NICK BRU­IN­ING

The West Australian - - AGENDA - with Nick Bru­in­ing For all your lat­est busi­ness news go to thewest.com.au/busi­ness

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.

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