Please post your questions and comments relating to the Feb Insider which is due out later today.
Cheers,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
I’ll take the bait then… isn’t it old news that interest rates are on the rise? I thought the negative sentiment from mums and dads was already factored into prices?
I read recently that building costs in WA are set to raise 10% a year for the next 4 years… we have a situation where replacement costs will be drastically higher than established house prices, with rents even more distorted. PMs are telling me rents are on the march and vacancy levels very low, so I think we can safely assume that at this stage in the cycle rents are set to go up. If interest rates kill the market the building industry will be in a huge slump – signs of which IMO are not happening.
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
I read the newsletter article, and, still my thought is :
If Interest Rates going up by .25 – .5% is something that is a worry to you….. you should not be investing in property……
Personally I look forward to the panicing stampede of so called property investors heading for the door…. I’ll be standing by the door ready to buy….
In less than 18 months NZ has had about 6 increases in the Official Cash Rate (presently 6.5%) however, a large percentage of mortgages are fixed due to the discrepancy between fixed and variable rates. There has also been competition between banks for a bigger slice of the mortgage market and some good 2 year fixed deals have been had. It’s worth having a look at http://www.interest.co.nz if intending to invest in NZ.
What Steve says about making a deal is imperative. Adding value, increasing cashflows and capping or fixing your loans can only be better for your pocket. You may wish to free up some cash for any impending opportunities that arise.
There is a bargain in every market whether it be found (right place at the right time) or made (add value).
Cheers
JeffOnce again, well said Steve,
the problem with a majority of property investors is that they are too interested in the mass market and feel they have to move with them. when that fail they then have someone to blame, the only way to be a successful investor is to assume your own strategies, trust them and be accountable. Good luck and do YOUR thing and do it well.Mic
Hunter House Hunters.
Specialising in finding your dream home in Newcastle and the Hunter Valley or your perfect investment property throughout Australia.To join our database [email protected]Interesting reading Steve. Whilst I do not necessarily have the same investment strategy as you do, I like to read your articles to offer a new perspective on investment strategies.
My investment strategy is to invest for capital growth, where cashflow comes a very distant second. The reason I mention this is that I think it has relevance to your article.
Yes, I agree the market sentiment for property is driven predominantly by the media. Investor activity has slowed considerably. I for one cannot understand the logic of this – the government is offering a free $7000 to first home buyers, there are some good stamp duty savings to be had for the same people, interest rates are still low by historical standards, and there are some good tax advantages to property investment. So as an investment class, property has not changed per se; it is only the buyers that have changed their understanding (or lack or it moreso).
However the impact to me as a capital gains investor is huge. But I cannot see what impact this has to you on cashflow for example. Why wouldn’t you lock in interest rates for a 5, 7 or 10 year term if you were worried about rate rises. Rates for these terms are very competitive. Plus if you are a wrapper, you pass on rate rises anyway.
Also interestingly, I note many of your strategies seem to be moving towards growth models now.
Either way, I look forwards to reading more
Originally posted by Troy Boy:as an investment class, property has not changed per se; it is only the buyers that have changed their understanding (or lack or it moreso).
Property as an investment class has changed a great deal! It has gone to being reasonably valued based on p/e and historically significant fundamentals to being grossly overpriced by these same measures! This should be even more significant to investors such as yourself who aim for capital gains rather than income.
Following your logic, tech stocks in 2001 were a good CG prospect because to paraphrase you, “as an investment class, (tech stocks have) not changed per se; it is only the buyers that have changed their understanding (or lack or it moreso).”
Cheers, F.[cowboy2]the tech stocks were never good value though as their price was based on future expectation which was never going to materialise, plus you couldn’t house your family in one if it became worthless overnight. Tech stocks were fundamentally flawed from within, property is being affected by the external force of interest rates (well may do if they go up), just one force of many.
http://www.megainvestments.com.au
Extensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
True. Apples are apples, oranges are oranges. Apples at $100 per kg would be overpriced. On the other hand oranges at $100 per kg would be overpriced.
