Hannah McQueen says the current market, with falling prices and rising interest rates, has made people nervous.
Hannah McQueen is a financial adviser, chartered accountant, personal finance author and the founder of enable.me – financial strategy and coaching.
OPINION: For many people, leverage – that is, borrowing the bank’s money to invest in an asset like property – is the key tool they have in their toolbox for closing their retirement savings gap.
That might not be politically popular – but it’s the reality. Most people have either a gap that’s too big, or a timeframe that’s too short (or both) to close it with savings alone.
But the current market – with falling prices and rising interest rates – has made people nervous, even though those same conditions mean there are good buys to be had. While you wait to feel comfortable enough to act, your runway to retirement is getting shorter.
To my mind, the current environment doesn’t mean it’s a bad time to invest, but it is a bad time to invest poorly, without a plan to mitigate the risks and a strategy to hold your investment for the long term.
* Investing 101: The golden rules of investing
* How to invest your money during times of inflation
* Why you should invest your money rather than save it
* Beware the fear of missing out – investing comes in many guises
Because of course there are risks – as is the case with any investment – it’s just that we’re prone to overlook them when times are buoyant and overstate when they’re not.
So, let’s call out some of those, and also some of the ways you can mitigate them.
CoreLogic head of research Nick Goodall says the upcoming Consumer Price Index will have a big effect on interest rates and the rate of house price falls. (First published January 15, 2023)
One of the key risks right now is the bank. If you could go unconditional on a new-build property, the bank’s lending criteria could change before you settle. It could up its test rate and decide it doesn’t want to lend you as much as it indicated it would at the outset. The valuer could come in with a lower valuation and again the bank will lend you less. Annoying – but possible.
You can de-risk that by spending the time while the property is being built – that is, the period between going unconditional and settlement – strengthening your financial foundations, saving more, paying down debts, building up your buffer, and making yourself a better candidate to the bank.
The good news is: if you can clear the hurdle of current test rates, which are currently mid-8s, you should be in a strong position to hold the property for the long term.
You also de-risk your exposure to the whims of the banks by modelling different interest rate scenarios at the start of the process – before you go unconditional. What does your debt serviceability and your property’s cashflow look like at different interest rates (including worst-case scenarios and all likely expenses, not just the mortgage).
What if the builder goes bust or doesn’t finish the property?
The building and development industry is very cyclical, the businesses within it can be high-risk, high-reward, and some come a cropper in the economic cycle. That is a genuine risk. For that reason, do your homework on the builder and the developer, understand their reputation and how their business model works. How secure is their funding? What’s their track record?
If you’re investing in a turnkey property (where you put down a deposit and then don’t pay anything until the property settles), ensure your deposit is held in the solicitor’s trust account, not in the builder or developer’s pocket. That way, if they don’t complete it, you get your money back. Don’t invest with anyone for whom that isn’t standard practice.
If it’s a “land and build” property, only pay for work that has been completed, and never, ever hand over the final payment if the property isn’t complete or you’re not completely satisfied.
What if I can’t get tenants?
In reality, this risk is less that you’ll have your property empty for months on end, but rather that you may have to discount the rent to secure tenants. So, this comes back to strengthening your financial foundations and modelling the scenarios, so you know you can bridge any shortfall between rent and the mortgage for a period of time.
What if the proverbial really hits the fan and I can’t settle?
There are circumstances that may mean settling as you intended isn’t possible, despite your best efforts. Navigating this will require legal advice, but there are often options, depending on your circumstances and the terms of your sale and purchase agreement (which is why it’s key to have a lawyer review this before going unconditional). Options include transferring the contract to a nominee through a deed of nomination, contemporaneous settlement where you buy and on sell the property to someone else at the same time or talking to the developer about on selling the property to someone else.
What if prices fall?
If you’re a property investor (as distinct from a “buy and flick” property speculator) what happens to property prices this week or next month or even next year shouldn’t concern you. Your concern should be investing in the right property in the first place, and then working on your hold strategy so you can own it for the long term – and sell when the conditions suit you.