6 ways to succeed during a recession
6 ways to succeed during a recession (and become a confident and knowledgeable investor)
Bill Zheng reveals smart strategies investors can adopt to stay afloat and succeed in the current downturn
If you’re confused, uncertain and even frightened about the property market in Australia, you’re not alone. Most investors feel that way. They also feel angry and even betrayed.
During most of 2008, property investors across Australia didn’t fair too well, some couldn’t sell their properties at the right price to exit, others couldn’t refinance on a good valuation to get out of their existing mortgages provided by those defunct non-bank lenders. Many developers couldn’t sell their stocks or obtain proper development finance, and you name it.
We’ve seen some relief, in the first few months of 2009 at the low-end property market due to the first home owner grant and lower interest rates. We all know this won’t last, especially when Australia is officially included in the ‘Great Recession’ by IMF.
I believe that in tough times you should revisit your strategy, purpose and assumptions continually – especially when you’re experiencing resistance or frustration of any kind in the accomplishment of your investment and lifestyle goals.
Now more than ever, it’s especially important that you anticipate market shifts, control risk and create powerful strategies that move you in the direction you want to go.
1. Re-position your leverage level on properties
The current recession is mainly caused by financial crisis, a good percentage of the economic growth and asset value have been contributed by over-leverage. Deleveraging across the world will see credit tight for many years to come, even after the economy recovers. Hence we will see tight credit markets for at least another 2-3 years if the IMF’s prediction of the global economy recovery late 2010 is correct.
You should consider at least 3 factors when you look at leverage:
1. Return on investment: this is comparing your deposit money sitting in a bank vs. being invested into a property.
2. Safety: this is to avoid negative equity or loan recalls.
3. Your own circumstances: how close you can achieve the ideal leverage level.
Ideal leverage level:
• If residential property prices were going up at 7-10% each year, higher leverage (such as 80% or above) will give you higher return on your capital invested and still relatively safe.
• If residential property prices were to be flat or even slightly down each year, lower leverage (60% or below) will give you a higher return on your capital invested and it is also safer to keep your leverage lower.
In my opinion, our current property market trend is likely to be suitable for 60%LVR or below if your circumstances allow you to do so.
If you must stay at higher leverage, your income should at least allow you to pay down your mortgage principal on a monthly basis. Because paying down your mortgage is similar to lending your money to the lenders. The lender is paying you the interest rate your mortgage is costing you; you have effectively become a lender. Lenders make more money than borrowers in a deleverage economy (home loan calculator).
Many people are concerned about lenders recalling their mortgages if they show negative equity. For most private property investors and homeowners, negative equity will not be the main reason why the lenders would recall your loans. Lenders would usually recall loans when the borrowers fail to make repayments.
However if you are one of those property investors with a very large property portfolio or run a business with credit facilities with the same lender, you may want to separate the business credit facility from your mortgages and reduce the exposure to a single lender. This can avoid the unnecessary risk of your mortgage being reviewed by the lenders at an inconvenient time.
2. Re-set your minimum cash reserve
Cash reserve is not a new concept to most property investors; most of us know we must have them to cover our rainy days.
How much is sufficient is quite a personal matter, but the general idea is: how many months you would like your cash reserve to last if you experience severe loss of income and overrun of cost at the same time.
• Loss of income can be loss of your job & business income, default of debtors, loss or decrease of investment income such as rent & dividends;
• Overrun of cost can be increase of interest repayment from your mortgage, unexpected expenses.
>>>Read more at Your Investment Property magazine<<<
Republished with permission.
Australian banks have ‘favourable position’ in home loans
Wednesday 19 August 2009
Throughout the economic downturn, Australia’s banks have outperformed their global counterparts when it comes to home loans.
The news comes from the Reserve Bank of Australian (RBA), which has commented this week on the strength of the country’s financial systems.
Speaking at the seventh Annual Retail Financial Services Forum, assistant governor Malcom Edey reviews the banks’ performances in a variety of sectors from shares and profits to loan approvals.
When it came to home loans, Mr Edey explained that Australia has a “favourable position” compared to other countries, with lower loss rates than the UK and US.
This is because mortgages are full-recourse, adding an incentive to borrowers, including those looking for low interest home loans, to avoid over committing themselves financially.
Also, the Uniform Consumer Credit Code ensures that lenders distribute home loans responsibly, he remarked.
“It’s a great advantage during an economic downturn to have a banking system that remains profitable and is able to continue lending,” he said.
Research from Deutsche Bank has suggested that banks have begun to restrict lending to first-time buyers the Sydney Morning Herald reports.
This article is brought to you by Mozo – Helping you compare home loans