As the reports from the Eastern States over collapsing house prices gather pace, spare a thought for those who were relying on one or two investment properties to provide the bulk of their retirement nest egg.
As the mini credit crunch starts to take hold, there’s no sign of the pain ending anytime soon.
The fact is we West Aussies have been there and many of us are already living through the pain. Those who bought investment properties during the mining boom have seen most values decline steadily since 2014.
While the real estate industry is keen to talk about bottoms being reached and green shoots appearing, the data tells a different story. Declines have slowed dramatically, but there’s still plenty of red ink around.
It raises some interesting dilemmas about what to do if you are in your late 50s and the investment you bought 10 years ago is showing flat or, even worse, negative returns. Do you hold on to it or quit now and lick your wounds?
Let’s return to some basics of the negative gearing strategy.
We borrow money to buy an investment property, enjoying short-term benefits thanks to the tax rules in place. But let’s not forget that any way you cut it, the strategy costs money. And underpinning the entire concept is that the investment will grow in value at a rate that offsets the loss.
One suspects that most property investors of the past 10 years are not in that position.
Many will opt to stick it out. That is, keep feeding the beast in the hope that one day (soon) there will be a miraculous pick-up in the market, so that you at least break even.
In many respects, this strategy is akin to a flip of the coin. In the brutal world of finance, basic economic principles are king. There is a supply of housing and a demand for housing — where the two meet, prices are set. For prices to rise, either the supply has to reduce or the demand increase.
If retirement is looming, we have to ask ourselves what things could happen to cause prices to increase suddenly? None of the statistics shows a real shortage of housing in WA and with the mining construction boom over, there has been a period where more people were leaving WA than coming here. All the while, the banks collect the interest on the outstanding loans.
Option two is to manage the situation and develop an effective exit strategy.
For some, this will be to simply sell the place and wear the loss, releasing cashflow to prop up super in the run-up to retirement. For others, an ability to access some of their super means they can reduce the debt and that gives them time for a hoped-for recovery. This option is usually reserved for those aged 57 or more.
The tough call is to decide which will do better, the property or an alternative investment such as super?
Now is the time to consider these options.
Sticking your head in the sand won’t work.