How will 2008 impact you?

Enjoying the break over the festive season, I had the opportunity to read a plethora of articles in newspapers and magazines suggesting that life in 2008 could either be a bumper year for investors or that it’s time to call it quits and cash out of your investments.

One of the biggest challenges facing investors is how to decipher what everything means and how it will personally impact on you. I usually look at investing from two perspectives, one from a macro (big picture - Global) level and the two from the micro (local - Australia) level as it helps me to be better informed and assists with my decision making processes. Ultimately I need to know how local and global market conditions will impact on my investments.

It’s interesting to look at things on a global scale at the moment as they some what contradict what is happening at the local level within Australia.

The Global Impact

US Market

We have all heard the saying ‘when the US sneezes, the rest of the world catches a cold’…well it seems that the US, due to the sub-prime crisis is starting to cough and economists from around the world are worried that it could develop into a cold. We haven’t yet seen the full impact of this crisis so 2008 will be another year of uncertainty for investors…well for some it will.

For the month of November 2007, 45,166 home owners filed for bankruptcy to stop their home from going into foreclosure and 9,978 more homeowners got kicked out of bankruptcy due to non-performance of their bankruptcy obligations and are now heading towards foreclosure.

These numbers are increasing each month and they are the number one reason why many lenders in the US are no longer offering 100% finance to people with less than a 620 credit score. And it’s also the same reason why many sub-prime lenders are out of business.

Here are the Top 20 cities with the most bankruptcy for November 2007:

These are scary figures but do present immense opportunity for those wanting to purchase real estate in the US.

Luckily for Australia, our financial markets are heavily regulated which means lenders have stricter guide lines for lending money. Part of the sub-prime problem is that many Americans were able to obtain 100 per cent finance using what they called – NINJA loans (No Income No Job or Assets). These loans started off at low “honeymoon” interest rate levels which then significantly increased after the “honeymoon” period expired.  Borrowers banked on the asset appreciating rather than depreciating so that they could refinance to a normal interest rate loan at the end of the “honeymoon” period.

The next rate increase is due in March 2008 and analysts predict another wave of foreclosures.

To make matters worse, the sub-prime fiasco is impacting on the US stock market which has also been experiencing a down turn (the worst in 7 years), hence there are real fears of the US economy going into recession. It all sounds rather grim doesn’t it.

The China/India phenomenon

Right on our back door step we have China and India who are both emerging markets. What that means is that big population third world countries are fast becoming consumers. Not only is China the world factory, it is now starting to consume at a great rate of knots. This is where Australia comes into the picture. You see to build economies like China and India you need raw materials such as iron ore, coal, nickel, copper, zinc and even uranium. And what does Australia have an abundant supply of…you guessed it! We are a big pit for emerging markets establishing themselves.

An article written in the Financial Review (Dec 28, 2007) called – ‘China ushers in truly global villages’ and describes the lives of some of the poorest people in Asia as being transformed. It goes on to describe that for years, getting produce to market meant someone had to carry a giant basket on day-long treks down narrow mountain trails through jungles. This is changing, thanks in large part to China. Villagers now ride their Chinese motorcycles, which sell for as little as $US440 ($500), down dirt roads to the markets…the trip takes 1.5 hours.

In one village of 150 families there are 44 Chinese motorcycles…. five years ago there were none.

Chinese exports to Burma, Laos and Vietnam amounted to $US8.3 billion in the first eight months of 2007, up 50 per cent from the same period in 2006”.

Resource Boom

With countries like China and India experiencing rapidly expanding economies, Australia is enjoying a resource boom. Many mining towns around Australia are expanding as mining companies pour billions of dollars into research, exploration, development and infrastructure. As a result of the resource boom, I personally have enjoyed sensational capital growth and cash flow from our investment properties in Perth and central Queensland. China alone has around one billion people to support and even if their economy was to slow down because of a global crisis, it is rapidly heading toward self sustainability. Look at it this way…Australia has a population of around 21 million people with inflation around 3-4 per cent. China has approximately one billion people with their economy growing at around 8.7 per cent, so if for some reason the Chinese government slows their economic growth down to around 5 per cent then their production and domestic consumption would still be massive.

With the US market starting to flounder and the Asian markets gearing up, what does it mean for you as an investor?

