7 Reasons I Wouldn’t Just Chase Capital Growth in 2019/2020

Now is a very exciting time in the Australian property market with Australia showing it’s first month of growth in nearly 2 years. But I personally wouldn’t just be chasing capital growth in this market, here’s 7 reasons why.

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0:00 – Introduction
0:31 – #1: Mid Cycle vs End Cycle Slow Downs
2:15 – #2: Looks Like We Are Heading For A Global Recession
3:14 – #3: Interest Rates Are At All Time Lows
4:09 – #4: Sydney Only Dropped ~15%, Melbourne Only Dropped ~10%
5:37 – #5: Not All Areas Are Growing in Value
6:33 – #6: Wage Growth Isn’t That Strong
7:08 – #7: We Are In Turbulent Times

What I Would Do In The Current Market

8:22 – #1: Seek To Minimise Risk With My Investments
9:05 – #2: Get Myself In A Good Cash Flow Position
10:03 – #3: Purchase Assets That Are Increasing in Natural Desirability
11:30 – #4: Have a Back Up Plan
12:08 – #5: Properties Where You Can Manufacture Growth

Transcription:

Ryan 0:00
Now is a very exciting time in the Australian property market with the market as a whole. On the rise again, I’m just looking at some data here from corelogic, showing with high growth in Sydney, Melbourne, Brisbane, Hobart and even Darwin over the last month, but I still don’t think this is a time to just be chasing capital growth above everything else. So in this episode, I want to talk about seven reasons why you shouldn’t just chase capital growth in 2019 and 2020. The first reason is mid cycle versus end cycle slowdowns, or recessions. Now, the last recession or global recession that happened was in 2008, the last Australian recession was something like 27 or 28 years ago, it’s absolutely ridiculous, and how long we’ve actually staved off a technical recession. But it does look like we’re heading into a time of economic contraction. In Australia where things aren’t growing as quickly as they were during boom time. It’s unclear as to whether this is a mid cycle slowdown, like Ben Everingham talks about and Phil Anderson talks about, which is a little bit of a slowdown before we have more growth, and leading into an end cycle, which is a much larger style, depression or recession. So it’s unsure at the moment, if we’re heading towards a mid cycle slowdown or an end cycle slowdown. And those will affect the market very differently. And what governments do to combat those will affect things differently as well. And so one of these things that I’ll talk about just kind of lead to the turbulent times in the market, unclear as to whether we’re going to have boom times ahead, looking back at Sydney at 2015 2016. Right before it had that massive run up, you could kind of see that, okay, yeah, this ramp is going to happen. And it’s just a matter of how long this is going to last. Whereas at the moment, heading into a mid cycle slowdown or an end cycle slowdown, it’s unsure which of those we’re heading into, but it definitely looks like turbulent times ahead. It doesn’t look like boom times ahead. And now that may change, and the economy may flip on a dime and move into boom times again. But at the moment, it doesn’t look like that’s happening. The second reason is that does also look like we’re heading for a global recession. Now the last global recession was 2008. And what’s happened is that the yield curve has inverted. I’m not going to get into the technicalities of this. But this has been an indicator that a recession is coming and has always happened before a recession in the last 50 years. Now there was I think one or two times that happened and we didn’t have a recession. But we did have a slowdown. But the longer this yield curve is inverted, and it has been inverted for some time, the higher the chance of a recession in America. And so America obviously is going to lead the charge. And if they end up in a recession, it’s highly likely to cause a global recession. So it is looking like we’re going to head into a global recession. Again, it’s very unclear how this is going to affect the Australian property market and the Australian economy as a whole. So turbulent times there. The third reason is interest rates are at all time lows. Now what this means in terms of global recession is there’s less room to move in terms of lowering interest rates to help stimulate the economy unless we go into negative interest rate territory, which it looks like we might in the near future. But it also means that if you’re investing just for capital growth, because interest rates are an all time long, people are getting interest rates around 3%. At the moment, if interest rates were to go up, and you’re just investing for capital growth, what happens if interest rates go up, and you’re already negatively geared as they move up, that’s just gonna put more and more cash flow pressure on you, which may force you to sell your asset before you can actually make money. So interest rates an all time low can be a great opportunity, because obviously there’s access to cheap money. But it also does represent a risk because interest rates can go up over time. The fourth reason is that Sydney only drops 15% and Melbourne only dropped 10% according to core logics data. So looking at this, that sounds like a lot. Sydney drop 15% that is a lot, especially for people who invested at the top of the market, especially for people who invested in the areas that dropped more than 15%. But Sydney and Melbourne both had incredible run outs over a very short period of time, with growth in some areas, upwards of 80% over just a couple of years, and then only corrected by 10 or 15%. That’s not a huge correction.

