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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Shanley Financial Planning Pty Ltd trading as Steve May Financial Services (ABN 19 612 825 180) is a Corporate Authorised Representative of (1265706) of Sensibly Pty Ltd (AFSL 533923)
Nick Shanley, Steve May and Luke Styles are Authorised Representatives of Sensibly Pty Ltd (AFSL 533923)