As an ‘aggressive’ property investor and someone leading others, I am very mindful of my responsibility to be sober and considered in my views.

Successful people swim against the tide of popular opinion. They carefully consider facts before making decisions of far reaching consequence. As the events in America bring on a feeding frenzy for those with an opinion (and often an agenda); the need for sobriety is needed now more than ever.

My Considered Opinion:

Recent global events in the credit market haven’t altered my long standing confidence in selective residential real estate. I expect my investment strategy will ultimately defy some of the broad-brushed statements being tossed about by a few pessimistic economists; who ironically have had most of the recent television and radio airplay.

Many hours have gone into penning this article… I trust the few minutes it’ll take you to read will deliver real benefit.

Let me start with some background to put into context my thoughts…

I don’t like exaggeration, manipulation or dealing with people in business who lack a conscience. If I really thought the sky was going to fall in… I would close my business and go and do something else; but I am incredibly optimistic about the future. Katrina and I are looking forward to the settlement of our next investment property; about April next year, after the three we have settled since November ’07.

I listen, read and engage. Some follow cricket; I closely follow politics & economics with focussed attention on monetary and fiscal policy. I consider the opinions of political leaders, economists, analysts, journalists, commentators and so on. I like to get inside their headspace in an attempt to understand the “why” behind their logic. It’s fair to say I am influenced by the many voices… but my conclusions will come back to basic fundamentals; and so should yours.

Over supply and lack of demand undid the property market in the USA… and the lack of investor confidence has undone many other investment markets. My investment exposure is limited to a market dominated by owner occupiers (i.e. the housing market). It will continue to perform on the basis that everybody needs a roof over their head (and I am really selective in where I buy).

Those who cannot afford to buy… rent. Australia has an existing housing shortage, a growing population and increasing (record) immigration numbers. The supply side of the equation has been hit hard by interest rates in recent years, so unlike America where homes were built to satisfy greed rather than need; my attitude is “DON’T PANIC” (as famously quoted in “The Hitchhiker’s Guide to the Galaxy”).

BEWARE of irresponsible borrowings! There are three types of debt and it’s vitally important to understand their differences:

First there is what can only be described as HORRIBLE DEBT

Horrible debt refers to debt used to purchase consumables, or things that depreciate… bought with after tax dollars (that is no tax deductions). Cars, furniture, televisions and all general credit card debt best describe this category. Clear what horrible debt you have as soon as you can and quit taking on any more. The interest free deals at Harvey Norman are not a good idea; unless you have the cash and temporarily park it in an offset account against your home loan until the interest free period expires.

Then there is TOLERABLE DEBT

Tolerable debt refers to the type of debt we incur when purchasing an item (such as the family home or a valuable piece of art) that appreciates in value, but offers no tax relief.

The “Great Australian Dream” ought not to be mortgaged and in debt struggling for 30 years, just so you can say “we have a home”. In my opinion, the great Australian dream is being a self funded retiree, while you are still young enough to enjoy it. To this end it may make more financial sense to accumulate property that others rent from you… while you go and rent something to live in. It’s horses for courses and no, one size does not fit all. That’s why our decisions need to be sober and considered, but only after we have defined our desired outcomes and we have the knowledge necessary to make such decisions.

Finally there is the good kind of debt that I like to call PRODUCTIVE DEBT

Because productive debt works for me, it’s the type that I want as much of as I can responsibly get my hands on! Productive debt is used to buy items that appreciate in value… And it also ATTRACTS TAX RELIEF. Borrowing to invest into property falls into this category and, done responsibly, is still the gateway to your financial freedom!

The danger we face is that we throw the baby out with the bath water, stick our heads in the sand and see opportunity pass us by again… for another season of our lives.

DEBT & RESPONSIBILITY

Sadly, I see too much evidence of people embracing one of two extremities with the following results:

1. Financially destitute people; due to their investments going bad
2. Financially destitute people; due to them failing to plan and take action for their “financial tomorrow”

Please don’t wake up one morning and find yourself in either camp; it’s completely avoidable. I believe that these difficult times serve to reaffirm the urgency of:

• Taking responsibility
• Being rational and considered in making financial decisions
• Blocking out the noise, hype and sensationalising of current events
• Not being dictated to by fear; which is generally ill-founded anyway
• Accumulate assets (albeit with conservative discrimination)

It’s always been provocative, however, my opinion is that safety comes by discriminating against those asset classes that investors predominately drive; anything other than residential real estate.

I “preach” fiscal responsibility. That does not necessarily mean do nothing so as to protect what you have; but subject to your debt levels and ability to service that debt… it may! We need to also consider opportunity cost, because time and inflation ensures standing still is really a backward step.

We need some sober balance to counter all the misguided, broad-brush, simplistic hysteria being screamed at us. Yes, some pretty scary stuff has been going down lately. Yes, many people will sadly see their nest eggs disappearing. Personally I am not convinced that the stock market will recover in a hurry and I think there is a justifiable reason for some concern surrounding the property market. However, those with well located, residential real estate… in areas of growing demand and limited supply; closely positioned to infrastructure and essential services… that offers lifestyle and employment options AND priced in the median bracket for such an area… should dig out an old copy of “The Hitchhikers Guide to the Galaxy” and take advice from the front cover “DON’T PANIC”!

You would be so forgiven for tuning out right now and saying “you’re only saying that because mrd deals in just residential real estate”… EXCEPT that I am on record everywhere for over 6 years as saying the opposite! Namely, mrd only deals in residential real estate because what I have outlined above is what I have believed and promoted; even when stocks were flying high!

We live in a society (world) that is debt propelled… so I am going to continue this theme of debt for at least a few more weeks. Please click the link above the top of this newsletter to pass this article/blog onto others who you believe would benefit from a sober & considered voice on the topic of responsible debt. I have attached a couple of relevant PDF articles that I encourage you to download and read… as well as some commentary snippets from others that I believe have a more considered view on the future of residential real estate, than some commentators getting much of the current airplay.

Happy Investing,

Nick Lockhart

No Rent Relief in Sight as Demand Remains High; say experts:

RP Data state research director Tim Lawless said demand for rental properties – far outstripping vacancies – had driven rents up sharply. He said while the Federal Government’s boost to the first homeowner’s grant would probably deliver a “minimal” increase in rental vacancies, in the long term it would not be enough to match demand. “We have such a dramatic undersupply (of properties) I really can’t see rents falling,” he said.

Download “This is Australia – Not the USA” – RP DATA Property Pulse

ANZ Property Outlook September 2008:

With evidence of a slowing economy, a series of interest rates rises to digest and falling house prices in overseas markets, the question needs to be asked: are house prices going to fall in Australia? We think not. Australian established house prices rose almost 8% in the year to June 2008 and are up nearly 10% per annum over the past decade. Following a brief respite in 2004, triggered by two interest rate rises in late 2003, house prices re-accelerated for a few years before softening into 2008, again in response to interest rate rises.

Download “ANZ Property Outlook September 2008“

Boost to the First Home Owners Grant:

In response to the Rudd Government’s announcement this week to boost the First Home Owners Grant, Opposition Finance Spokesman Joe Hockey warned the housing package could backfire. “There is a danger that this initiative could push up house prices,” he said. “It might be another way to help out the banks because it pushes up the value of bank securities against existing mortgages”.

Link To: Property Market Results Defy Doom & Gloom Merchants