post code reclassification, etc. This contraction trend is building. It is erroneous to believe credit is easing locally because interest rates are coming down. This is offset very much by needing a higher deposit and/or full documentation, and the factors mentioned above.

 

[plusnq]

- why are non bank lenders still exiting the market?

- current property prices are at levels that required loose credit. Credit continues to tighten via lo doc availability and conditions (lower LVRs), more conservative property valuation/revaluations, mortgage insurer risk analysis, post code reclassification, etc. This contraction trend is building. It is erroneous to believe credit is easing locally because interest rates are coming down. This is offset very much by needing a higher deposit and/or full documentation, and the factors mentioned above.

As Spidey said above though...weren't these circumstances in place before? I remember the 1980's with 20% deposit, full doc only and a boom still occurred. On a personal level as a full doc, Big 4 client, we aren't seeing any problems with finance now. Back in August the bank was flip flopping all over the place. I think if you rely on low doc loans you could be in difficulty dependent on your LVR. Friends of mine with a substantial portfolio (esp for their income) just moved from their lo doc to a Big 4 lender with no issues but their LVR was conservative.

Our last Nanny is buying her first house using the FHB grant. Both her and her partner ( both aged 23) are employed but the finance didn't seem to be an issue for them even with a low deposit (once again a Big 4 lender).

My anecdotal perspective is that if you are a reasonable credit risk, then the banks are lending. So my question again is if there is an issue with 2nd tier lenders is it because the Big 4 are clawing back market share atm due to lower cost of funds?

Perhaps some of MB's would like to comment on the availability of funds?

Cheers

Shane

 

[WinstonWolfe]

So my question again is if there is an issue with 2nd tier lenders is it because the Big 4 are clawing back market share atm due to lower cost of funds?

Cheers

Shane

if non bank lenders are still gauged a higher credit risk, then the global supply of credit is still restricted.

yes Australia had tighter lending criteria years ago. however house prices were a lower multiple of median wage. I cannot see house prices sustained at current levels if we move back to the lending criteria of yesterday.

To me, there is serious downside risk to property prices, though maybe not as much as 40% across the board. I am already seeing it.

 

[plusnq]

Hi WW

I agree there is some risk (as there always is as no-one can fortell the future)
For me the biggest risk to the economy is high unemployment. This may occur due to the credit contraction and is why I altered some of the mix of properties in my portfolio to reflect that risk.

Cheers

Shane

 

[WinstonWolfe]

Hi WW

I agree there is some risk (as there always is as no-one can fortell the future)
For me the biggest risk to the economy is high unemployment. This may occur due to the credit contraction and is why I altered some of the mix of properties in my portfolio to reflect that risk.

Cheers

Shane

So do you believe a credit is contracting or not?

 

[plusnq]

Hi WW

I believe it did contract quite severley for Aug-Oct and is now beginning to flow gain. The question in my mind is the degree of severity of that contraction ( seen in Allco, ABC etc etc) and whether the new flow is sufficient to overcome the real effects and the perceived risks in employers minds.

As an aside major banks are doing letter drops here in Clayfield offering LOC's and investment loans. So whilst they may be being selective they are lending.

Cheers

Shane

 

[boomtown]

Even at the peak lo doc was still less than 10 percent of the market.

Brisbane boomed under 8 percent standard variable IRs. Barring a significant rise in unemployment (ie 7 percent or higher) I do not see prices sliding if IRs hit 5 percent. Keep in mind that standard variables still have 7 in front of them.

 

[WinstonWolfe]

Even at the peak lo doc was still less than 10 percent of the market.

Brisbane boomed under 8 percent standard variable IRs. Barring a significant rise in unemployment (ie 7 percent or higher) I do not see prices sliding if IRs hit 5 percent. Keep in mind that standard variables still have 7 in front of them.

10% of all outstanding loands, or 10% of loans written in any one year?

 

[markcoinoz]

Hi WinstonWolfe,

My first post here.

I suppose i am coming from a slightly different perspective rather than just property as an investment. In fact, i have been renting for a number of years expecting a major downturn in our economy before i would consider buying again. Its been difficult to convince my wife that i was doing the right thing up until recently where now we have the Media using the Sub-Prime as a "Byword". Before last August most had never heard of it. Suddenly, now they are the experts. Have also followed Steve Keen's argument regarding Debt to GDP over the last 18 months or so.

http://www.geocities.com/homes4aussies/

Dr Brett Edgerton is one person that puts together some excellent stats together with his own analysis often gathered from ABS rather than rely on the Spruikers of the R/E group. He shares similar views to Steve Keen.

To your original question. What would Ian & Jan do in November 2008?

I suppose it depends on where they believed the overall economy is heading.
Renting and being cashed up with very little debt would be a very good place to be ATM.

IMO many investors tend to be guided by their own enclave without realising what we are witnessing here. The number one priority of government at this point in time should not be focused on FHB & Interest Rate Cuts as being the saviour. On the contrary, it should be more focused on land releases and preserving jobs. Without jobs, you don't have a stable economy.
I work within the transport industry in Melbourne. The first sign of a slowing economy will always be the reduction of jobads for Truckdrivers and Warehouse staff. I know of 4 small to medium transport companies that have gone under within the last couple of months. Heard of another one going down the shoot after 35 years in business. Overall Jobads are dwindling each week. What does that tell me?

It tells me that consumers are tightening their purse strings and looking at ways to reduce debt given the situation the economy is heading. We are seeing places like Toorak & Brighton selling properties at discount. The smart money seems to want to exit first to preserve capital. The question still remains. Can 7 or 8 times the average annual income be justified to owning your own piece of real estate in Australia whilst the global economy is faltering, hedge funds are exiting and causing havoc on the stockmarkets, liquidity becoming more and more difficult, unemployment increasing?

