The economy is constantly evolving. The Government, the Reserve Bank and various Regulatory bodies all combine to put the emphasis on different parts of the economy for different results. If you follow the media closely you’ll see that the economy is either overheating, doing fine or underperforming depending on who is being interviewed.
Because of that, investment requires a positive outlook to balance any potential risk, otherwise the positives are not enough to encourage investors to channel their money into the markets.
But what do investors look at to gain a balanced view?
Attending Investing seminars and subscribing to investing websites that you trust are ways to keep abreast of what is happening in the marketplace. Constantly educating yourself is very helpful habit to get into if you plan on investing in Australian property.
Following the changes to interest rates is a basic method of following the effects of the economy on the finance markets. Reading all of the financial press and interpreting the data is one way and experiencing the results of that data is another.
Most investors will be leveraged to a certain degree by investing in rental properties, so they are susceptible to changes in the interest rates, especially if they are large, rapid and unexpected. The current focus on interest only loans and investor loans in particular have seen interest rates skyrocket. According to the Reserve Bank, interest only variable rates have increased 73 points since November 2016. That’s a massive shift in price and the Banks seem to have no intention of stopping anytime soon.
Increases like that put huge pressure on the overall cash flow of a property portfolio, though the effect is the same for small or large investors alike. Lower yields will also impact on the cash flow of property assets, placing more pressure on an investor’s income position, especially if Negative Gearing is involved. Keep in mind that the property markets are different for each State too so investing in Brisbane property will have a different yield than investing in property in Melbourne.
Coupled with this cash flow pressure is a reduction in borrowing capacity enforced through the Bank’s amended servicing calculators. It’s this “invisible change” that impacts investors directly as reducing the ability to borrow is far worse than increasing interest rates. At the heart of investing is the need to accumulate assets and strangling an investor’s ability to purchase assets is not a welcome development.
Of course, another aspect of the cash flow problem is the lack of wage growth. Without doubt, most of us want to maintain our standard of living but right now, wage growth is at record lows and according to Bureau of Statistics figures there hasn’t been any meaningful rise since 2015.
In fact, while wage growth has been around 4% for the last 20 years, the last few years has only been around 2%. To boost wages, Australia has to increase productivity while still using roughly the same amount of effort which would lift economic growth and therefore wages. However, a big contributor to low wage growth is the move to increased casual employment in the workforce.
More workers, competing for insecure jobs with less hours inevitably results in lower pay. Part time work increased dramatically in 2016, a development that only now seems to be slowing down. This situation is exacerbated by a lack of confidence in asking for a pay rise, so less money is being spent which in turn hurts business turnover leading to more job insecurity, hence low wages.
The final pressure point for any investor comes from the home front. Upward shifts in the prices of food, healthcare, education, gas and electricity prices as well as petrol, and telecommunication costs all contribute to reduce an investor’s available surplus. The appetite for further investing takes a hit when a combination of these factors begin to take hold and his holds true whether you are investing in Melbourne, investing in Sydney or even investing in Commercial property.
Confidence, sentiment or rational forecasting as we like to call it, is the ability to make a decision based on what is visible in the marketplace and what effect the economy is having on your own circumstances. It’s very easy to get caught up in the media hype and misinterpret the signals when you are investing in property.
Despite this, as we know, opportunities are still available regardless of what shape the economy is in. An investor’s mind set contains the key to creating wealth and remaining open to moving forward when others may be more circumspect is one element. When it comes down to it, an investor should be ready for when others think the times are tough.
Warren Buffett once said “be fearful when others are greedy and greedy only when others are fearful.”
Maybe it’s time to be greedy?