[ErikHMember@erikhJoin Date: 2007Post Count: 118]

August 6, 2008 - 4:55 am

Both will happen … a correction in house prices and a corresponding decline in interest rates. Typical cycle.
 
The key question really is how long and how deep and for a large degree that will depend on what unemployment does.

I think the BRICs and other emerging markets will slow in growth but continue to grow, that will slow demand for commodities but it will stay robust, commodity prices will drop from their peaks (like oil has already done) but they will still remain high compared to a few years ago and hence a large part of the Australian economy will remain strong and unemployment in certain states will suffer less than in other states and therefore I think we'll see a wide spread in declines between states. This will make it difficult for the RBA to manage rates as inflation will stay above target due to high but not extreme commodity prices so the reduction in interest rates will be slow.

US, UK and continental Europe will suffer most with. Canada, Australia will tread water but keep their heads above water and emerging markets will continue to grow, but some will suffer a severe correction in the process.  

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August 5, 2008 - 5:22 am

crashy wrote:

… I talked to a guy who had $3m worth of property leading into the early 90's recession.  he explained how things slowly got worse for him, cashflow drying up day by day even though he sold property (in a falling market) quickly, finally ending up $500k in debt with no properties left.

I wonder how many people here realise just how easy it can happen? …

crashy, anymore details you can share about that story? 

[ErikHMember@erikhJoin Date: 2007Post Count: 118]

August 5, 2008 - 3:22 am

Well… Rudd does speak fluent Mandarin, doesn't he?

Back onto topic, I found the following article on housing prices quite interesting: http://www.realestate.com.au/doc/review/july08/housing-prices.htm

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August 5, 2008 - 2:40 am

ummester wrote:

ErikH wrote:

Ormeau – I'm with crashy, your post is out of place and actually pretty low on facts and sound reasoning. One of the biggest empires of all times, the Roman Empire, did not fall apart due to depletion of local resources, but their decline was much more related to a decline in morals and increasing greed and corruption. I found "Empire of Debt" an interesting read in that it made the prediction a few years ago that the US was an Empire like the Roman Empire but that it's fiscal model was fundamentally flawed (Empire of Debt) and hence would self destruct and that it would al start with a collapse in housing. The authors also explored the similarities between the Roman Empire and the US in terms of the decline of morals. Interesting even though the book was 2-3 times as long as it needed to be…

ErikH, I agree with your thoughts on Ormeau – this topic is too specific for his comments. I also agree with comparrison of modern US and Rome before it fell. And I wonder, is Australia a smaller version of that, or atleast connected enough to the US to fall a little with it?

Ummester, I don't think Australia is anywhere near in bad a shape as the US, it never was an Empire and never got itself into such a (financial) mess as the US did, but I think you're right in that Australia will stumble a bit as the US continues it's fall downwards. But I don't believe it will be more than a stumble as long as Australia and Australians recognize the global shift in power and influence and are willing to change their focus accordingly.

Scamp raises an interesting point in that China is indeed trying to secure Australian resources so the question is how do you keep China as a valued customer, get the (much needed?) investment from China but do not handover control over key companies and national resources… 

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August 4, 2008 - 2:36 am

In Australia and most if not all other western countries too many people expect too much too early in their life i.e. a nice big house, a fancy car, the latest electronic gadgets, overseas holidays etc. and all that without putting in many years of hard work and saving. The years of easy credit has made people believe that it's their god given right to have all this without compromise and without first having had to work for it. This will change, it has to and if people can not adjust it will be a very rude awakening.

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August 4, 2008 - 2:26 am

Story makes me sick, truly sad.

It does highlight how easily people part with their very heard earned cash without doing any due diligence. There is obviously still not enough education going to stop people from making these kinds of mistakes. 

