Why I Want Property Values to Remain Subdued

This may sound strange that someone who has many investment properties would want property values to remain subdued.

Well, let me put to you a counter argument to the normal rhetoric for property growth.

In a down market, inflation is low and GDP is low.

When inflation and GDP is low, interest rates are kept low in an attempt to stimulate the economy.

When interest rates are low, one has more cash left over to pay down ones principle on their loans.

Whilst same payments are maintained on your mortgage, a larger portion of the payment comes off the principle because the interest portion is less.

When one is able to accelerate the payment of principle, they are one step closer to creating a positive cash flow position, where rents collected is sufficient to cover all costs and interest so the property becomes self-funding.

Once the property becomes self-funding it is now working for you instead of you working for it.

When there’s a turn in the market and we start experiencing capital growth again, you are now making money whilst you are sleeping.

If you are a long term investor then a down market is welcoming from time to time.

It’s probably the only time you get a chance to do this.

The longer the down turn, the longer the interest rates remain low, the longer the opportunity to pay down principle without changing the amount you have been paying towards the loan.

If you are a long term investor than it does not matter when capital growth begins again unless you were planning to sell your properties and retire on the proceeds or you were planning to leverage on the increased equity to purchase more properties.

It’s more important to get the properties to become self-funding as soon as possible.

Let’s look at the position when the property market is booming and property prices are growing.

When property values are booming it leads to higher inflation and higher GDP which leads to higher interest rates by the RBA in an attempt to reduce inflation and slow the economy.

When interest rates go up it means there is less money left over to pay down principle which means we can only rely on increasing rents for it to become self-funding.

Relying on Rental growth to achieve positive gearing is much slower.

In summary there’s always a silver lining in any economic condition, all it takes is to have a different mindset and to think outside the square.

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Ed Chan

About

Ed is a founding partner of Chan and Naylor accountants and a leading property tax specialist. He has co-authored 3 best selling books. As a seasoned property investor he shares his unique understanding of the relationship between property investment and tax. Visit www.Chan-Naylor.com.au


'Why I Want Property Values to Remain Subdued' have 1 comment

  1. May 5, 2013 @ 10:19 am Chris Burrill

    Good article, but conversely, you could use the extra money to take advantage of the lower market to purchase more property that may then experience capital growth in the upswing when it comes round. Paying off the principal is good if you don’t want to expand your property folio as you would have to wait for the next cycle to buy low. This, I believe, has now extended to 12 – 15 years when it used to be the said 7 – 10 years. Lastly, paying off the principal is using your own money anyway, so whether it be today (paying off the P) or tomorrow (paying interest on a higher P) it’s all much of a muchness.

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