During the 1929-1932 depression there was a huge wealth shift. There were millionaires who became paupers and there were entrepreneurs who started with nothing and became multi-millionaires. During periods of stability status co is maintained. Fortunes are made and lost during times of financial crises. There are people who freeze with fear and let events over take them. Their non action is the cause of their down fall. On the other hand there those who tread with caution on their nimble feet through the thorny financial jungle. It is not that these people do not have fear but they learn to act in spite of their fear because they have they are mentally prepared to meet the challenge head on.
The events of last week are indicators of things to come. US Government and Federal Reserve acted in time to prevent what could have been run on the banks and collapse of the financial system. I have been following the crisis closely and not one financial expert is able to comprehensively tell us as to how much rot has set in and what is the magnitude of the problem. It seems the problem is not limited to sub-prime loan crisis. America is engaged in two very expensive wars that has cost trillions of dollars. The American government and people have been living beyond their means for several decade and it is all catching up. So far there has been no talk of tightening up the belt, bringing in financial discipline and sacrifice that is needed to put the house back in order. There is only talk of patch repairs and this to my opinion will simply not work. The so called bail out package will result in printing or electronically producing more money. This will dilute the value of the dollar and may cause inflation which in turn may result in increase in interest rates. US is the consumption power house of the world. Sooner than later US will need to tighten their belt and reduce their consumption if they have to put their house in order. This may no longer be choice for them.......circumstances will dictate that they will have to reduce consumption. Their pockets will not support the purchasing power. This is like to result in world economy slowing down in short run until such time slack is picked by other developing countries.
How does this situation relate to real estate in New Zealand? There is break down in the financial system in USA. We are feeling the reverberations but are not sure how it will affect us. We feel that the problem is far away across the ocean and our money and life style is safe and protected. The world that we live in has completely changed during the past two decades.....we are no longer isolated. Most of the money now is electronic. It is not even printed. The financial network is so deeply inter connected that it will be naive to expect that the pain will not hit us sooner than later.
It is the financial system that pumps life into real estate and businesses. If the financial system is damaged then there will be little or no money forth coming to fund real estate or new businesses. Most of us related to real estate are already feeling the crunch. It will take time, effort and energy to rebuild credible financial systems in which we can have faith. It will take a new generation of entrepreneurs to rebuild second tier financial companies that have vanished from the scene. This is not going to happen over night. We are in for a long haul.
The investing strategies will have to change drastically if one is to remain successful. If you are investing in city fringe at 6% to 7% yield in the hope of capital gain then just forget it. There is likely to be no capital gain during the next couple of years. You will just baby sit a negatively geared property out of your pocket for years and miss out on several buying opportunities that are likely to come up during the next year. Buy properties that give instant equity i.e by buying below value. This better than waiting for capital gain that my not happen for next 3 to 5 years. Also buy cash flow positive properties that not only pay the mortgage but also leave some money in your pocket. The yields are steadily going up and interest rates coming down. If you have patience cash flow positive properties will once again be a reality sooner than later. These two strategies will give you cushion if things go wrong. Don't rush there will be plenty of time to buy.
Please have a very hard look at the tenants and also on the leases. There is a saying that more leases you read in bed the richer you will get. We are in a shrinking economy......some tenants will fail. During the last one month 6 real estate companies in Auckland that I know of have closed shop or gone into receivership. Beware of tenants who are in the financial sector or related to real estate. Please keep enough cash on hand so as not to get into trouble. Try and increase your equity to loan ratio to less than 60%. When the markets start to move up then you can start reducing it by buying aggressively.
As most of us do not have enough knowledge about the internal health of our banks it is prudent to keep your money in a bank from which you have borrowed money. Your borrowings must always be higher than the money you have in bank. This will be a great security if the bank goes belly up. The receiver will have to offset your money with that of your borrowings. If you have borrowings from more than one bank then spread your money accordingly.
I will recommend that you watch the under mentioned video by Robert Kyosaki giving predictions for 2008. Although this was made before the current crisis it still has lots of relevance and sound advice.
http://www.youtube.com/watch?v=FOKn7tiUMyc
These are interesting times for those who are willing to take action with cautious optimism. I will appreciate if you will leave your comments on the present crisis. Your comments will be invaluable and will enrich us to help us cope with the present crisis.
Look forward to hearing from you.
Best regards,
Mr Colin Kumar
c.kumar@barfoot.co.nz
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