Interest Rate Rises?

Is The Market Heading Towards a Correction?

Jacob Field Published by Jacob Field on 1 January 2022

There was a whiff of low consumer sentiment in the air last December, the current news cycle was hard at work. We’ve had a very strong bull market run, a very strong price growth period was had in 2021. Is it set to continue or are we looking down the barrel of another correction? Now I’m going to take you through the logic behind this because I want to remind you we are property investors by taking a long term perspective.

We are looking at what we’re trying to achieve in our goals and then we are taking incremental and deliberate steps to achieve them. We’re not speculators, we are investors. But that does not mean we don’t want good, strong short term returns, but obviously not at the expense of long term returns.

We strive for both as we’re actively looking for opportunities to maximise our return on investment.

Property investment, it’s not about speculation. It’s not about booms and busts.

It is about constructing a deal and when we find that deal, executing our plan to take us towards our goals. I’ve been investing for over two decades and I’ve learnt to no longer get thrown around by media cycles, but it is definitely a concern for many people at present.

Westpac hiked the fixed rate amount, for the second time in a little over two weeks. But when you dig in a little bit deeper, the first time they moved, it was by just 0. 21% and then once again, 0.1%.

But the vast majority of Australians prefer variable interest rates, and there’s no mention of that changing.

In the same period, variable interest rates have actually been further trimmed by some of the smaller banks. The vast majority of Australians are using variable interest and that has currently been trimmed. So this is media hype. This is sensationalist journalism coming in here and causing this clickbait.

So the fixed rate has been increased, but the variable interest rate has even been trimmed by some of the smaller banks. Now that’s not to say that the interest rates won’t increase, we are at record lows, they really only can go one way. But the RBA has been very consistent in saying that they’re not looking at increasing the cash rate until 2024.

It doesn’t mean that the banks won’t increase it either. But that’s a whole different topic of conversation around how they can really move the interest rates independently of the RBA.

So really, is there much substance to this?

Surely property prices can’t keep travelling at this momentum and growing at this pace, but I’m not sure if the stop is just around the corner.

They were upgrading their property price growth predictions and still saying it’s going to continue growing into 2022, 6% to 8% across the capitals. So this is showing you you’ve got to dig a little bit deeper. Westpac themselves are the ones that have increased the fixed rate.

It’s a minority of property purchases. When you hear talk about the future, and they are still bullish on property, dig in a little bit deeper.

We’re not buying an Australian index fund of property. We are buying an individual dwelling on an individual street, and we control the dialogue in our favour.

We don’t have to buy in Melbourne and Sydney if we don’t want to. We can source the hotspots across the country. We can find those locations using data and research, which is what we specialise in to find those locations where the cards are stacked in our favour, identifying which suburbs are under (to avoid) and over performing.

So even in a downward trending, macro doom and gloom environment, there are still some locations that are going through strong growth trajectories, that are not a flash in the pan.

The national headlines are just that, national. We need to focus on a location and the property, and we need to control our own dialogue and grab the bull by the horns. But even then, the growth associated with an asset is only one of the components to generate us a return.

We want to make money when we buy. We don’t want the vendor to make money. We want that money. When we buy, we can purchase under market value, we can uplift the property in value through a cosmetic renovation. I’m not talking about a big subdivision or, you know, a large value add, I’m talking about a good quality cosmetic property makeover.

We spend money to make money and we drive strong profits into that property. We want to buy a property that gives us surplus cash flow. So it’s paying us to be in our portfolio. If it has very strong yields, this generally means the property is located in a very tight rental market.

So it generally means if the economy was to correct, more people will pile into the rental side of the equation and our surplus cash flow is protected. We have been paid to hold this asset through stable price price.

It might just slow down, but at least we’re being paid to hold that property. But if we do our job finding a good location, it should weather the storm very well. And the growth is what we target, and it’s what we all invest for. But if it doesn’t happen according to our plans, we have still made compelling money in other ways.

So we’ve got to grab the bull by the horns. And for me, I prefer not to look at the news cycle and the media cycle. I look at what I’m trying to achieve across my portfolio, where I’m trying to get to the construction of a deal to get me there. And then I look for properties that meet these numbers and whenever you find, that it’s, buy,. I bought most of my properties in the GFC and the period soon after.

That’s when I was buying and I looked and found deals that met my requirement and then executed on them. I was doing renovations. I was doing all of this and I was paying 7% interest rates! Not 3% interest rates, 7%. 8% 9% interest rates.

I was making money in multiple ways, and I was executing on my plan of attack. I think that’s really important to mention, because that question has been coming up quite a lot. We do need to bring focus into the longer term. We do need to bring focus into an asset class where we can control the variables.

When we profit in property, we can access that equity, and we use that to buy again. We don’t have to sell the asset down like shares or even crypto, to realise our gains.

LVR’s allow us to buy property, and that in itself is an indication. When the banks are lending 90% LVR’s, it means they are pretty comfortable about the direction that property prices are heading. And that’s food for thought too.