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Property investment is not the proverbial roll of dice

1407331_red_dice“I am not in the position to sacrifice the necessary in the hope of winning the superfluous.” I took this line out of my memory’s yard. I think it’s from Alexander Pushkin’s The Captain’s Daughter. Pete Wargent for the Property Update writes how we love to gamble (something which Pushkin would never have done) – knowingly, unknowingly, as often as we can.

While the dice are hardly loaded in the favour of a player, you still won’t lose much if you are talking 50 or 100 AUD but when you start gambling with your property investments, the world becomes too small a place to hide your face.

Stay away from investing emotionally

Basing investment on market news or on your own emotion is akin to gambling, nothing short of it. Pundits would have us believe that they know all the price fluctuations over the short-term. In hindsight, we are all prophets, aren’t we?  Just look at what they had predicted in 2011, about 2012, and you will be able to call their bluff.

Short-term fluctuations should not hamper an investor

Wargent says that ideally, short-term market fluctuations should not have any effect on your investment portfolio. You will be hard pressed to believe that buoyant markets are cause for delight and bearish trends are time to grieve but an ideal situation for an investor to be in is when these fluctuations stop mattering to him completely.

Property investors better placed to beat market medians

The property market is not priced rationally. This also means that you are not forced to expect similar outcomes for similar moves every times. Also, you are likely to beat the median prices with a little use of cerebrum, much more easily than the stock market (if we take an analogy).

Four-pronged property investment formula

Wargent gives his thumbs up to Yardney’s four-pronged formula.

  • Buy at low stickers
  • Buy in historically strong areas
  • Look for unique properties
  • Seek renovation-worthy properties

Wargent dissuades us from believing in market news (or to be influenced by it completely) without reasoning them out . Having said this, he also asks to keep an eye on the world market. A couple of things he talks about with a hint of wry smile:

  • Government’s unwillingness to look into house price inflation
  • Disproportionately large amounts of offshore funding

You can read the whole article here.

Offshore funding necessitated by lack of bank deposit growth

As always, I think Wargent has put up a highly readable post. I however hold a more empathetic stance towards the subject of RBA’s offshore funding. At this moment, there is a distinct threat of fall in bank deposit growth. This will virtually stop banks’ mortgage books from rolling further unless they seek aid of offshore funding. In a climate of slackening wholesale borrowings from offshore funders, the recovery of the housing market may weaken.

There is just one glitch with offshore funding. When funds come in, we treat them as capital but once they go out we treat them as expenditure- interest paid on net import bills. This eases our access to ghost accounting (self-deceit).

Do you invest with your heart or mind?