A couple of weeks ago I urged our good friend the RBA Governor, Mr Glenn Stevens to “just do it!”
What am I talking about?
Well, the INCREASE OF INTEREST RATES.
It looks now almost 99% that this will happen on guess what day..?
The first Tuesday of next month… which is Melbourne Cup Day.
I good time to lift rates – probably no one will notice that much and by the time they do, it'll be almost forgotten.
So why are they taking action on this?
The only reason I can see to lift rates is to kill off the surge in the property market which they and the government helped fuel 12 months ago anyway.
However, as an investor here's what I see…
Firstly, CONFIRMATION OF A PROPERTY BOOM in its early stages.
Secondly, confirmation of LIKELY INCREASES IN PRICES in the next 12-18 months of 10-15%.
Now of course not all properties will do this, you have to know exactly which style of property you should be buying that will best benefit in this current economic climate.
I don't have enough time to deal with the exact property-selection right now, but what I want to do is urge you to seriously look at the real estate market – because if you miss out on the next 12-18 months, based on a purchase price of $400,000 – $500,000 YOU ARE POTENTIALLY LEAVING $50-$100,000 ON THE TABLE.
For some individuals it takes a whole 12 months of slogging it out in a job to get this sort of income… many take 2 years.
On what am I basing this view?
It's really simple.
Interest rates WILL go up. That's almost a certainty. This will scare many potential owner-occupiers not to sit on the sidelines and watch, but to jump in the market and buy now.
Why?
The fear of missing out.
Missing out on historically low interest rates (even with the increase) and being shut out of the real estate market… maybe forever.
I know, I know, I know… Many of you will have an immediate knee-jerk reaction and say that the winding back of the first-home-owners grant will slow the market down anyway.
I don't think so. Here's why…
If we look back historically, I remember a time when the RBA in 1989 wanting to do the same thing and took interest rates from 10% to 17%, trying to kill off the real estate boom.
EVERY TIME THEY LIFTED RATES THE MARKET JUST KEPT GOING UP.
They lifted interest rates, market kept roaring.
Until eventually the cost of money was so great that it stopped the real estate market dead in its tracks almost overnight, around 1991.
…but here's the thing.
The capital gains that were made as the market kept going were enormous.
Here's something else that's interesting to note… That surge in interest rates as well as real estate prices came 2 years after the famous 1987 stock market crash.
Hmmmmm…. Isn't that interesting?
What happened in 2007? Yes, that's right – the GFC. Where are we today? 2009.
Does history repeat?
So here's my theory… and let me tell you it's a little more than just a theory for me, because this time I'm going to ride the real estate market as interest rates climb and profit enormously as two key emotions kick in.
FEAR AND GREED.
What will you do?
Sit on the sidelines and watch?
Miss this, and you will be kicking yourself in 2 years.
Hey, let me tell you one thing. I'm not suggesting that property will go up forever, I think it will flatten out around 2010-2011.
But between now and then, HUGE profits are going to be made.
Look, right now we're at a cash-rate of 3.25% and banks are lending at about 5.7%.
My prediction is that the RBA will have to go to AT LEAST 9% BEFORE THEY CAN SLOW THE IMMINENT PROPERTY BOOM.
From now until then, it's your chance to take advantage of this unique period in history.
OK, there are other factors than the potential owner-occupiers jumping in the fear of missing out… and I'll be covering lots more on that in the coming weeks.
If you read this email and you do nothing in the next 12-18 months in the real estate market, I can say some with some degree of certainty that YOU WILL NEVER HAVE ANOTHER OPPORTUNITY LIKE THIS.
So let me invite some discussion on this and you can reply below.
Signed with Success,
Jon Giaan
Knowledge Source
Richard Baldock says
I like your positive outlook and agree we a going to get a bit of a upwards kick, in real terms – for the right properties. A 9% cash rate scares me though – d you think rents will rise to keep pace with this ?
Steve says
Hi Jon
How would you suggest a student get involved in investing in the property market? I don’t have enough income for banks to lend money to me. Am I better off focusing on other investments like the share market? I don’t want to miss out on this opportunity but I do not see how I can take advantage of it.
Regards
Steve
Manny says
Hi Jon
I agree with you that the property market will go up over the next 18 months but maybe not with the analysis that the owner occupiers will jump in thinking they will miss out. I think the Psychology of people who are not as real estate savvy might be that if interest rates are going to go up and up then I should wait because the higher interest rates will bring the prices down (I don’t think it works like that but what I am saying is that most people think this way) and I should buy later when the prices are down.
The reason I think the prices will go up is just because of the flip side of this analysis. Some of first time or owner occupiers will stay out thinking we rather wait as higher interest rates might bring prices down. This means more people will be renting and putting extra pressure on rents. This will throw more keen investors out in the market and investement activity will kick on in a big way. Although the net cash flow effect for investors might be the same (extra rent will offset high interest) but existing shortage of homes in Australia coupled with higher rents will make it attarctive for investors to jump in.
Anyway that was my analysis. Would really like to know if u agree or if you feel there is a flaw in my analysis? Thanks
Manny
Quang says
I think its best to stay on variable as the rba would not want to crash the economy.
