7 Reasons I Wouldn’t Just Chase Capital Growth in 2019/2020

https://www.youtube.com/watch?v=eaL7u50Mcw4 Now is a very exciting time in the Australian property market with Australia showing it's first month of growth in nearly 2 years. But I personally wouldn't just be chasing capital growth in this market, here's 7 reasons why. Book a Free Property Strategy Session 0:00 - Introduction0:31 - #1: Mid Cycle vs End Cycle Slow Downs2:15 - #2: Looks Like We Are Heading For A Global Recession3:14 - #3: Interest Rates Are At All Time Lows4:09 - #4: Sydney Only Dropped ~15%, Melbourne Only Dropped ~10%5:37 - #5: Not All Areas Are Growing in Value6:33 - #6: Wage Growth Isn't That Strong7:08 - #7: We Are In Turbulent Times What I Would Do In The Current Market 8:22 - #1: Seek To Minimise Risk With My Investments9:05 - #2: Get Myself In A Good Cash Flow Position10:03 - #3: Purchase Assets That Are Increasing in Natural Desirability11:30 - #4: Have a Back Up Plan12:08 - #5: Properties Where You Can Manufacture Growth Transcription: Ryan 0:00Now is a very exciting time in the Australian property market with the market as a whole. On the rise again, I'm just looking at some data here from corelogic, showing with high growth in Sydney, Melbourne, Brisbane, Hobart and even Darwin over the last month, but I still don't think this is a time to just be chasing capital growth above everything else. So in this episode, I want to talk about seven reasons why you shouldn't just chase capital growth in 2019 and 2020. The first reason is mid cycle versus end cycle slowdowns, or recessions. Now, the last recession or global recession that happened was in 2008, the last Australian recession was something like 27 or 28 years ago, it's absolutely ridiculous, and how long we've actually staved off a technical recession. But it does look like we're heading into a time of economic contraction. In Australia where things aren't growing as quickly as they were during boom time. It's unclear as to whether this is a mid cycle slowdown, like Ben Everingham talks about and Phil Anderson talks about, which is a little bit of a slowdown before we have more growth, and leading into an end cycle, which is a much larger style, depression or recession. So it's unsure at the moment, if we're heading towards a mid cycle slowdown or an end cycle slowdown. And those will affect the market very differently. And what governments do to combat those will affect things differently as well. And so one of these things that I'll talk about just kind of lead to the turbulent times in the market, unclear as to whether we're going to have boom times ahead, looking back at Sydney at 2015 2016. Right before it had that massive run up, you could kind of see that, okay, yeah, this ramp is going to happen. And it's just a matter of how long this is going to last. Whereas at the moment, heading into a mid cycle slowdown or an end cycle slowdown, it's unsure which of those we're heading into, but it definitely looks like turbulent times ahead. It doesn't look like boom times ahead. And now that may change, and the economy may flip on a dime and move into boom times again. But at the moment, it doesn't look like that's happening. The second reason is that does also look like we're heading for a global recession. Now the last global recession was 2008. And what's happened is that the yield curve has inverted. I'm not going to get into the technicalities of this. But this has been an indicator that a recession is coming and has always happened before a recession in the last 50 years. Now there was I think one or two times that happened and we didn't have a recession. But we did have a slowdown. But the longer this yield curve is inverted, and it has been inverted for some time, the higher the chance of a recession in America. And so America obviously is going to lead the charge. And if they end up in a recession, it's highly likely to cause a global recession. So it is looking like we're going to head into a global recession. Again, it's very unclear how this is going to affect the Australian property market and the Australian economy as a whole. So turbulent times there. The third reason is interest rates are at all time lows. Now what this means in terms of global recession is there's less room to move in terms of lowering interest rates to help stimulate the economy unless we go into negative interest rate territory, which it looks like we might in the near future. But it also means that if you're investing just for capital growth, because interest rates are an all time long, people are getting interest rates around 3%. At the moment, if interest rates were to go up, and you're just investing for capital growth, what happens if interest rates go up, and you're already negatively geared as they move up, that's just gonna put more and more cash flow pressure on you, which may force you to sell your asset before you can actually make money. So interest rates an all time