The Local Impact

Our economy is strong at the moment however things could turn should the global markets change. However, you do need to take into account the impact of what is happening here in Australia when making investment decisions. At the moment we have around 178,000 migrants coming into the country and the employment market is strong, in fact in many areas we are experiencing labour shortages. With so many people coming into Australia, a shortage of residential housing has emerged which has put pressure on the availability of rentals. This in turn has put upward pressure on rental yields for investment properties. To add fuel to the fire, construction costs are on the way up and so are interest rates.

As a nation, we require around 180,000 new homes to be built each year to meet demand from the increase in population, at the moment we are producing around 150,000, a shortfall of around 30,000. With so many variables how do you possibly make an informed decision on whether to invest or just sit tight?

The way I see it the Australian economy is in good shape and will be for some time to come and I would prefer to make hay while the sun shines. However, its always important to plan for your worst case scenario and although there are reports saying the ‘sky is about to fall in’, it may not necessarily be the case for your personal situation. When it comes to property investing, each choice you make must work for you and your lifestyle regardless of what others may say. For example in the US, economists are crying fowl yet I hear of people making a truck load of cash from the sub-prime debacle as they buy up undervalued properties. There are generally always positives for most situations…it’s a case of identifying them and how you take advantage of them.

While China and India continue to expand and 178,000 migrants enter Australia each year plus there being a shortage of housing and rentals to accommodate them, there will be continuing upward pressure on housing prices. We are seeing this already in our major cities like Melbourne, Brisbane and Canberra which are experiencing capital growth rates of up to 19 per cent according to Australian Property Monitors. Even high priced Sydney had a 4.6 per cent growth rate.

Impact of Interest Rates

Increases in interest rates can in my view, work in an investors favor. If you work your numbers and factor in rate increases then it shouldn’t impact on you greatly when they do go up. It’s the naïve investors who do not plan ahead that suffer and struggle. Higher interest rates mean less competition when buying and therefore better deals for the smart investor. A 2004 BIS Shrapnel report predicted interest rates would increase to 10 per cent by 2009 and judging by how the economy is tracking, they may not be too far off the mark. If interest rates fail to go up and instead come down, then I will be in an even better position. So the way I see it, I win either way.

Pending Recession/Depression

I have read books predicting 2012 as being the beginnings of an era of recession and possibly depression. In Robert Kiyosaki’s book “Prophecy” he talks in detail on how and why he believes this will occur. He talks about ‘building an ark’ to protect yourself from the looming economic catastrophe. Donald Trump also reiterates the same in his joint authorship book with Robert Kiyosaki “We want you to be rich” in which he identifies the pending retirement of baby boomers as the cause of the pending recession/depression. Again more doom and gloom…so what can you do about it?

Once again, investors should develop a back up plan and/or exit strategy to see you through these periods of potential economic turbulence. My investment strategy is based on the assumption that Kiyosaki’s and Trumps prediction are correct. I will be closely monitoring global and local events up to 2010 and implement our restructuring strategies when appropriate to do so. The strategy will be to sell off properties that I believe will be adversely impacted by the predicted global events and buy and hold quality properties for the long term. My attitude is that people will still need to live somewhere even in a recession/depression therefore quality properties will always be in demand.

This will provide me with cashflow in the worst case scenario and will position me for the time when the economy pulls out of recession and begins to expand again. At this point in time I will be in a position to buy bargain properties.  

If the predictions of Kiyosaki and Trump are correct then I expect to ride the wave without being adversely impacted. However if they are half wrong, then my attitude is that I will have prepared a plan and created a strong position anyway. I guess it’s like living in the bush and having a fire plan just in case a bush fire occurs. If they don’t, it doesn’t matter…so I would rather be safe than sorry.

Next Hot Spot?

Back to 2008. This I believe will prove to be another great year for property investors and while I will be off loading a couple of my non performing properties, I will be gearing and focusing my energy on what I believe to be the emerging Adelaide property market. Although there will be many hot spots around Australia, Adelaide has the classic signs of being the next spot to invest in.

Adelaide is gearing up to take advantage of the current resource boom with a prediction of quadrupled production at BHP’s Roxby Downs mine in a few years time. Adelaide is also gearing up for major submarine and shipbuilding contracts for the federal government defence departments. These initiatives will create strong demand for housing.

Currently housing in Adelaide is very affordable providing lots of scope for capital growth in the future. Rents are lower than in other capital cities but should rise quickly as demand for housing increases. So if you are a canny investor, Adelaide possesses some great opportunities for you.

Until next time, happy investing.

Helen Collier-Kogtevs

www.realwealthaustralia.com.au

P.s remember to pick up a copy of my new book, 47 Biggest Mistakes Made By Property Investors and How to Avoid Them.