Robert Ferguson says
The 4 ausie banks have a market capitalisation of $A 1.7 billion BUT derivitives on their books of $14 Trillion – which they ? don’t have to account for?YET but when they do ? well its gone they are bankrupt!!! The only decent asset the have is in property ? Mortgages? so would they want that to go down? that is why they are driving prices up its all false values are going to retract in the orer of the USA same same 40 % who knows – every thing, employment is down any figures are false everything is false- But it all depends on what yo u want to believe I supose and all govts are just printing al l the money they need backed by nothing so … its all opinion at the moment AND THATS MY OPINION
mario says
hi all,
i have wanting to invest in positive cash flow properties for year but have not had the knowledge or balls to do so. but time is up. is now or for ever dig holes work hard with no real rewards. so what i need or what m,y family and i need is.
some one who has done it already made the money have a passive and dont need to work but are doing what they love to take my family and i by the hand and teach us step by step how and what to buy to create this life style we have been missing out on…………………….!
thanks.
mario
Dean says
i unfortunatly, do not share your optimism regarding an imminent property boom.I believe we have reached a time in history, where the past does not prepare us for the future Thus, to look at historical data to predict future events is misleading and dangerous.
The Global Financial Crisis is in no small part based upon the realisation that easy credit and leveraging is a hollow and brittle basis for expansionistic desires. As markets contract, people lose jobs, credit tightens, countries stop printing money and artificially propping up markets, the true proportions of this crunch will be felt, in many areas, including australias real estate market.
Future profits rely upon future demand, relativities, and affordabilities. Australias real estate is amongst the worlds most expensive and unaffordable now, and to suggest that it will continue its previous epic bubble based rises is i feel denying the core undercurrents that exist, locally..countrywide, as well as globally.
Tread wearily my fellow investors
Danny Giles says
Hi Jon, thanks for your emails. The objective to making money is so relatively simple, I agree. But let me put this in to the equation. If you have nothing, not a spare dollar to invest, with a previous bankruptcy on your credit history, how does one firstly establish a credit rating to borrow money, espescially when they dont have any equity. and secondly, how do they go about it?. This question would be on a lot of would like to be investor peoples minds. Now let me put this into the equation as well, what if you already were sucessfull and reached the objective, only to have it all taken away due to common everyday reasons (Defacto Property Settlement, Health reasons and Defacto Property Settlement , yet again… not forgetting bankruptcy as well, how does one start again in the system thats currently in place. DO YOU KNOW OF A SOLUTION TO MY SITUATION?.If so, I would appreciate your feed back. Thank- you for the opportunity to respond to your emails.
Sincerely Your’s
Dany Giles.
Gaby says
Hi Jon,
Just wondering what you’d be suggesting we do with a large family home that is not needed anymore? Need to really downsize, however the agents’ quote us unreasonable prices on the expected sale price range, compared to those of smaller and single story homes around the area which are getting great sale prices. Basically, what the agents are saying is that homes half or less than half our home’s size, will sell for only approx $100-120,000 less. How is this justified and what would be the best outcome for us to take?
Many thanks Jon,
Warren says
At the end of the day, we can only attempt to predict the future based only on what we have experienced in the past, but there is a relatively unknown factor sitting in the mix at the moment… World leaders are talking about how they can ensure we never see another GFC again…ever!
With this in mind we may well see a more secure future with less fluctuation than the past – if they get it right… in any case, I dont expect we will see any devistating lows in the near future anyway.
So, with an unknown factor, I personally will be looking for properties where I can control better returns, by forcing an increase in value up front, through something like… renovations, subdivisions, buying at the right end of the local market so there is room to improve in the first place, etc.
This way, if John is rght, then I will only benefit even more in a few years, but if he is worng, (not that I think he is that far off the mark, btw!) then I still have a buffer in forced equity and potentially a better ROI on rent VS debt.
Why just sit and wait for the forces of the world economy to control your destiny, when you can have a certain degree of influence yourself?
Steve says
I do agree with John I have seen property cycles come and go and have invested in it for 25 years even known i have always had a fairly low paying job you will not get rich buy working if that make sence its what you do with that money even if you end up with 4 houses at 300,000 and they go up by 5% a year thats 60,000 a year or 15,000 each plus your rent increase,s each year now we all know that these figures are very conservertive but it just goes to show how its done do it in your own time and factor in 3% increase in rates just in case if you do no act you will look at these houses in 10 years and go i could have bought that at 300,000 it now worth 800,000 as i bought a unit for 57,000 in 1997 now worth around 250,000 now i wished i had bought 3or 4 this is just a sample but you must be happy with your level of dept thats why positive cash flow is good
Rob says
Hi Jon,
I’m always very interested in your observations & although times are a little strange economy wise, I could not agree more about NOW IS THE TIME to get on board. History in every facet of life does have a way of repeating itself & while that’s no guarantee I feel all the signs for future rental increases are positive. It does not matter weather you believe prices will rise or interest rates will do WHATEVER, the only consideration is the RENTAL MARKET. The only real question is if you buy an investment property is there someone to rent that property to give you a positive cash flow ? Given all the current & immediate future predictions the answer is without a doubt YES !!!!
sam says
Hi Jon
Iām a student with a not so high income, i don’t want to miss such a big opportunity like this a, how would you suggest i start?
Ray says
I remember in 2007 pre-GFC I definitely felt priced out of the market for out first home. At that point even far off suburbs we werent considering were rising and beginning to be out of reach. Then the sky fell and suddenly it came down to much affordable levels. My point is while property will always increase it will not go to spectacular levels. That is like predicting another bubble. The old argument about first home buyer incomes not catching up with prices always seems to find a way to eventually drag prices down at some point. IBesides I do not see $80,000 pa as the new minimum wage happening soon.
undisclosed desires says
A good deed never goes unpunished.