low can be a great opportunity, because obviously there's access to cheap money. But it also does represent a risk because interest rates can go up over time. The fourth reason is that Sydney only drops 15% and Melbourne only dropped 10% according to core logics data. So looking at this, that sounds like a lot. Sydney drop 15% that is a lot, especially for people who invested at the top of the market, especially for people who invested in the areas that dropped more than 15%. But Sydney and Melbourne both had incredible run outs over a very short period of time, with growth in some areas, upwards of 80% over just a couple of years, and then only corrected by 10 or 15%. That's not a huge correction. It's one of the biggest corrections that we've seen in the Australian property market of late but in terms of general cycles, and compared to the route that it actually had. It's not a giant correction. So People out there are still predicting that okay, Sydney could potentially drop more Melbourne could drop more could drop 2030 40% from its peak, and it's only dropped 15%. So, while it has dropped a lot, Sydney is still quite unaffordable, and Melbourne is still quite unaffordable. So while the market may decide that Sydney and Melbourne have reached the floor, and that this is where value is looking at a lot of other indicators, it does look like there is potential depending on which way the market goes that Sydney and Melbourne do have room to drop even further. fifth reason is that not all areas are growing in value. So investing in Sydney, back in 2015, where the whole market just boomed dramatically over 2016 into mid 2017. You could almost invest in any area and your property will grow in value, there's that saying the rising tide lifts all boats, that doesn't seem to be happening at the moment doesn't seem to be happening in Brisbane doesn't seem to be happening in Sydney doesn't seem to be happening in Melbourne. What's happening, however, is that some areas are declining in value, some areas are kind of staying steady, and other areas are in large demand and actually growing. So it's very pocketed in terms of the suburbs that are having growth potential. And so you can't just invest anywhere in a city and expect to get growth. So it's just some pockets of the city that tend to be growing. The sixth reason is that wage growth isn't that strong. So dropping interest rates is to try and help stimulate the economy, because wage growth isn't where the Australian Government wants it to be, and just isn't growing at a steady rate as it has in the past. And so wage growth is needed in order for asset prices to grow. So people need more money in order to spend on properties and to spend on assets. So because we had that wage growth that isn't strong, we want to start seeing that strong wage growth, again, to help the Australian economy as a whole and to help property values there too. And the seventh reason is just that we are heading into turbulent times or we are in turbulent times, and we have been for some period of time, I don't look at the future and say, okay, it's just boom times ahead, I look at the future and say the Australian property market could actually grow in value significantly, with a lot of levers that the government is pulling to try and prop up the property market. Yeah, we could definitely see some growth in the market, both in the short and long term. But there's also potential for so many other things to happen. That may mean the property market goes backwards. So it's just it's just very unclear ahead, exactly what's going to happen. And you're if you're investing in something, and the only way for you to make money is for that property to go up in value for the market as a whole to go up in value that I feel like at this point in time, that is a little bit risky, because it is quite unclear what's going to happen in the future. So what can we do, given that all of this sort of stuff is happening? And given that it is still turbulent times, even though there's the exciting data that Australia is growing again? So what would I do in this situation? Because obviously, I'm not a financial advisor, you need to decide what is best for you. And what you would do? Well, what would I do is I would seek to minimize risk with my investment. So how to minimize risk, do a boatload of research. So remember, we talked about that not all areas are growing, just some pockets are growing. And so I'll be doing research into the areas trying to pick the market that is in the correct market cycle trying to find the best suburbs within those markets that both had the lowest downside risk, as well as the potential for growth. So rather than searching for hotspots that I think are going to grow 20% year on year, for the next five years, it would be like, Okay, what area is in demand, and I can see is going to be in demand long into the future. And I'd also love to get myself in a good cash flow position.