It’s one of the biggest corrections that we’ve seen in the Australian property market of late but in terms of general cycles, and compared to the route that it actually had. It’s not a giant correction. So People out there are still predicting that okay, Sydney could potentially drop more Melbourne could drop more could drop 2030 40% from its peak, and it’s only dropped 15%. So, while it has dropped a lot, Sydney is still quite unaffordable, and Melbourne is still quite unaffordable. So while the market may decide that Sydney and Melbourne have reached the floor, and that this is where value is looking at a lot of other indicators, it does look like there is potential depending on which way the market goes that Sydney and Melbourne do have room to drop even further. fifth reason is that not all areas are growing in value. So investing in Sydney, back in 2015, where the whole market just boomed dramatically over 2016 into mid 2017. You could almost invest in any area and your property will grow in value, there’s that saying the rising tide lifts all boats, that doesn’t seem to be happening at the moment doesn’t seem to be happening in Brisbane doesn’t seem to be happening in Sydney doesn’t seem to be happening in Melbourne. What’s happening, however, is that some areas are declining in value, some areas are kind of staying steady, and other areas are in large demand and actually growing. So it’s very pocketed in terms of the suburbs that are having growth potential. And so you can’t just invest anywhere in a city and expect to get growth. So it’s just some pockets of the city that tend to be growing. The sixth reason is that wage growth isn’t that strong. So dropping interest rates is to try and help stimulate the economy, because wage growth isn’t where the Australian Government wants it to be, and just isn’t growing at a steady rate as it has in the past. And so wage growth is needed in order for asset prices to grow. So people need more money in order to spend on properties and to spend on assets. So because we had that wage growth that isn’t strong, we want to start seeing that strong wage growth, again, to help the Australian economy as a whole and to help property values there too. And the seventh reason is just that we are heading into turbulent times or we are in turbulent times, and we have been for some period of time, I don’t look at the future and say, okay, it’s just boom times ahead, I look at the future and say the Australian property market could actually grow in value significantly, with a lot of levers that the government is pulling to try and prop up the property market. Yeah, we could definitely see some growth in the market, both in the short and long term. But there’s also potential for so many other things to happen. That may mean the property market goes backwards. So it’s just it’s just very unclear ahead, exactly what’s going to happen. And you’re if you’re investing in something, and the only way for you to make money is for that property to go up in value for the market as a whole to go up in value that I feel like at this point in time, that is a little bit risky, because it is quite unclear what’s going to happen in the future. So what can we do, given that all of this sort of stuff is happening? And given that it is still turbulent times, even though there’s the exciting data that Australia is growing again? So what would I do in this situation? Because obviously, I’m not a financial advisor, you need to decide what is best for you. And what you would do? Well, what would I do is I would seek to minimize risk with my investment. So how to minimize risk, do a boatload of research. So remember, we talked about that not all areas are growing, just some pockets are growing. And so I’ll be doing research into the areas trying to pick the market that is in the correct market cycle trying to find the best suburbs within those markets that both had the lowest downside risk, as well as the potential for growth. So rather than searching for hotspots that I think are going to grow 20% year on year, for the next five years, it would be like, Okay, what area is in demand, and I can see is going to be in demand long into the future. And I’d also love to get myself in a good cash flow position. So we talk a lot about the two properties to financial freedom strategy, which is investing in properties and building granny flats. So you’re in a positive cash flow position. Getting in a good cash flow position with interest rates, so low is actually easier than it ever has been. And so getting in a good cash flow position, building up those cash buffers building out those cash reserves. That way, no matter what happens in the market, moving forward, whether my property goes up in value, whether my property stays the same or even if the market continues to slip backwards a