Cheers, F.[cowboy2]Originally posted in Steve’s email:
the 30 year low interest rate environment in Australia is now facing the dawn of a new trend. You just cannot ignore that US interest rates have bounced and are now heading higher. Just as New Zealand has a premium on interest rates above Australia, so too does Australia have a premium above US rates. Sooner rather than later (maybe even tomorrow!), our interest rates WILL and MUST go up.As we all know the RBA aims to keep inflation between 2%-3%. If it looks like it is going outside this, the RBA will generally act. I think the issue the RBA is most concerned with this time round is not so much historical or global context but local pressures on increasing (minimum) wages.
So remember to say a big thank you to your nearest union rep when your mortgage repayments go up this year. [jerry]
But I agree with above posts that if 0.25%-0.5% rise is going to be a problem for you, then you were probably over extended in the first place.[bawl]
Hello Steve and the Forum
Thanks for an interesting article. The whole situation with property reminds me of the technology boom in the late nineties. At tha time the whole perception what is reasonable in the market got distorted to the degree of ridiculous. Shares of Internet companies showing losses were doubling in price every couple of months. Reputable analysts kept explaining that this is new economy and that old valuation methids for stocks should be abandoned. PE ratios of 50, 70 and even 100 were normal at that time, again, perfectly explained and justified by expert economists. They kept predicting fantastic returns for the years ahead. When the market stumbled for the first time at the beginning of 2000, analysts started talking about “moderate growth” for technology stocks. The ending – we know it now. “New” economy became “old” one, with common sense and reason coming back. While Nasdaq Composite Index fell from about 5000 to 1200 in couple of years.
What does it have to do with property? Look for yourself. Analysts find reasons for recent property boom. In Sydney it is immigration, about 1000 people a month or so. And it was undervalued “for years”. And the economy is booming. And so on. In Johannesburg property also skyrocketed. There is no immigration (more people probably are leaving the country), but local economists find suitable reasons too. What about reasons for property prices increasing in Shanghai, Moscow, the whole of USA, Latvia? This boom has affected the whole world. And everywhere economists and analysts find logical explanation why it is happening. But very few in fact understand what is really happening. Often reasons are not visible until well after the fact. Often there are no reasons at all. Over the last 100 years, property appreciated at the rate of 5 – 8% per year on the average. In the last four-five years property trippled in price. Has the value trippled as well? I doubt it. Booms have happened many times before, and always ended up with sad consequences of various magnitude. Take property boom and bust in the USA at the beginning of nineties. Federal reserve had to bail out banks uncontrollably exposed to property. The reality always returns to common sense and some sort of fundamental value, often overshooting to another extreme for a while.
I don’t want to get in line with others and try and predict what should happen now. Couple of things are fairly predictable though. Interest rates move in cycles, and now are at the bottom. They will have to go up. Many people, coined by Steve mum and dad investors, are exposed to negatively geared property. When interest rates go up – they will suffer, and at least some of them will have to sell. People are easily subjected to panic, and seloffs may be quite dramatic.
They say that the most successful investors are contrarians. They buy when everyone sells and vice versa. I am going to wait and see what happens after three or four interest rates increases. Good things come to people with patience.
Hi,
Well, looks like this month was the month. Interest rates up 0.25% this morning.
I have just posted this comment as a blog:
The Reserve Bank of Australia (RBA) today announced that its benchmark cash rate would rise 0.25% to 5.5%. The last increase was in December 2003 when it rose the same amount.As far as impact goes, someone with a mortgage of $200,000 and who is now 7% interest will be paying an extra $7.32 per week. This doesn’t sound like a whole lot at first glance… but it is!
First, for someone on the top marginal rate, $7.32 a week after tax equates to $14.21 a week before tax, which in turn is $739.05 of salary income sucked away in one small increase.
Second, home loan interest rates aren’t the only finance product that will rise – credit cards and personal loans will also rise too. That might cause a bigger problem because Australian’s are sitting on a record amount of debt at the moment at the same time as having negative savings.
