Should An Upcoming Election Change Your 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.
So, is it a good time for you to be fence sitting or could it be an opportunity that everyone else is missing?
Will the election result actually make a difference?
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.
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.
Never invest solely for tax
One of the biggest differences 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. My thoughts on this are:
- Labor first needs to get in
- Then they need to make the agreed changes
- Politicians aren’t best known for doing what they promise
- Even if they do make the changes, it’s for future purchases so better to buy now
- If all that happens will Labor stay in government forever 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 the average person then has to rely on government housing, might they amend those changes?
Invest for the long term
I came to Australia in 1997 and bought my first property here in 1999 – a 2 bed unit with parking and views in Coogee for $360k (current value $1.2m+). At the time everyone was fence sitting as they thought the market would crash after the Olympics. We’ve had a number of fence sitting elections during that time and we also had a fence sitting Global Financial Crisis (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 whole bunch of property cycles and things coming up, but the laws of supply and demand often override any temporary changes. Every year the negative gearing debate comes up and it hasn’t happened yet so lucky I didn’t wait 20 years to buy in and 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. 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 cashflow 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! Should you 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 and even though I’m in the media. I don’t spend much time listening to 95% of it. I prefer to get my information from being on the ground, reading from specific experts that I know don’t have hidden agendas or 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. And 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.