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Hypothetical scenario: Australian GFC/Longterm negative growth across the Australian property market

Discussion in 'General Property Chat' started by NTR, 6th Dec, 2015.

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  1. NTR

    NTR Member

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    Question to all - What tactics would you employ to mitigate losses across your portfolio? Do you - Pay down? Ride the storm? Diversify? What are some creative solutions to this pressing scenario that has the potential to affect us all?...
     
  2. JohnPropChat

    JohnPropChat Well-Known Member

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    Ride it out, if I can
    Cut out worst performing assets with no long term prospect at that point in time
    Pick-up extra work if I can
    Most importantly, if I have the dough - just pick-up absolute bargains in the massive downturn.
     
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  3. Leo2413

    Leo2413 Well-Known Member Premium Member

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    It all comes back to how you bought and your strategy. If you bought well then most negative effects will be softened.

    1. Buy well and across diversified markets.
    2. Have good buffers.
    3. Don't rely on a strategy that is to 100% wait for the market to move to get your capital growth.
    4. Worst case sell an underperforming asset if no other option.
    5. If your in a strong equity/cash position, time to go shopping big time to get the best deals at the lowest prices you can hardcore negotiate down.
     
    Last edited: 7th Dec, 2015
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  4. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    If you don't sell, you don't realise a loss.

    :)
     
  5. MTR

    MTR Well-Known Member Premium Member

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    I have sold down in Perth, Melb and Syd, some markets have already turned.

    Reducing debt, cashed up ready when an opportunity arises.
     
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  6. D.T.

    D.T. Adelaide Property Manager Business Member

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    Ride it out - being cashflow positive helps in this regard.
     
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  7. jpcashflow

    jpcashflow Well-Known Member Business Member

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    Awesome post :)...
    Here is a strategy that i use for my self: This is based on three things i work with:
    1) My share portfolio 2) Investment / development properties 3) Mortgage broking business.

    I sold what ever shares I had about three months ago, I saw the market being over valued and most of the my shares where trading above their weight.

    My development project in East Keilor: We had a two x town houses site, 1) my business partner wanted to keep for him and his wife to live in and for my mine, I sold my and it settles in FEB.

    I have really low LVR on my investment properties and no other debt as my PPOR is paid off.

    So cash flow is no issue.
     
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  8. NTR

    NTR Member

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    Thanks everyone for the rapid response. All these strategies are valid indeed. What happens when you are cash flow positive and have a sub 50% LVR? Should one assume this is enough in a property apocalypse? Remembering that Japan sustained negative growth for how long? There has to be some other "creative solutions" out there?
    ps, im always wary of the opportunity cost when the pay down approach is employed.
     
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  9. Barny

    Barny Well-Known Member

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    Other creative solutions, I think everyone has pretty much listed them.
    If your cash flow positive that's a bonus and will help with costs. If an apocalypse occurs such as Japan, then your probably going to see job looses throughout the country. Which means cash flow positive eventually won't help your scenario. Rents will drop too so if you still have a job, then they may become negative geared.
    I'm still waiting for @Xenia to inform me what happens to rents in this scenario :)
    If you try and sell up when everyone else is selling then you will have issues, so the 50%lvr also won't help as you can't pay what you owe without income, but lower lvr should help your scenario compared to high lvr.
    Perhaps learn more trades, work on yourself, so you can earn an income if the worst does occur so you will be more employable. Or self employed. Find out what jobs are always in demand when the worst happens.
     
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  10. Xenia

    Xenia Adelaide Property Manager Business Member

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    What - who?
    what am I in trouble about this time?
    :D
     
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  11. radson

    radson Well-Known Member

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    Remembering as well that Japan has basically zero migration and one of the lowest birth rates in the world resulting in a declining population.