The news for property investors isn’t all bad though, unless you are relying on general market capital appreciation to drive your profits. Yes, some of the positive cashflow you were enjoying may now be swallowed up in extra interest, but in the same token there should be more opportunities for those who are cashed up.
If this rate rise has caught you unawares then don’t beat yourself up too much. You need to re-evaluate your portfolio and takes steps to eliminate personal debt as fast as possible.
All in all, we are in for some uncertain times ahead as the market first digests and then later reacts to today’s RBA announcement.
Cheers,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
those hoping for an interest rate induced property collpase may be disappointed:
Economy hits wall as RBA raises rates
Mar 02 11:52
Feedback Jim ParkerThe Australian economy has eased to its slowest pace in four years, eclipsing already gloomy market forecasts and raising the question of whether the Reserve Bank’s anticipated interest rate rise on Wednesday would be the last.
Gross domestic product – a measure of the economy’s total output – rose by 0.1 per cent in the December quarter, well below consensus forecasts of 0.5 per cent and the slowest pace of economic growth since the post-GST bust of late 2000.
The annual pace of growth slowed by nearly half to 1.5 per cent, again well below forecasts of 2.0 per cent and partly reflecting a downward revision of the originally reported September quarter growth rate to 0.2 per cent from 0.3 per cent.
The quarterly national accounts, released by the Australian Bureau of Statistics on Wednesday, provided a dramatic contrast to the upbeat statement from the Reserve Bank just two hours earlier announcing its first rate rise in 15 months.
“This release must make uncomfortable reading for the RBA after its 25 basis point hike this morning, regardless of its assessment that the slowdown does not reflect the real ‘facts on the ground’ in the economy,” said RBC Capital Markets senior economist Michael Every..
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While the RBA acknowledged that output growth, as measured by GDP, had slowed, it said this had not reflected any deficiency in domestic or global demand.
“Domestic spending has been growing strongly for some time and the global economy last year grew at its fastest pace in more than a decade,” the bank said, while noting that conditions were still conducive to spending growth.
The bank’s main concern, as it had argued beforehand, was that after a record 14-year expansion, the economy was running out of productive capacity and this was threatening higher wage and price inflation.
On the expenditure side of the national accounts, the increase in GDP was driven by growth in total private business investment (+0.8 percentage points), and total final consumption expenditure (+0.5 percentage points).
These were offset by negative contributions from net exports (-0.6 percentage points), changes in inventories (-0.6 percentage points) and private gross fixed capital formation on dwellings (-0.2%).
On the production side, there were small positive contributions from a number of industries. However, three industries – construction, retail trade and property and business services – detracted from growth.
The release of the weaker-than-expected growth data sent the Australian dollar down by a quarter of a cent to around US78.4¢ and triggered a rally in interest rate futures.
The implied yield on the June bill futures contract – a measure of where the market sees official interest rates headed – fell 3 basis points to 5.84 per cent, still suggesting investors expect the RBA to raise rates once more by mid-year.
The central bank has argued that Australians will have to get used to economic growth rates closer to 2 per cent than the 4 per cent-plus rates of recent years, if the nation is to avoid the sort of imbalances that have derailed past expansions.
Those imbalances were evident this week in data showing the current account deficit hit record highs in the December quarter at more than 7 per cent of GDP, eclipsing the levels it was at in 1986 when then Treasurer Paul Keating warned that the nation was in danger of becoming a banana republic.
However, the RBA’s confidence in hiking rates in the face of what appears to be a sharp economic slowdown has raised more than a few eyebrows.
“Although these data are backward looking, and the RBA forward, the bank appear to have started out on a bold course in terms of rates – and it is not yet 100 per centcertain that the economy has gone along with them,” said RBC’s Mr Every.
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
Originally posted by AUSPROP:those hoping for an interest rate induced property collpase may be disappointed:
Hi Ausprop,
Are you suggesting that the article you posted contains any good news or that a property collapse is innevitable regardless of interest rates?
