"My Investing strategy in a coronavirus economy What’s going on guys Its Jordan de Jong here and today I want to talk about how I’ll be investing in the current economy, with the recent reactions of coronavirus hitting all economies, monetary policy and consumer confidence the voice in the back of head starts to kick in and wonder if we should react in the same way and follow the flock. In all honesty, this is a very serious matter and we don’t know the extent of the potential impact it may have, In no way throughout this blog am I proposing of taking advantage of a horrific situation, my first and primary objective is to stay safe and healthy and help the rest of the world do the same as much as possible, but in times like these, it brings uneasiness about investment decisions. We have recently seen this with global markets taking overnight shocks due to the population reacting to the spread of the virus, but these sorts of emotional reactions aren’t uncommon and we have even seen some strong recovery already to those overnight falls. Thankfully, being property investors, our assets aren’t as liquid as the stock market, we can’t dramatically sell our property tomorrow (without a significant cost), in reaction to market conditions, and with interest rates continuing to come down it lowers the burden of holding costs to pay our mortgages. This is the great safety net of our asset selection and is helpful in maintaining the current recovery in the property market, I can’t see an immediate drop in property prices within the next couple of months but that’s not to say consumer confidence won’t soften over the next 12 months. There is so much speculation about the virus currently, some are saying it’s a man-made virus created to wipe out half the populations, others are saying it will just become the 5th type of flu we will experience seasonally. I am in no way an expert on the virus and have not conducted any research for this blog so this strategy will be purely based on what I have learned about investing in various economic conditions. Warren Buffets has many iconic quotes, one of which is “Be fearful when others are greedy and greedy when others are fearful.” In simple terms, this means invest counter-cyclically and this is the approach that I’m taking, we don’t really know what’s going to happen, so I am preparing for market conditions to drastically change. The property market has just come out of a market downturn caused by a series of events, In 2014 APRA required that all lenders must assess loans using the greater of either a 7% serviceability rate or a 2% buffer on the actual loan rate, this lowered borrowing capacities significantly which mean property buyers had less money they could borrow to purchase property. On top of this APRA also implemented restrictions on investor lending, in March 2017 APRA forced lenders to limit new interest-only lending to 30 percent of home loans they issue, and on top of this ASIC cracked down on how lenders are assessing your HEM, which stands for household expenditure measure, and is essentially your monthly living expenses. To top this all off there were serious concerns around policy changes to negative gearing and the capital gains tax discount being proposed by the labor government in the 2019 election, and if they had won the election we would have been in a very different property market then we are today. In combination, this almost haltered all property investors, borrowing was tight, it was hard to get finance and even if they managed to, they didn’t know what types of assets to buy due to the proposed changes that might have come through after the election, this bottomed out the market around mid-2019 and we have seen a recovery since the election. Not only due to the liberals retaining government, but APRA also lifted the 30% interest-only investor loan restraints on the 1st of January 2019, followed by removing the 7% assessment requirement on the 21st of May 2019 and ASIC lost a court case against Westpac on responsible lending in August 2019, giving lenders some hope, however, ASIC have since appealed to the federal court. But the main recovery driver was the three interest rate cuts in late 2019 and now a fourth in March 2020, which reduces mortgage interest repayments and reduces the cost of holding our most expensive asset, which leads us to where we are now with 5 of our capital city property markets at their all-time peaks, also if your loving this content don’t forget to smash the like button! The APRA changes in 2017 were needed, yes, the property market seemed to be growing out of control back then without any restraints and someone had to step in, but looking back now it makes you wonder if it was worth all the while. So, although this has been a long-winded back story, I wanted to frame the mindsets of the property market now, there has been a huge pent up demand from investors since 2017 to get back into the market, we have seen this surcharge come through In late 2019 but the problem really is the quality of stock on market. There has been a limited amount of stock on the market altogether and with this pent up demand, it’s no wonder we have been seeing high clearance rates over recent weekends, which news outlets and property commentators all like to report heavily on, in turn, this distills consumer confidence back into the rest of the population about the property market. So this is where we are at, really up until