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The perfect Storm

Discussion in 'Property Market Economics' started by Cactus, 2nd Feb, 2016.

  1. Cactus

    Cactus Well-Known Member

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    Ok so I get property and I get many of the drivers of growth and decline and interest rates and rental yields however there is one thing I struggle with and hoping someone can clear this up for me. I read a lot of posts on here where people talk about the inevitable return to high interest rates and then in the same sentence talk about declining values and rental rates and I struggle to see how all three occur at the same time.

    I was always of the understanding if interest rates go up this is normally to curb inflation. If your curbing inflation then normally values are inflating so you have just benefited from capital growth. If this is occurring yields might be dropping but rentals rates will be increasing as leases are renewed.

    Equally the reverse scenario results in lowering interest rates causing relief to the deflation which ultimate tries to reignite inflation.

    Succinctly...

    What has to occur for your property portfolio to experience wide set decline, vacancy/lower rental and high interest rates to the effect of panic?

    And how likely is this perfect storm of economics occurring in the short to medium term?
     
  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    They probably can't, but from risk perspective its worth knowing what maneuver you'd have in that scenario i.e. buffer, insurance, etc

    Have all your properties in one area and you could. On an Australian wide basis, probably only from war, famine, environmental disaster or massive overhauling change in tax/finance by govt.
    I'm of the view that if something bad happened to property, lots of investors would exit the market. This would mean less available rentals driving rents up in conjunction with some OOs needing to sell and begin renting too.
     
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  3. Omnidragon

    Omnidragon Well-Known Member

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    Answer: read about the 91 recession

    Or for more recent history, read the recent news around Brazil.
     
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  4. MarkB

    MarkB Some guy on the internet Premium Member

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    I apologise in advance, I've done some quick searches for graphs which illustrate my points, but they're not graphs to the end of 2015.

    A couple of points on that -

    1. In the "long run" (an undefined period of time over which everything is considered variable) of course high interest rates are inevitable. But how far down the track is that? I've seen a few people (central banker types) come out and say that they expect low interest rates to be the new normal and to continue for years to come. Things change of course, but it is fair to say that markedly higher interest rates aren't anywhere on the foreseeable radar.

    2. And, What do you define as a "high interest rate" ? (and by that I mean the RBA official cash rate [OCR])

    [​IMG]
    Obviously 17 % or so at the left is high (pre inflation targeting)

    But is 7.25% (2008) "high" ?

    (And then you get into the whole nominal / real interest rate thing).

    3. If it looks like interest rates are trending up - what do you do? (You fix, of course)

    Fixing your interest rates isn't about trying to beat the bank - they've made their dollar the moment you fix. But it is about providing insurance (peace of mind if you will) about the impact of rising interest rates on your portfolio. It takes that element of risk off the table.

    Since the early 90's, the main (not sole, but main) focus of the OCR is to keep inflation - on average at between 2 and 3% over the medium term. They've done a pretty good job tbh.

    The spike around 2000-01 is the one-off effect of the introduction of the GST.

    [​IMG]


    I wouldn't be so certain of benefiting from capital growth - I think the stage in the cycle for whatever city / town you have IPs in will dictate that more.

    But, lets say inflation does get out of hand... the more it does, the faster the value of your mortgage(s) falls in real terms. That's good for you (assuming you've managed your interest rate risk).

    Setting aside interest rates (which are macroeconomic)

    Look at all those boom mining towns that aren't so boom anymore (microeconomic).

    Obviously if GFC #2 (or really GFC #1 Part 2) did come to pass - even in towns / cities where there was good demand for rentals, you would see a retraction in prices (even if rents held). I guess the thing for any investor is can you hold your portfolio through it? If you're neg geared and relying on rising values to keep you going - obviously you're in for a ***** of a time.

    [emphasis added]

    (Short to medium term to me, means 5-10 years).

    Imo it is very unlikely.

    Though the (biggest but not only) elephant in the room is the US Government. There's (give or take) $18,966,275,000,000 reasons why we all need to keep one eye on them.

    I don't want to make light of what is happening in China atm, but I see that more as a form of "economic growing pain". Look at it this way, their economy is the economic equivalent of Usain Bolt sprinting an entire marathon - when you're that big, running that fast, for that long. You're going to have some lactic acid along the way. (But you'll run through the pain)

    So if China is Usain, what's that make America?

    The fat couch-bound type 2 diabetic who smokes, survives on fast-food and softdrinks, and is probably suffering some form of mental disease.
     
    Last edited: 2nd Feb, 2016
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  5. THX

    THX Well-Known Member

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    I wouldn't worry too much about their debt, they mostly owe it to themselves (left hand owing to the right), they are the reserve currency of the world, they are the most powerful economy in the world.

    I worry more about China because you can't believe figures from China, and as the mining industry discovered Chinas problems are our problems.
     
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  6. MarkB

    MarkB Some guy on the internet Premium Member

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    All imho of course.

    Forbes had this to say in 2014 -

    Given the state of the global markets, the U.S. is still considered to be the best house in a bad neighborhood. Even though more than one third of the debt is owned by foreign nations, as long as there are no safer places to invest, money will find its way here. Therefore, global turmoil would be in the best interest of the federal government. Anything which raises fear will bring money to the Treasury and allay the need for higher taxes. However, one day this unsustainable path we’re on will reach its day of reckoning. However, that’s probably not any time soon.

    [emphasis added]

    [​IMG]

    Their growth figure is sometimes a figment of imagination, but they're still growing very fast.

    Yeah, it blew a bit of a hole in the federal budget, and it has turned some boom towns into dust.

    But so long as there is no iron ore mines on Pitt St in Sydney or Collins St in Melbourne, for the most part (fed budget aside) the effects will be localised.
     
  7. THX

    THX Well-Known Member

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    They've been saying that since 1789 :D. As your graph shows, 2/3rds of the debt is owed to themselves.

    Agreed re: China, Their problems knock our economy around a bit but not enough to sink us.
     
  8. MarkB

    MarkB Some guy on the internet Premium Member

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    2/3 is domociled in the US.

    The largest owner of U.S. debt is Social Security. Since the Social Security system is a government entity, how can the government own its own debt? Good question. This is where the “house of cards” theory resides. Some believe the federal government is merely moving the IOUs from one shell to another, hoping to escape the watchful eye of its citizens. In any event, Social Security owns about 16% of the debt followed by other federal government entities (13%), and the Federal Reserve (12%).

    There is still around 25% of total debt that is owed to the private sector (US based).

    And even if around 40% is owned by US Govt entities, it's still money shuffling, you know.
     
  9. Cactus

    Cactus Well-Known Member

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    @mark b

    Thank you for your opinion. It echoes mine which is refreshing. Your assumptions of high interest rates and short to medium term are what I had in my head.

    I am comfortable with interest rates up to 8% and starting to hurt but not dire up to 10%