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August 4, 2008 - 2:01 am

Scamp, true, but the interesting point about the current (global) inflation debate is whether the inflation can actually be effectively influenced by reserve bank rates – some believe firmly that the current global inflation is due to high energy and food prices which are due to accelereated demand/growth in emerging markets and that therefore increasing base rates is unlikely to make any real difference and these individuals argue that avoid further economic damage base rates should be lowered…

I expect the RBA to hold the rates for now, but probably start indicating when they think rates can come down so that an expectation of lower rates is being built into the market… but heck I might be completely wrong!

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August 4, 2008 - 1:56 am

We're B and about to cross into C.

For me it is all numbers — just not number of properties, but indeed as marc said it's the combintaion of cashflow and networth which in due time will give us the financial freedom we are looking for.

I think the question "how many have you got" has some merit in that there is a common phenomena in just about every part of life that some who know it all and know it best have in fact have no skin in the game (i.e. they have never been and will never be property investors but do know everything on PI… and can't wait to tell everybody else what to do or not do …)

But we have to make sure we also take into account people like crashy who've decided to cash in for now and must obviously have given that a lot of careful thought.

Any chance of getting an online survey setup on the site so we could explore how long members have been in property, how much of their wealth is tied up in property, what their attitude to risk is etc. Would probably make fascinating reading

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August 4, 2008 - 1:10 am

I'm no believer in ultimate Doom & Gloom, but some good point's have been raised above and it's interesting to see that the mood of the discussion is heating up so much! If as bulls we are getting too upset with posts from the bears, maybe we haven't got our backsides covered just in case the bears are right, i.e. maybe we're not setup to ride out the rough patch?

I say thanks to all you D&G'ers as you've helped me to look more critically at my own position and make sure I can ride out a rouuh patch – and now that I'm sure I can I see the near term as a great opportunity! But I'm going to take my time to find the next bargain.

By the way, just looked up UK house prices for an analogy — in 1989 UK house prices peaked at GBP 117k and then dropped to GBP 77k around 1992/3 (35% drop). It took until 2001/2 for house prices to get back to the 1989 mark (that is 12 yrs) but then they grew by some 60% in the next 5-6 yrs to GBP 191k and now they're in decline again. That was a pretty long and nasty decline, but again if held on for the long term you would have been ok (depending on your financing etc.)

These are real prices, i.e. adjusted for inflation. The data is from Nationwide (http://www.nationwide.co.uk/hpi/historical.htm)

At the same time as the housing price peaked in around 89/90 interest rates also peaked around 15% and then stayed lowish (6%) for many, many years. Interestingly the UK market suffered from similar ups and downs between 75-77 and 80-82 with corresponding interest rates moveemnts but these cycles were short and not deep.

I don't believe that AU is in the same place as the UK was in '89 and I beleiev that of most western nations AU is well placed to ride out the coming rough patch, but I will read up on my history… as they say, history repeats itself so if only we could learn from it!

 

[ErikHMember@erikhJoin Date: 2007Post Count: 118]

August 4, 2008 - 12:31 am

Ormeau – I'm with crashy, your post is out of place and actually pretty low on facts and sound reasoning. One of the biggest empires of all times, the Roman Empire, did not fall apart due to depletion of local resources, but their decline was much more related to a decline in morals and increasing greed and corruption. I found "Empire of Debt" an interesting read in that it made the prediction a few years ago that the US was an Empire like the Roman Empire but that it's fiscal model was fundamentally flawed (Empire of Debt) and hence would self destruct and that it would al start with a collapse in housing. The authors also explored the similarities between the Roman Empire and the US in terms of the decline of morals. Interesting even though the book was 2-3 times as long as it needed to be…

[ErikHMember@erikhJoin Date: 2007Post Count: 118]

August 1, 2008 - 6:34 am

Carol, before you head off in any direction do a bit of research / reading on investing principles, i.e.:

(1) do you want your investments to generate an income on a monthly basis or do you want capital growth or some combintaion of the two. And how much income or growth do you want? A combination is often (but not always) the best in that you get cash from your income producing investments but you get capital appreciation (i.e. protection against inflation) from your growth investments. Typically the recommended ratio shifts towards more income focus as you get older.