the start of March 2020, consumer confidence is strong, borrowing money is cheap and slowly getting easier, there’s plenty of pent up demand for homeowners and investors alike to buy quality property, but then almost overnight, the coronavirus has shocked the stock market and world economies, and we can see flock mentality kick in as doom dayers scramble to buy all the toilet paper in stores. It’s too early to speculate if this is going to be an overnight reaction, a couple of months thing or seriously impact the economy over the following years, all we know right now is a vaccine is potentially 12-18 months away and given the impact and spread that has already flowed through China since it was discovered in January, we may be in it for the long haul. There are so many unknowns in this scenario right now, and if we take it back to Warren Buffets' quote “Be fearful when others are greedy and greedy when others are fearful.” This is definitely a time where the economy is in a state of fear, we don’t know how long it will last or the full impact it will have but all we can do is prepare for it. I’m a sit a hold investor, I never plan to sell my properties unless financial circumstances changed and required me to, so for my existing investments there will be no movement, they will sit there and ride out the waves regardless of how significant the values change. We have had a phenomenal run in Australia over the last 25 years, set a record number of quarters of positive economic growth and property values have continued on their growth trajectories even after the GFC, so even if property prices did fall for a period of 5 years, I would still have hope of some sort of recovery after those economical events. However, with the current state of the property market being in a strong condition, I’m taking this opportunity to re-finance my existing loans, pull out some equity and leave it in their offset accounts, this means that I’m not paying any more interest by pulling out that money because it remains in the offset. Although, in the case where an opportunity came up, I would have instant access to use that money sitting in the offset account If I needed to, and at the point where I used the money I would then start paying interest on the additional borrowed monies, but by doing it now rather than later we are utilizing the current market conditions to prepare for unknown market conditions. If borrowing money became much harder at the time I wanted to take advantage of an opportunity, I might not be able to achieve the same results, and even worse what if property prices had fallen, even If I could pull out the equity, I wouldn’t be able to borrow as much as I could in a stronger market. Now you may be thinking, well the cash rate just came down again, and all the economists are talking about another one in April, isn’t this a good thing for property markets as interest rates keep coming down and it costs less to hold on to property? Well, the immediate answer is yes. However, If you haven’t read the RBA meeting minutes for the March cash rate drop, it’s the pure focus is around the coronavirus and its impact on the economy, they aren't focusing on the property market right now, and when the RBA is concerned about the economy, so am I. Firstly, when the economy is down, consumer confidence reduces, people are reluctant to spend on luxury items and tend to save more, this intern leads to a reduction in economic activity, essentially fewer business transactions are occurring but overheads remain the same, such as staff, building running costs etc so the business is ultimately making less profit. If this happens consistently overtime, business try and stay afloat by cutting costs such as employees, if this is happening to multiple businesses in multiple industries all at the same time, it leads to higher unemployment and underemployment in the economy and this is ultimately what the RBA wants to avoid, they are reducing business costs by lowering their interest repayments before they make employees redundant. If a recession does occur where unemployment levels are rising and people are saving more rather than spending, the last thing on their minds is property being the most expensive asset, all they are worried about is putting food on the table and trying to find a new job. If you’ve been watching my other blogs you’ll know how much of an impact supply and demand has on the housing market, and in this scenario, as people aren’t primarily focused on property, there’s less demand overall in the market, potentially slowing down the growth of the housing sector or even seeing property values decrease. So, although the property market might seem in high spirits right now, given the RBA’s response to the current economic conditions, we may see a delayed flow-through effect as the population reacts to the coronavirus, essentially spending less money in the economy, leading to lower economic activity. This is why I am getting my finances in order now, as there is so much uncertainty about how the property market will look amongst the spread of the virus and the economic reaction it may cause. As always, seek your own professional financial, legal, taxation & property investment advice for your current situation, these blogs are just my opinion and general in nature and should never be considered personal advice. Until next time, happy house hunting.

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