Sure, i have heard all the arguments regarding immigration will help keep the demand supply in tact, that just because the rest of the world places owning a home at 3 - 3.5 times the Annual Average Income, it does not take into account for double income earners in Australia.

Seriously, i would not consider buying in this market until there is an overshoot of despair. That time maybe this time next year.

Cheers markcoinoz

 

[ethereal]

Sure, i have heard all the arguments regarding immigration will help keep the demand supply in tact, that just because the rest of the world places owning a home at 3 - 3.5 times the Annual Average Income, it does not take into account for double income earners in Australia.

Seriously, i would not consider buying in this market until there is an overshoot of despair. That time maybe this time next year.

Cheers markcoinoz

You might be waiting a while Mark. 3 times average annual income will not even build you a basic 3 bedroom home where I live, let alone buy land to build it on. The cost of labour and materials are not going down and builders/developers won't produce houses for a loss. There is already an undersupply.

You mention that you have been renting for a number of years waiting for 'despair'. Had I taken this course I would be filled with despair right now, as my PPOR and first IP have quadrupled in value over the past 5 years. I don't think there is ever a 'perfect' time to invest and hanging out for it will quite possibly mean missing out altogether. Fortune favours the brave.

Louise

 

[topcropper]

Had I taken this course I would be filled with despair right now, as my PPOR and first IP have quadrupled in value over the past 5 years.

Nah...!!! You must be joking right? Quadrupled in 5 years? Where abouts is this?

See ya's.

 

[Toni]

You might be waiting a while Mark. 3 times average annual income will not even build you a basic 3 bedroom home where I live, let alone buy land to build it on. The cost of labour and materials are not going down and builders/developers won't produce houses for a loss. There is already an undersupply.

You mention that you have been renting for a number of years waiting for 'despair'. Had I taken this course I would be filled with despair right now, as my PPOR and first IP have quadrupled in value over the past 5 years. I don't think there is ever a 'perfect' time to invest and hanging out for it will quite possibly mean missing out altogether. Fortune favours the brave.

Louise

I couldn't agree with you more. If I had listened to other people, I certainly wouldn't have invested, particularly in the area I chose and as a result of that decision, paid off our ppor within 5 years! Going against the masses really does pay off.

I now fully own my ppor and land in Qld, and three other investment properties almost neutrally geared, with interest rates dropping and the possibility of rising rents. I see no logic in panic selling, just because the media tells us to. I think it is wise to be cautioned and prepared for any possibility, even in good times, which is what I have always done.

I don't care what happens to prices in the short term, there will always be dips, be it some deeper than others, It's the long term I'm interested in and provided you're prepared, there really is nothing to worry about.

I personally am looking forward to, but not counting on, any great investment opportunities that may come my way, when I am ready. But this will have nothing to do with the economic climate; this will have to do with my husband and I and our personal situation at the time.

If I had waited for the perfect time to buy in, I certainly wouldn’t be where I am today.

Toni

 

[Rockstar]

Hi WinstonWolfe,

My first post here.
To your original question. What would Ian & Jan do in November 2008?

Cheers markcoinoz

Mark,
Have you read Jan's book? Have you read Ian's interview thread? Did you answer the above question?

From what I can glean from the Somers' strategy they wouldn't be phased at all by what's going on. They probably don't need to buy property anymore since they have become so wealthy out of their strategy but if they were still in the accumulating stage they would definitely buy now if they could afford to. Simple as that.

Cheers,

 

[Sunfish]

Was credit really easier to get in the 1950s, 60s, 70s and 80s than now?

These were the years when:

- Single women could hardly get credit
- Non-bank lending such as vendor finance and (later) building societies was popular due to difficulty with bank credit
- The income of a working wife wasn't counted (as she might have a baby and quit work)
- Banks charged higher interest on investment properties than one's own home
- Interest rates were regulated, so the main 'tightness' came about by restricting supply of credit (as opposed to using pricing - ie higher interest rates - to dampen demand)

Reading this reminded me that "Bowker" building societies existed in the early '70s. I can't really remember the details but the idea was that members saved into the society and there were monthly "lotto" draws. The winners got their loans. It may have been something like 10 years before you were "guaranteed" your loan. How would you younguns handle that!

All the "good" things gen X & Y see now, they assume always did, but are quick to point out any perceived advantage the BBs had and they miss.

Life's a balloon. You contain one thing and it pops out somewhere else. Get on with it!

 

[Sunfish]

but if they were still in the accumulating stage they would definitely buy now if they could afford to. Simple as that.

Cheers,

This site is all about the "accumulating phase" because their book was "Hey! You can do what we did!" and the site is spreading the word (as a business venture). So let's go with the original post, shall we?

What would Ian and Jan do today if they were in the position we are?

I would be surprised if they would say: "Go for it! Damn the torpedos!" In this analogy the "torpedos" are the -ve CF commitments. IMHO.

 

[markcoinoz]

Mark,
Have you read Jan's book? Have you read Ian's interview thread? Did you answer the above question?

From what I can glean from the Somers' strategy they wouldn't be phased at all by what's going on. They probably don't need to buy property anymore since they have become so wealthy out of their strategy but if they were still in the accumulating stage they would definitely buy now if they could afford to. Simple as that.

Cheers,

Hi Rockstar,

No i have not read the book nore have i heard of Jan and Ian.
Perhaps Jan and Ian have a completely different view on things.

Suppose i don't feel the same need to use property as an investment vehicle.
Have only ever invested in shares. Much easier to liquidate and maintain.

At some stage i will buy a property. However, it won't necessarily be as an IP.

Maybe i can't see the point in buying something now when i am very confident the prices will come down a lot further within the next year or two.

Cheers markcoinoz