little bit. If I’m in a positive cash flow position, then I can weather those storms because I’m making money and I’m earning more money in rental income each month than I’m paying out in expenses. And so just gives me that safety buffer, which is really good and if interest rates go up, ideally have enough cash flow and enough buffer there that you can withstand some interest rate rises, but for you end up in a cashflow negative situation i would also look to purchase assets that are increasing in natural desirability so when markets move there’s obviously some areas more people are moving into those areas because there’s more jobs or they’re more desirable and things like that and as the other aspect of it which is just the whole market is going up in value because more people want to buy there and so if i was looking to invest i’d be looking for those areas looking for those assets that are growing in natural desirability so this may be through things like gentrification like on the northern beaches in brisbane you’re seeing a lot of gentrification over those areas and desirability for those areas being not too far from the cbd but they have that lifestyle appeal to them so you can see over time as that area gentrified and gets nicer and more affluent people live there there it just becomes more and more desirable to live because it has those natural lifestyle features that also can be infrastructure so when you universities go in or the government invest in infrastructure in an area then that can increase its desirability because there’s jobs in that area and there’s things in the area that people want to live there for and talks about as well but lifestyle so looking at assets where they’re naturally going to increase in desirability more people are going to want to live there so you’re not just relying on the market as a whole the city as a whole going up but that pocket of the city is becoming more desirable i’d also look at having a backup plan with my investments so looking at some different scenarios and some worst case scenario so what happens if interest rates go up significantly what happens in my property drops in value look at all these worst case scenarios and think okay what is my backup plan for if this happens you know could you potentially move into the property could you rent out the property for a short term lease and increase the cash flow that way by furnishing it there’s a lot of different things that you can do in different scenarios to have a backup plan could you rent it out room by room there’s lots of different things that you can do and i’d also be looking for properties where i can manufacture growth i love properties where you can manufacture growth because it just gives you so much potential so there’s a potential that if the markets going well you can manufacture growth and make even more money if the markets flat you can manufacture growth and create equity for yourself and if the market goes backwards rather than losing money you can manufacture growth like doing a renovation to actually make up the value that you’ve lost so you don’t end up in a negative equity situation and you just give yourself those options there you can also manufacture value in terms of the cash flow of your property and increase the cash flow and get a return on investment that way so rather than just relying on the market to make money and capital growth you can rely on cash flow and you can manufacture your own growth so a bit of a somber one today but i hope that it has been insightful and helpful to you because the market is growing and because there’s a lot of excitement in the market i do still think it’s a time to be very educated as an investor and to invest wisely if you’re smart and if you invest in good assets then you can make money but if you’re just silly and you think oh the whole market is going to boom again so i’ll just invest in anything and you buy something that’s completely overpriced in the wrong area with poor cash flow you can set yourself up for failure so i don’t think it’s a time to just go out there and buy absolutely anything i do think there are capital growth opportunities out there so i’m not saying don’t chase capital growth at all i’m just saying you know that time where people will just chase capital growth above everything else just be cautious out there and just have a clear investment strategy of how you want to invest if you want some help getting clear on how to invest in the current market how to create that property investment strategy then ben and the team over at pumped on property are offering free strategy session so you can jump on the phone to them talking about your situation where you’re at what you want to achieve and they can help design a property strategy for you and help show you the next steps that you need to build your property portfolio in the current market so go to onproperty com au forward slash strategy and you can learn more about those strategy sessions over there and book in a time that suits you thanks so much for tuning in today and until next time stay positive