(2) think about your time horizon as you do not want to have to exit any investments too soon and then have to face a loss as a result of that, property typically has a 7-10 yr cycle and shares I would suggest you should be looking to keep them at least 5 yrs (less if you have a great bull-run) 

(3) think about your approach to risk – would you mind if your invesments went up or down by 5%, 10%, 15% or 20%. Your attitude towards risk helps to determine how you split up your investment portfolio between the different asset classes i.e. property, mutual funds, shares, bonds, cash etc. This is called asset allocation (just google it).

(4) think about how much cash you need as emergency funds whether you need any (additional) life insurance

I would suggest that you first read some of the free stuff that is on the web or get some books from the library and then find a financial planner who gives advise on a fee basis rather than a commission basis so he/she doesn't try and sell you something you don't want / need.

[ErikHMember@erikhJoin Date: 2007Post Count: 118]

August 1, 2008 - 6:04 am

First of all, get another accountant who does know something about NZ tax.

I would expect that there would be a tax treaty between the two countries so you would not be paying tax on the same income twice. We are overseas investors and all income from property in AU is indeed taxable, but you also still get the usual deductions i.e. interest, costs, depreciation etc. but since your main income will now be in NZ you can no longer negatively gear against your personal income and any tax losses on your properties will build up until you return to AU or until you sell whichever is earlier.

As a non resident you might be able to qualify for a foreign currency loan which is a bit risky but can be worthwhile if you have the stomach for it.

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August 1, 2008 - 5:54 am

Scamp… I actually live in a third world country, have been for the last 6 years and the US most certainly isn't one whatever we might think of their financial mess. Making statements like that undermines your credibility hugely which is a shame as I was enjoying your bearish posts – I don't always agree with them, but they challenge my thinking and that is always good. 

As for interest rates … the RBA just like every other central bank is in a dilemma in that they face inflation rates higher than their targets which would drive them normally to increase rates, but the various economies incl. Australia are weakening and would normally need the lift from reduced interest rates. According to some the inflation in energy and food prices will not be halted by increasing interest rates and would only further weaken the economies …

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August 1, 2008 - 5:39 am

A good property manager will do eveything he needs to do – that's what you pay them for. If you have to get too involved you're waisting your money, hire another pm. If you want to be an active investor, why not be active in researching a next property or adding value to your existing property and leave the pm to do what you pay him to do? I certainly finding researching properties and thinking of wasy to add value a lot more interesting than looking after tenants anyway and chances are you will too.

Congratulations with your first IP and good luck with getting the next!

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August 1, 2008 - 5:35 am

Mel, make sure you get to see actual income / expense statements from the current owner. I looked at a few retirement properties in SE QLD and by the time all the management fees, rates, body corporates etc. where included (don't forget your tenants usually get 3 meals a day included in the rent) the cashflow was only just positive and simply too low in my view if you consider most of these places will have limited capital growth at best.

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July 30, 2008 - 6:39 am

Karen,

I only had a very brief look at the US market but decided I had my hands full with what I was doing in Oz so took a step back without doing a great amount of research. I did notice though that the scene is full of dodgy operators who try and flip vacant property in not so nice areas of the US and they often aim at foreign investors. Be very careful if you go for the lower end of the market !!

I do think that there are good deals to be had there but you need to do your research carefully and I would strongly suggest you go and see before you commit and personally I would probably aim at good quality properties in well established suburbs with good reputation (i.e. the not so cheap stuff!) As far as I understand financing as an overseas investor can be done but takes some time especially in the current climate (and watch the exchange rates and check what thier moement can do to your loan balance and/or your monthly repayments). 

Search the web and you'l find plenty of articles on investing in US property, the good, the bad and the ugly.

Good luck!

