Perspectives - Personal Finance Blog

: Linda says:

As the French say- “The more things change, the more they remain the same.” Saving money has been out of fashion for years. Why bother when even for major purchases like housing, you could get a loan often with minimal deposit. But the rules have drastically changed, which is a problem for those with an existing mortgage and an enormous profit opportunity for those without one.

All the economic gloom and doom is likely to result in a major fall in property prices in many countries. The simple fact that most financial institutions now require a sizable deposit, favors savers, over those who do not control their spending. Only people who can save a deposit and qualify for a loan, are going to be able to take advantage of the new circumstances. Property profits are going to be dependent on the ability to save.

The precise timing of property price falls is going to vary, but housing affordability, which has been woeful in many countries, is about to markedly improve. To save money to take advantage of this situation, is going to take a period of time. But the residential property market is looking at a prolonged downturn, so time is should be available for anyone who wants to profit from this situation.

When there are changed trends and circumstances, acting quickly rather persisting with outdated ideas is important. Saving money will be the hot new trend, recognise it now and be ahead of people who still believe that last year’s strategies will work.

Linda says:

Or any of the other big mining companies with known huge resources in the ground and major cashflow. You may not realize it, but that is who you are now competing with to get money you may need for your business, or to fund a real estate purchase or other investment. Like food and oil, the cost of money is going up be it in your mortgage, overdraft or credit card.

What the sub prime crisis has done is make credit harder to obtain and more expensive.
The big mining companies and other large financial institutions, in days gone by, could obtain money that they needed cheaply overseas. But these cheap money supplies are no longer available, so they are now borrowing money from Australia’s big banks.

Which is good news if you are cash rich, and find a term deposit preferable to venturing back into the stock market. But don’t depend on a quick change in conditions, or being able to get credit again easily in the near future.

We have passed from a season of easy credit and relatively low interest rates to a time of much tighter money. Even in parts of the world such as the United States where official interest rates have fallen, mortgage rates have not moved and banks are far less willing to lend.

As we have warned multiple times before, now is the season to cut back your debts, and be aware that having your own savings will place you in a good position to weather uncertain times.

Linda says:

Warren Buffett, in an interview on CNBC has commented that ‘my general feeling is that the recession will be longer and deeper than most people think.’ Is the world’s wealthiest man and a legendary investor right?

Certainly he has age and massive experience on his side and an extremely successful record. Markets are looking a lot better than in mid March, and many are saying that the sub prime crisis is about to improve. Others, are far more cautious such as Mr Buffett and George Soros, another billionaire, also in his seventies and a former hedge fund operator.

Certainly, stock markets appear to be recovering, as the real economies of many nations appear to be slowing with falling consumer confidence and rising unemployment in several countries. No stabilization has been achieved in the US housing market with more foreclosures, falling house prices and no bottom yet in sight. And inflation, quiet for so long is becoming a worsening problem. (See our recent article - “Australia’s Inflation Rate Rises to 4.2%”‘ )

Falls in real estate prices are also now being experienced in the UK, Spain and Ireland with some other countries likely to follow. With the price of most people’s main asset still falling or likely to fall, the rise in the stock market may be premature.

If business activity and retail sales fall, the profits of many companies will also be affected and this will cause share prices to fall as a result. Therefore the outlook is still uncertain and the legendary Warren Buffett may be correct in his recession call.

Linda says:

The result that Australian home loan approvals have slumped in February confirmed that Australia, will not be an island of stability in a sea of global real estate woes. The multiple interest rate rises and headlines of domestic and International turmoil, have convinced the average person that now is not the time to rush into a big home loan.

The Reserve bank wanted to cool the economy and it is getting what it wanted, a big slump in home loan approvals, down by 5.9% in February. About the only good news out of this is that the if the boys at the Reserve Bank are scaring away the new home buyers, existing mortgage holders are less likely to be hit with yet another interest rate rise!

Which is good news if you are happy to stay in the mortgage and home you are in currently. If you are over committed or have speculated in an investment property, this news means that it will now be much harder to sell your property.

When people rush madly to buy real estate, they are often scared that prices are only going up and out of their reach. If they are now scared of higher and higher interest rates and economic gloom, the mood of the market changes again.

The home loan slump in Australia also means that more people are worried that property prices could FALL here as they are doing in other countries.

P.S.

Are you changing your ideas about investing or buying property?

Several of my friends have got far more cautious in just the last few weeks. Is that what you are thinking too?

Register to give us a comment of what you are seeing happen in your town.

(I am writing this from South East Queensland, which has been one of Australia’s hottest areas for rising property prices in recent years - But now I’m seeing new “For Sale” signs popping up every day)