    Based on 2012 data from the National Institute of Population and Social Security Research, Japan's population will keep declining by about one million people every year in the coming decades, Demographics of Japan - Wikipedia, the free encyclopedia
     
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  12. Xenia

    Xenia Adelaide Property Manager Business Member

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    A low LVR will enable you to hold longer and not force you to sell in a bad economy. It's always exposure to high debt - pressure from banks - that forces people to sell when economies collapse. If you owned a house outright and the value fell, why would it matter?
    (unless there are other personal financial circumstances at play)

    and yes in bad economic times rents drop due to a few different reasons:
    young people stay home longer due to affordability
    families share houses more when they would have a house each during good economic times.
    Many of the higher income tenants will purchase their own properties as their affordability may shift. Ie if a cheap house was $250,000, those people who are unable to get a $250,000 loan may be able to get a $200,000 loan and buy the house if the value has dropped - this will also take the better quality tenants out of the market.
     
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  13. radson

    radson Well-Known Member

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    I always thought it was not being able to service a loan that forced people to sell not its LVR. Otherwise housing would be like a margin loan?
     
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  14. Xenia

    Xenia Adelaide Property Manager Business Member

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    that's what I meant by exposed to debt
    sorry - yes you are right.
     
  15. euro73

    euro73 Well-Known Member Business Member

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    If Australia has a 15-20% price slump AND much higher rates AND much higher unemployment AND a decade or more of no growth, only cash flow will see you through. Unless, of course you are willing to sell at losses to get out. But that's a lot of IF's happening simultaneously.
     
    Last edited: 7th Dec, 2015
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  16. 2FAST4U

    2FAST4U Well-Known Member

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    If there was going to be no capital growth for say a decade I would offload all the properties that aren't cash flow positive and diversify to shares. If the market completely crashed I would hold onto the properties unless I was forced to sell- I wouldn't want to sell them for a loss.
     
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  17. keithj

    keithj Moderator Staff Member

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    Overly simplistic question IMO.

    The answer depends what what is the driver for the long term falls ? Is it legislated (or otherwise) falling popln, deflation, govt policy changes, planning law changes (eg anyone can build anything anywhere), terrorism (causing exodus of businesses from CBDs), technology allows anyone to live & work & play anywhere, inability to fund loans, falling wages/high unemp, lack of demand for our exports....

    ...and how long you think the issue will last ....

    ... and how you see the rest of the popln behaving...

    ....and whether you think there's a likelihood of changes for the better in the medium/long term....

    In some of the above scenarios, sell the lot ASAP at any price before everyone else sees it too. (Of course, most here are too blinkered to do that)

    Paying down the loan on an asset that is devaluing is madness - it's voluntarily transferring risk from the bank onto you.
    Not selling (to not realise a loss) is also madness - why suffer -ve equity for an extended period ?
    Not selling because it's all c/f +ve is also crazy talk - in scenarios some of the above scenarios unemp rises, rents fall, vacancies rise, job losses (inc yours?) occur. Will Centrelink come to the party if you have assets ?


    Think how you're going to feel after a couple of yrs of -7%, with no sign of it ending. And more importantly think how the weaker ones will be feeling - they will panic at some stage, causing steeper falls.

    Maybe sell one a year to mitigate risk.

    If you really really don't want to sell, then shorting the banks is likely to be partial hedge, but you'll need to be really, really quick, because the smart guys will be way ahead of you.
     
  18. headsonbeds

    headsonbeds Well-Known Member

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    The question is would we even know it was happening even in the medium term. When the big black swan flew in and GFC hit what happened to Aussie resi, not much... Unless one of the big banks fail in Aus not sure what would point to disaster. in Japan I'll bet there where plenty holding on for the recovery after the 80s
     
  19. big max

    big max Well-Known Member

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    I doubt rentals would fall much. And if we see a GFC again interest rates would remain low in any case. So all looks good.
     
  20. Michael_X

    Michael_X Mortgage Broker Business Member

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    If it's only value that falls, just hold and ride the wave. Hence why it's important to purchase positive/neutrally geared properties

    For those holding negatively geared properties, hoping for capital growth - when it doesn't come and being chained to the mortgage repayments won't be much fun.

    Cheers,
    Michael
     
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