Hard lessons learnt from GFC bankruptcy
Alow point in Nichole Lewis’ life was at the tailend of the global financial crisis when, in 2010, the family home she was building on two hectares of land went to mortgagee sale.
Valued at roughly $1 million, it did not sell for 18 months, and then the bank stepped in, foreclosed, and sold it for about $650,000.
The property investor and coach said she had learnt from her mistakes during the previous housing market downturn, and this time she is in the position to capitalise on distressed sales.
Next week she will be helping a client settle on a three-bedroom property in Avondale with an estimated value of $950,000, which they were getting for $600,000.
‘‘So it’s very similar, dollardollar price-wise, to the GFC,’’ she said. ‘‘But there’s not as many distressed sales – the GFC had a lot.’’
That could change, because the downturn was likely to put a lot of inexperienced investors in financial difficulty, she said.
‘‘Talking to sources of mine that I’ve got at the bank, they are preparing for customers to be under hardship.
‘‘They are setting up teams for people to be able to phone, so they can actually try to help them negate going to mortgagee, but unfortunately we are going to see, in my opinion, a lot more of that in 2023.’’
She said when distressed sales did appear, a lucky buyer could hope to get about a 35% discount – which would be below prepandemic prices. This could also have a more general downward effect on prices.
‘‘In a declining market distressed assets set the new lows, in an upward market desirable developments set the new highs.’’
To explain why more distressed sales may be on the horizon, Lewis talked about a central premise to her book, Property Quadrants.
The central concept was that there are four types of property investments. The first are emotional purchases – these were family homes and properties people fell in love with.
Quadrant two were properties that an investor purchased that didn’t stack up on the cash-flow front.
This often led to rentals that were negatively geared – meaning the investor had to top up repayments with their own money, because expenses were not covered by rental incomes.
‘‘They use that same thinking they used to buy their family home, and they then go and apply it to buying an investment.
‘‘They buy something they like, in an area they like, and give the tenants what they would want, and they overspend, and they overcommit themselves, and they end up with money going out on their own family home every month, and money going out on their rental every month.’’
Now, interest rates were going up, taking mortgage repayments with them, rents are stalled due to frozen population numbers, and investors are facing higher tax bills.
‘‘They accidentally become cashpoor.’’
Issues were compounded by price falls. ‘‘Suddenly you’ve got a negative equity, and then the bank comes knocking on the door, and you go ‘oops, oh I’m in trouble’.’’
Lewis has already seen the early signs of trouble.
‘‘In fact the client I just got off the phone with said ‘I bought these investment properties years ago, I’ve read your book, I’ve bought in quadrant two, and I’m worried. Interest rates are going up, we can’t deduct, I feel like I’m completely stuck. Help me . . . what can we do’?’’
Lewis said she expected the number of distressed sales would increase.
‘‘We haven’t really been hit in the pocket with mortgage interest deductibility yet. March 2023 are when those tax returns get done and people have to pay.’’
A significant proportion of home loans will roll off their current fixed terms and on to higher ones in the next six months.
At the moment, many commentators say whether there is an increase in the number of distressed sales from the current low level depends a lot on the employment market.
Economist Gareth Kiernan said there was a dichotomy between those who had owned properties for a while and knew they could cope with higher interest rates, and people who had bought recently, highly leveraged, on the expectation that rates would remain low.
Lewis pointed out property price falls were already greater than they were during the GFC.
The investors most affected by the phase-out of mortgage interest deductibility were those who had taken on large debts with the intention of using the interest on the loan to offset their rental income and keep their tax bills low.
Lewis said those who criticised this group for taking on a large amount of risk, and gambled on the fact they would benefit from capital gains, were ‘‘taking a dig at the property market’’.
‘‘You can only borrow 60%, so you haven’t taken on huge mortgages. Back before the GFC you could borrow 90% to 100%.’’
Quadrant three, according to Lewis, were ‘‘active purchases’’ – these involved investments that rewarded effort with gains, such as building a new home and renovations.
Quadrant four were multipleincome properties where rent covered all expenses and earned the investor money.
‘‘The reason I’m not a mega landlord with 500 properties is in the global financial crisis we lost everything.
‘‘We had our 20-odd properties then and I got it wrong, and we lost everything, and had to start everything over again.’’
Lewis’ portfolio of seven properties is almost entirely made up of quadrant four properties.
Multi-income properties also offered more security, because even if one tenancy was empty, rental income still came from the others.
‘‘If you’ve got cash, and you’ve got cashflow coming in, and you can sustain higher interest rates, and you’ve got higher equity it doesn’t become negative, the banks don’t come knocking at the door, and you can ride through anything.’’
Other large investors have made similar warnings to
Lewis, with one saying that most mum and dad investors have ignored ‘‘the cashflow principle’’.
‘‘I was one of those in the GFC, you jump in at a high when you see the market go up, and you see a frenzy of buying,’’ Lewis said.
‘‘Then everything drops off and they’re stuck, they get caught, they can’t afford it anymore.’’