Strategic property investors plan for the long term and therefore theoretically should be immune to the ups and downs of the property market.
However, the grinding reminders of the economic challenges we are facing can be a harsh test of character for even the most experienced investor.
There is continual news about rising inflation and higher interest rates and how this could lead to a significant downturn in our property market.
So how can property investors prepare for the possible turbulent times ahead?
That’s what I’m going to be asking leading financial advisor Stuart Weymss, in today’s show.
Preparing for turbulent times
I recently read an interesting quote from Morgan Housell, one of my favourite finance commentators.
“Your lifetime results as an investor will be mostly determined by what you do during wild times.
Building wealth doesn’t require a lifetime of superior skill.
It requires pretty mediocre skills — basic arithmetic and a grasp of investing fundamentals — practiced consistently throughout your entire lifetime, especially during times of mania and panic.”
Now that’s easier said than done, but then again — so is everything in investing.
We need to be prepared for the possibility that the next couple of years might be a bumpy ride
- The media thrives on higher levels of uncertainty, so be prepared for plenty of doomsday predictions and lots of negativity.
- The silver lining is that negative sentiment almost always creates attractive long-term investment opportunities, but you must be on the lookout for them.
- Our economy is the envy of the world
- Annual economic growth is 3.3%
- Unemployment is 3.9%
- Interest rates are still historically low
- Our stock market is down 4.69% year-to-date, while the US market is off a big 14.3%.
- Retail trade was up by 9.6% a year ago to a record $33.9 billion.
- Planned business investment was the strongest in a decade!
- Skilled vacancies rose by 8% in April to a record (16-year) high of 311,100
The simple facts are that we are in the box seat to grow well with a global economic rebound dying to happen, but it needs the Ukraine war to stop pushing up oil and energy prices.
And we need China to get out of lockdown which it is now trying to do and stay out of lockdown.
Let’s talk about inflation
The Reserve Bank’s inflation target is consumer price inflation of 2-3%, on average, over time.
But for most of the past ten years, that target has been missed.
While too much inflation can be a problem, it is important to remember that the jump is partly an unintended consequence of success.
As restrictions have eased, households and businesses have been keen to spend some of their accumulated savings, at a time when goods production has been disrupted, especially by the anti-COVID measures in China.
The result has been classic inflation of the kind where “too much money chases too few goods”.
It is very different from Australia’s last major episode of inflation, in the 1960s and 1970s.
Inflation is not demand-driven
- It has been well documented that the cost of living has been rising in Australia and around the world. Australia’s inflation rate is currently 5.1% p.a. (as measured by CPI), but anyone that’s been to the supermarket lately knows that prices of many products have risen by a lot more than this.
- Inflation occurs because demand for goods and services exceeds supply. Inflation can be demand-driven or supply-driven.
- I certainly acknowledge that some sectors have experienced levels of consumer demand that are well above normal levels. However, at this stage, I think inflation is mainly driven by supply chain shortages. Therefore, to cool inflation, demand must be reduced to below normal levels.
But interest rates must return to normal ASAP almost regardless of inflation
- One year ago, I wrote that interest rate expectations can change very quickly, and we shouldn’t get seduced into thinking they won’t rise. Last year many commentators were suggesting that interest rates might not rise for many, many years. Today, the same commentators are predicting multiple increases in the coming months.
- The reality is that interest rates were at emergency settings (zero) for a very good reason – Australia was in lockdown! But that is no longer the case and interest rates must return to more normal levels as soon as the economy can afford it.
The big question that economists are currently wrestling with is what do normal interest rates look like?
It is likely that the neutral interest rate is probably a lot lower than it used to be.
The RBA thinks it’s around 3.5% but most respected commentators think it’s likely to be less than this, maybe closer to 2%.
The upshot is that interest rates need to rise by 2% or more as soon as it's economically affordable.
Property market sentiment has soured very quickly
The property market was going gangbusters throughout most of 2020 and 2021.
The popular theme was that property prices were set to rise sharply for many years, and you’d better get in quick!
This led me to write a blog in mid-2021 advising readers to not buy property in such a buoyant market.
The property market has changed a lot since the beginning of this year.
The FOMO has evaporated, and the constant talk of inflation and higher interest rates has cooled demand for property.
Frankly, this is wonderful news for any would-be property buyers.
I expect that the negative sentiment surrounding the property market will become louder over the coming months.
If that’s true, it will be an excellent market to buy an investment-grade property.
The best time to invest is when…
It is entirely possible that inflation and interest rates will cause economic pain, particularly for lower-income earners.
In fact, it could cause a temporary recession.
If that happens, there will be pressure on the RBA to cut rates again.
The extent of economic pain is highly dependent on how long it takes for supply chains to return to normal.
This is dependent on many factors outside of Australia’s control.
Often, the best time to invest is when it's unpopular to do so.
I invite you to do three things over the next 1 to 2 years.
- Firstly, expect more bad news than good. Expect volatility. Expect negative predictions. Expect to feel uncertain.
- Secondly, focus on maximizing medium to long-term investment returns. I expect the market over the next 1 to 2 years will offer some excellent medium- to long-term investment opportunities.
- Thirdly, don’t get spooked by volatility and negative sentiment and make wholesale changes to your strategy/investments.
Links and Resources:
Stuart’s Book – Rules of the Lending Game & Investopoly
Some of our favourite quotes from the show:
“The suggestion could be that interest rates will go up to maybe a total of 2% from where they were, or maybe a little bit more.” – Michael Yardney
“When things slow down, there’s going to be opportunities for those who take a long-term perspective, and inflation is good for people who own assets.” – Michael Yardney
“Don’t make 30-year investment decisions based on what’s just happening.” – Michael Yardney
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