When the going gets tough

Another hard day at the office for home loan borrowers with the Reserve Bank raising the cash rate for the twelfth time in this cycle, taking the official rate to 7.25%. So, what should homeowners and property investors think about the value of their properties going forward?

Buyer's conundrum

And let me pose a seemingly odd question: is this a good time to buy or sell?

Anyone in debt stress would be asking if Switzer has gone crazy? It would be more so if they had endured 12 quarter per cent rises - that's 3% - and were at their wits end wondering if they were going to have to sell their home.

Others might fear that the 'repo man' could be knocking on the door to ask them to vacate their beloved property. Why would you want to buy now?

Playing on fear

Warren Buffett, the investment guru, famous for playing the US stock market, came up with a beauty this week. He is a wise old guy and has learnt a lot about investment and markets over the years.

He made this intriguing observation that when people were greedy he was fearful, but when people are fearful he gets greedy.

This is a new take on the old adage made popular by a famous US entrepreneur, which went something like: I know it is time to sell when I get stock tips from the bellhop or the shoeshine boy!

Calm before the storm

The message is that when everyone wants in to a red-hot stock market or property market it's when the prices have gone ballistic. The newspapers are running with the 'so-and-so got rich' stories and it builds up a momentum until a crash.

Blessing in disguise

Right now, most normal people would be so scared of the stock market that they'd be have to be on medication to even entertain the idea of buying shares.

But this, in fact, could be the right time to look at good quality companies that have been trashed in recent months because of the global credit crunch and likely US recession.

The first cut is the deepest

Mind you, I think there could be further to fall, but I reckon the deepest falls are behind us. It would be great to have 20/20 forward vision, but few of us have that so you have to bite the bullet and go in some time.

My gut feeling is that we have a bit of time on our side before we are fully invested again in the stock market. However, there is a case to start putting in smaller amounts over regular time periods or even when there are big sell offs.

The focus would be on great quality companies that always lead the stock market up and which haven't been the victim of overreaction and excessive price crunching.

Escalating rates

On the subject of property, the interest rate torture currently inflicted on home borrowers by the RBA is bound to reduce the number of enthusiastic buyers for property at a time when the number of sellers hit and hurt by higher interest rates are increasing.

Highs and lows

After a big year in 2007 for home prices in just about every state and territory except New South Wales, which only had a 5% increase, 2008 is bound to be less impressive.

Buying opportunities are bound to emerge especially when the RBA can honestly say that its need to raise interest rates is over. There has been a veiled suggestion that we're near the top from the Big Bank's boss, Glenn Stevens. But shell-shocked Aussies, who have been hit by the rate rises, will need some time to believe the worst is behind us.

When that does happen buyers will return and prices then will start to head up.

Win-win situation

Most buyers are now fearful and it is time to be the opposite. Let's face it, if you borrow at 9% variable, which is really high but you buy a house at $100,000 discount because of the fear factor then it has to be the right time to buy. Throw in the case that you buy well and then rates fall - it's a double win.

Healthy, wealthy and wise

The critical issue is to ensure that you are not paying more than 30% of your income in home loan repayments and also make sure you could afford another 1% increase in rates, just in case the RBA get the urge to inflict more pain.

Of course, if you're a property investor, the analysis also works for you as the tax system makes the deal even cheaper. Also, the fear factor stopping buyers will keep the supply of tenants up for a couple of years.

Cover all bases

Check out sites such as Residex to find out the history of properties you're intending to buy. That could help you work out fair value.

All investments are tricky and you need to do your homework and make sure you can cover off if things go wrong (such as sickness or losing a job). Insurance can be a good back up for the careful, risk-taking investor.

Good asset hunting.

Click here to visit Peter Switzer's website

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When the going gets tough

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