It’s easy to think that when the economy is booming, that it will last for ever. Share prices go through the roof, property prices soar and our wealth increases, as does tolerance for risk. This can, however, lead to some decision making based on some falsely high assumptions.
Data released by the Australian Bureau of Statistics shows that household wealth decreased 2.1 percent in the last quarter of 2018. This was driven by a slump in the share market and a more serious adjustment in house and land values. Stocks have managed to rally back to over 6000 points on the ASX200 index, however property prices are still in decline.
This is the issue when we combine Australians love of property with a period of economic growth. Investors see property as a ‘safe’ investment and are inclined to gear heavily. This is based on the belief that property will continue to increase in value. When property prices do fall, however, they tend to fall for longer periods than stocks. Subsequently, they tend to be slower to rise again after bottoming out. All this results in a decrease in wealth, and an increase in debt ratio, for a longer period of time.
Lets say that you have a $500,000 property geared to 80 percent. If that property value drops 5 percent to $475,000, then your gearing increases to 84.2 percent. That’s a $25,000 decrease in net wealth, and a 4.2 percent increase debt ratio. This may be ok in isolation, if this was your only debt. If you have several other leveraged investments, however, which have also decreased in value, then this result would be magnified.
We all like to capitalise on the good times, however this is when we must show some financial constraint. Nothing lasts forever, especially the boom times, but the recovery from carrying too much debt into a downturn just might seem like it.
For advice on your current wealth or debt position, give Steve May Financial Services a call and start a conversation today.
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Steve May, Luke Styles and May Wealth Pty Ltd T/A Steve May Financial Services are Authorised Representatives / Corporate Authorised Representative of Futuro Financial Services Pty Ltd ABN 30 085 870 015, Australian Financial Services Licensee, Licence number 238478. Please refer to our website at www.stevemayfs.com.au to reference our Financial Services Guide and business/adviser profiles.
May Wealth Pty Ltd ABN 71 612 234 518 trading as Steve May Financial Services is a Corporate Authorised representative of Futuro Financial Services Pty Ltd ABN 30 085 870 015, Australian Financial Services Licensee, Licence number 238478.
Steve May and Luke Styles are Authorised Representative’s of Futuro Financial Services Pty Ltd ABN 30 085 870 015, Australian Financial Services Licensee, Licence number 238478