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July 30, 2008 - 6:23 am

Looked at the site and their stock quite a few times, but never used them. I did find though that often, by good searching/googling you can find the same (kind of) properties in http://www.realestate.com.au or other sites and the you save yourself 2% commission… most of the stock is pretty standard positive cashflow type anyway e.g. student accommodation (most of what they list is in Sippy Downs, QLD) or homes in mining towns. Most of this you can find yourself. Also when I did some calcs myself I often foudn that their expectation of rental returns was alwasy on the optimistic side, but why wouldn't it be because they're trying to sell you something!!

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July 30, 2008 - 12:06 am

Scamp wrote:

Erik,

You realize that the real-estate in Japan has been crashing for decades already ?
Are you ready to invest your money into something that will keep going down every year , costs you a LOT of money per month ( negative gearing ) and on top of that have 10% inflation ?

Everything looked similar in Japan 20 years ago to Australia now. And their housing market has been crashing lower, and lower… and lower every year, without exception. I think a house there is worth 10% of what it was worth in the height of their bubble.

Scamp, I certainly do, but Japan was and is a structurally different economy than Australia in many ways. Japan experienced years of deflation, which is most certainly not the case in Australia and with the pressure on energy and food is unlikely. You yourself highlight inflation of 10% – well, that will perculate into house prices at some point. Furthermore, I believe the 21st century will belong to emerging markets and Australia is fundamentally well placed to take advantage of the emerging markets due to its commodities and has great potential in providing (financial) services to these countries (especially in Asia). Of most wetsren economies Australia is one of the best placed to weather the oncoming downturn.

You make a few assumptions here that actually don't apply to my situation: I have access to much lower interest rates, my properties do not cost me much money to hold, in fact my portfolio is almost neutral before tax. With rents set to continue to rise for another 3-5 years at least that will make the portfolio positively geared, even with rising costs.

I have never actively experienced a housing crash – too young for that  – but that does not mean I can't learn from what has happened in the past and I have, my portfolio is neutrally geared, well placed, less susceptible to interest rate rises and has a lowish LVR so I can easily weather a flatlined market or a crash. At the same time history shows that in every major western economy property has been a good investment if your time horizon has been long enough – even if you pick a "bad time" to start to invest!

And I think the next 12-24 months could actually be a good time to invest if the market does really correct heavily…

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July 29, 2008 - 6:24 am

I have a couple of foreign currency loans in place and pay <4% interest, what you need to keep in mind is:

– most banks only lend in the currency you earn and typically up to 70%-75%, some to 80% if the loan is big enough and St George goes up to 100% if you provide additional security e.g. an investment portfolio

– you can get loans in curencies different from what you earn but then the bank's margin often goes up and the LVR goes down to 60% to 65%

– you can get loans that offer free swicthing between currencies. My loan allows me to witch between USD/JPY/EUR/GBP/CHF/AUD at anytime without incurring a fee. That is why my interest rate is not the lowest in town, but I can move from curency to currency, and I typically look for a currency with a stable trending exchange rate, that is why I took USD rather than JPY when I took the loan out, now I'm considering moving to out of USD into another currency

– using a mulliple currency loan is my way off hedging, i.e. I can move out in and out of 6 major currencies at any time and worst case you just go back to AUD and pay teh rate everybody pays! Real currency heding using options will simply cost you more money than it's worth

– be careful with loans that limit you to a single currency and the AUD because you have much less flexibility and when go are forced into the AUD you often have pay pretty high rates

– currencies move easily 10% or 15% per month and that is when there is no scare! So be careful, our loan has been reduced by about 5% due to currency movement and I've the benefit of low interest rates. I keep a very careful eye on the exchange rates for all major currencies and actually pay for a currency trading service, not to trade but to get their insight in likely trends.

– worthwhile if you can stomach the risk and ride out any volatility and understand the combined effect of the interest rates and the exchange rates on your loan balance

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July 29, 2008 - 5:39 am

or try http://www.efm.info which as of now covers all states except NT and TAS