With the federal election looming large this weekend, the most common questions I am being asked right now revolves around one thing…
Should the upcoming election change my property investing strategy?
There are many different stages to the property clock and one of them is ‘fence sitting’ – a time when buyers and sellers do absolutely nothing. One of the best examples of a fence sitting period is when there’s an election on the horizon – have you noticed a lot of fence sitting recently?
The question you have to ask then should be… is it a good time to be fence sitting or could it be an opportunity that everyone else is missing?
Furthermore, will the election result make a difference at all?
What about consumer sentiment?
Most of the decisions that people make every day aren’t based on logical facts and figures, they are based on emotion. When consumer sentiment is down, which it is now, no one wants to make a decision as no one else is. It’s good to recognise this and to try perhaps reconsider your thought process and the way you make decisions to at least have an open mind, rather than following what everyone else is doing.
The contrarian viewpoint
Consumers are known to operate in a herd mentality as they have social proof they are making the right decision if their colleagues, friends and family are taking similar actions. However, if you are buying when everyone else is buying, it’s very hard to stand out from the crowd and get exceptional deals. Professional investors are known for being contrarian and going against the herd as they realise that if they buy when no one else is, they’re going to get more choice for a lesser price.
Important lesson: Never invest solely for tax
One of the biggest differences (in policies relating to property) between our two major parties is the proposed changes to negative gearing. Labor has indicated that they will remove negative gearing benefits for second-hand properties but that it will probably be grandfathered meaning that it’s only future purchases that would be affected.
Here’s my thoughts:
Labor first needs to win the election
Secondly, they need to make the agreed changes
Politicians aren’t best known for doing what they promise (sometimes I make outrageous statements, I know)
Even if they do make the changes, it will be for future purchases, so it’s better to buy now anyway
If all that happens, will Labor stay in government forever to protect these changes, or will Liberal get in at some point?
If the changes to negative gearing really do crash the property market and make rents soar high (so more people then have to rely on government housing), is it possible any party would notice this and the need to amend those changes?
Invest for the long term
I came to Australia in 1997 and bought my first property here in 1999, which was a 2 bedroom unit with parking and views in Coogee. I paid $360k (and the current value is $1.2m+). At the time everyone was fence sitting as they thought the market would crash after the Olympics. Do you remember that?
Since then, we’ve had a number of fence sitting elections and we also had a fence sitting Global Financial Crisis (which is when I bought half my current portfolio).
If you’re investing in property for 10, 20, 30, 40+ years, then there’s going to be a myriad of property cycles and things always seem to pop up. Just remember the laws of supply and demand often override any temporary changes.
What if you were waiting for government to make a decision on negative gearing?
Every year the negative gearing debate comes up and it hasn’t happened yet. Lucky I didn’t wait 20 years to buy in based on legistlation that could “possibly” be introduced.
I don’t think my $1.2m Coogee unit will drop back down to $360k anytime soon.
Make a decision based on the numbers
I’m a former accountant and so maybe it’s easier for me than most as I don’t have a head full of emotion (they teach you that at university).
If you buy $1m worth of property (to make the numbers easy) and have a 105% loan (based on using equity from your home as deposit and costs) then based on a 3.5% yield, a 4% mortgage and 1% of other costs, that property will cost you around $17k a year.
If you are on 35% marginal tax, then that you would get $6k back in tax. (Please adjust the variables according to your personal position and thoughts).
While that $6k would make a difference to the cash flow of many investors, a 1% rise in interest rates will cause you more trouble as that equates to $10,500 and that’s pretty likely in time. If we get up to a more normal interest rate of 7% you would be paying another $31,500!
The question you need to ask yourself is… “should I be worried about negative gearing or rising interest rates?”
Putting it into another perspective, that $6k equates to 0.6% of the property’s value and so how significant is it against the other costs?
If the negative gearing debate is temporarily putting everyone else off buying and property prices are dropping, you may be able to get a 5% or 10% discount off the purchase price which would equate to $50k – $100k on every $1m of property you purchase. That extra discount would make up for 8 to 17 years of losing $6k/yr and do you think rules might change in that time?
Concentrate on what you can control
Personally, I don’t spend much time listening to politicians even though I’m in the media.
I prefer to get my information from:
Being on the ground
Reading from specific experts that I know don’t have hidden agendas
Looking at the actual numbers
I also know that I can’t really control the outcome of major decisions.
For that reason:
I just get on with investing
I concentrate on increasing my income and serviceability so that banks lend me more money
I concentrate on knowing the market so that I can buy better properties and increase their value
Who knows what the future will bring and what’s around the corner and so in the meantime I’m going to carry on life as normal. Many people thought that the world would come to an end when Trump came into power and while many would not agree with many things he’s done; life goes on and we haven’t all disappeared into a hole.
Emotion says sit on the fence and wait till everyone jumps in. Logic says buy now when no one else is. It’s your choice and in ten years’ time have a think about which way you should have played it.
A variation of this article originally appeared in “Australian Property Investor” here.