Property is one of Australia’s greatest risks | The Finn Review
May – what a miserable month!
As much as I hate cliches, ‘sell in May and go away‘ has come to fruition again.
The Australian Market has gone down more than 7% this month!
Europe is still dragging on. We are tiring of talking about the Greeks so attention is focused on who will be next? The Spaniards are looking pretty ugly, which you would expect considering the Country has an unemployment rate of just under 25%. Even worse, 1 in every 2 youths are unemployed!
Interestingly there was a study recently done that rated how happy different countries were.
Australians, who are currently richer than we ever have been before and have enjoyed an amazing boom, you would assume would be a lot happier than the unemployed Spaniards? No, for some reason we are a lot more miserable.
What really concerns me is what happens when things do actually get tough for us, how are we going to feel then?
It wouldn’t surprise me though if we felt happier then because we like being the underdog. We feel uncomfortable being at the top and it will also allow us to have a good whine about how hard we have it!
We are going to continue to see a lot more news come out of Europe which is going to cause volatility in the markets.
Remember journalists and economists don’t get people listening to them if they say average things. They will go out of their way to say controversial statements and give ludicrous predictions, just to stand out – this is what causes the volatility.
I get asked a lot about property.
Do I own property? Yes I do. Do I want to? No I don’t!
Why do I? Cause I can’t sell the damn thing!
This is one of many reasons I believe property is one of Australia’s greatest risks.
Australians have become so accustomed to property prices always going up, that I think we are going to find it hard to adjust when they don’t. Most Australians are leveraged to their eye balls in property and don’t even blink to go get a million dollar mortgage.
Even if property prices go down by only 5% per year for a couple of years, for an average owner who has a 10% deposit, you are now in the situation where you have negative equity (you owe more than your property is worth). This is the case for a large percentage of new home buyers in the last 2 years.
Take my case as an example. What happens if I didn’t take the advice of the great advisors at Wealth Enhancers and didn’t have a diversified portfolio and also a cash reserve and I suddenly needed money because I was ill or even for my wedding which is coming up?
I would be forced to keep on lowering my sale price until I found a buyer, which could erase all my gains.
Where do I think property prices are going?
Nowhere quickly and potentially down.
The baby boomers’ love of property has helped to force the property prices up for many years.
The problem is that they will also cause it to go down. Unfortunately most baby boomers don’t have enough Superannuation to live off, so they are going to have to sell their properties to help fund their ongoing living expenses. The ones who do have adequate money are thinking differently than the previous generations. They plan to spend most of their kid’s inheritances before they die.
If all these properties start coming on to the market and, as we all know young people can’t afford to buy these properties, there is only one way the price can go. I don’t want to scare people about property, I just really want people to think about the real risks and consequences involved with having such a large exposure to property.
Where to invest
We are still happy to sit out, be patient and wait for the right opportunity to take action.
It blew me away when I saw a number of people wanting to blaze away on Tuesday just because there was some news articles out that the Chinese were going to provide a massive stimulation package – wait a day and you find out this was just a rumour.
Australian government bond yields touched 2.89% just passing the September 1897 record low of 2.9%
US Treasury’s 10 year bond hit an all-time record low over night. The chart below shows the greatest Bull Run and potential bubble of recent times.
Investors are still hungry for income. Heritage bank recently raised a bond paying a fixed rate of 7.25% and this was oversubscribed by three times!
We need to be looking at portfolios, cleaning out the bad investments and improving the quality in the portfolios. Good companies will win out in bad times. I like energy as a long term theme and will discuss this in the future.
Word on the street
We have become obsessed about speculating about which direction the Australian Dollar is going and whenever there demand companies will form to try to capitalise on this opportunity.
I am talking about Contracts for Difference (CFDs) market makers and Foreign exchange (Forex) so called “learn how to trade and make money” currency courses.
It is scary how many people have fallen to the attraction of being able to trade 24/7 and the advertised easy way to make money. If you ask your friends and colleagues you will be surprised who has fallen for this and lost a quick $10,000 or even nearly a million dollars like a person I know.
This is a warning from someone who did this for a number of years and actually was successful and made money. It is not for the faint-hearted and not a good way to make money. I was very lucky and would not recommend it for anyone.
Out and about with TheFinnReview
BRW Magazine Fast Club Lunch
On Tuesday I went to a lunch held by BRW magazine. Mark Carnegie was the guest speaker. He spoke about the current environment, the future of business and where to invest. He is one of Australia’s most high profile private equity investors and corporate advisor.
Mark believes the current environment is extremely tough. We are seeing some major structural changes with newer businesses being in the best position to adapt and prosper.
He said that activity will build in about two to three years when Asia pulls through and starts buying our products.
Mark is a lot more bullish on emerging markets. Eventually six billion poor people will stop looking at one billion rich people and start activity and trading with each other.
He emphasised that you have to have profitable clients for business to have success.
This is why we charge the fees that we do. We can ensure we are successful which means that you get better service and advice.
He thinks you should start a business in an industry when “your wife says you are nuts!”
Did you know?
Change in private health insurance rebate
From 1 July 2012, the way in which the private health insurance rebate and the Medicare levy surcharge is calculated is changing. Basically higher income earners (over $80,000) will be penalised. You have one opportunity to receive the full 30% rebate by paying your policy premiums for the 2013 financial year in the current financial year (should your fund allow this).
The end of In-specie (off market) transfers to your SMSF
From 1 July this year new rules require transactions to be conducted through the market where one exists. This means that you will no longer be able to transfer listed shares into your SMSF. You must first sell the shares on market and contribute the cash into the fund. Then organise for the fund to reacquire the shares on the market. With the current volatility in the markets this could mean by the time the funds are contributed into the fund the price of the share could have moved considerably. Resulting in a loss!
If you hold shares outside your SMSF you should strongly consider making a transfer in the next few weeks while you have the chance. This is a relatively easy process.
Want to chat to Finn and the WE coaches about your money? Book in a time for a free Free Strategy Session.
Disclaimer: Information contained within this article is of a general nature. Do not be rely upon it when making financial decisions. Please consult a professional financial advisor or planner (like us!) before acting.