Paul’s verdict: Interest rates are low, but cash is still king
House prices are likely to soften, so don’t rush in
These are truly strange times, Elissa. A pandemic is something we only expected to read about. I have used world wars, the Great Depression of the 1930s and dreadful events such as the bubonic plague of the mid 14th century on a very regular basis when talking about investment risk and to highlight the need to diversify our investments, but I did not expect to be seeing a global pandemic in my lifetime, let alone be living through one.
I greatly empathise with your point about a housing correction giving kids a chance to buy a home in what is truly a blessed country. Sure, we are far from perfect, but the reality is nothing and nowhere is perfect. Our country, along with a number of others, is about as good as it gets.
Helping the kids is one of the most common questions these days. Interestingly, it did not come up a lot when I first started chatting about money on radio in 1982. I think this was because back then people sought to buy and pay off a home, and retire with that home and an aged pension. The kids got the house when they died. But today we are a much wealthier nation. Superannuation and knowledge about buying an investment property has made a vast difference. In a way, we can blame things like the Money TV show and Money magazine for this. People are much smarter with money; we better understand tax advantages such as negative gearing, hence the huge number of people owning more than just a house. This, along with our growing population, has driven prices up.
The other huge factor is we oldies living so much longer. With many parents now living into their 90s, kids are looking at receiving an inheritance in their 60s or 70s. Equally, we live far more expansively in retirement than in the past, so we baby boomers are looking to hang onto enough assets to fund our own dreams and eventual aged care.
But back to where we started. Here we are, in the middle of a pandemic with not a lot of good news about us getting Covid-19 under control. So right now cash is king. I’d be hanging onto your cash. Yes, the rate of interest you are earning is very low. But the asset you want to buy, namely a property, is most unlikely to be increasing in value. This means the value of your money when compared to what you want to buy is doing okay. Shares are just not a good call as a short-term investment. For all you or I know, the stockmarket could fall dramatically. You ask the question about the housing market falling to three to four times median income rather than its current seven to nine times. If this was to happen, your cash is obviously far more powerful. The drop you refer to means that property would need to fall by around 50%. There are so many uncertainties that forecasting anything right now is just speculation, but I really would be surprised if property dropped 50%. Sure, this happened in the mid-1300s as around 50% of the population of Europe died!
The evidence we have is not pretty, but the global population is predicted to grow by some 93 million this year. Covid-19 is a terribly infectious disease, but I am not seeing health experts predicting anywhere near that number as a death rate. Property is driven by supply and demand. A primary factor here is population growth and while this is a really difficult time our population here is unlikely to shrink. Property prices are very likely to be impacted by job losses and reduced income, but interest rates are very low and government support is high.
The lockdown in Victoria, for example, is being done for good health reasons. We all want fewer infections and deaths, but obviously it is terrible for business and jobs. If Covid-19 continues to spread and cause economic mayhem, at some stage some property owners with debt will become forced sellers. No one wants this to happen, but I fear it is inevitable. If so, property values will be weak. All up, as good a guess as any is for property prices to be soft, but not collapse. It seems to me that this is not the time to rush in. Providing you have good job security, if a good property at a sensible price in the area where you want to live for many decades is available, buying a home still makes a lot of sense to me.