Cheers, F.[cowboy2]not sure what you mean? everyone is panicking about interest rates going to double digits, yet it’s looking like the economy can’t withstand it and even the latest is questionable. If this is it for rate rises Iwould say that is good news.
talk of a property collapse – I believe – is fanciful. But always expect the unexpected!
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
Hello everybody,
Over the past two days I have read in the newspapers both sides of the argument. However, the RBA is only concerned about inflationary pressures, which seems to be more external than internal at the moment. The external pressure is coming from our exports not leaving the country fast enough and bottle necking because of infrastructure, demands from China and the US on commodities, our balance of payments, the skilled job shortage and the US balance of payments.
The RBA barely mentions any concern for the property market, either for or against, which means that another rate rise could still be on the cards. Besides the property market is only one amongst many.
As for a property collapse, who knows, market prediction is crystal ball management. However, the recent boom was built on emotion and the sentiment of capital gain over a short period, these speculators could very well change their minds and create an emotional downslide. Besides they now only have to decide not to buy. I have been trading options on commodity futures for sometime and generally the way a market goes in is the way it will come out. This market could eventually change on emotion. Media hype will make sure of that!!!
The fundamentals had nothing to do with the building of the recent house prices and the fundamentals may have nothing to do with dismantling, correction or collapse.
It is very interesting times
Ciao,
AaronI dont think they are that interesting. I foresee a very dull period of the market (overall) moving sideways, which means it will require greater skill by the investor to make a deal work for them.
As has been mentioned before – talk of a ‘property market’ suggests that property is a homogenised product, which couldn’t be further from the truth. So if you can’t make a deal work in a particular market, maybe you nedd to look at the next house, street, suburb, state (or country, though I wouldn’t personally rush into that one).
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
Does anyone believe what agents tell them?
I had one agent assure me Adelaide’s market was still incredibly strong (and from the prices I’ve seen properties fetching, I have to agree).
Another agent, from a huge company, told me people were “hanging on to their homes by their fingertips” and that attendances at opens had “fallen through the floor”. He also said that you’d have to have “rocks in your head” to buy an investment property now because when the second .25% rate rise hits, there’ll be mortgagee sales “left right and centre”.
I find it very hard to believe that so many people are so close to not being able to keep up repayments, and when I suggested to him that surely a .5% increase wouldn’t make much difference to most people’s circumstances he assured me that a .5% increase would have the same impact as a 2-3% impact would have had 10 years ago, such is the household income to household debt ratio.
Interesting times indeed….
Hi Carlin
I find it very hard to believe that so many people are so close to not being able to keep up repayments, and when I suggested to him that surely a .5% increase wouldn’t make much difference to most people’s circumstances he assured me that a .5% increase would have the same impact as a 2-3% impact would have had 10 years ago, such is the household income to household debt ratio.I don’t know about believing agents. Probably not productive to go there. Its a personal judgement thing.
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Anyway, there is some merit in what you are saying but i’m not sure that it is the investors that have to worry. It may be those mums and dads that have just one or two negatively geared properties plus their principal.
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Just and example I know people that have outstanding debt on PPOR of over 500k. I suppose it is not that uncommon in Sydney. Except these people don’t earn mega wages they are just average wage earners with two incomes.
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Of course these home are now worth substantially more than they paid for them. Part of the trouble is that some of the debt is made up of equity draw downs to pay for new four wheel drives and holidays.
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I used two work with people like this. Great people but they could tell you exactly how many hours it was until pay day. If the pay was late then they would have to borrow money for lunch.
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So, I agree. There is a bit of pressure out there. I don’t want to be all doom and gloom though. Many people have made good use of the current and past low fixed rates and locked them in. I have some debt fixed for another 3.5 years and 5.95%. Many others would have done better than that when rates were at there lowest.
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I don’t pretend to know what proportion of households are in this situation (over extended) or how it will effect the overall economy. However, .5 percent will have a big impact in some areas.
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However, I tend to agree with AUSPROP. Dull times ahead and good times for skilled investors.
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Good Luck.
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