Why we believe property is one of the safest assets to invest in, in an economic crisis.
We believe that property is not just a safe place to live in – it is also one of the safest assets to invest in during an economic crisis.
Everyone wants a roof over their heads – which means there will always be a need for property. But more than that, the property market underpins our entire economy; making it a fundamental asset in which to invest.
When the stock market tanks, people turn to property.
Ever heard of the expression “Safe as houses”? Coined in Victorian England, it has come to mean certainty or no risk of failure.
That doesn’t mean property investing comes without risk. Of course, property prices do fall, homeowners can sometimes struggle to make ends meet and property investors do lose money at times.
But, when the stock market crashes, investors often see property as a safer place to park their money.
Property investor and co-founder of Binvested, Nathan Birch, says the property market has done well during times of recession many times over thanks to people taking their money out of the stock market and reinvesting it into property.
Property isn’t as volatile as shares.
Property doesn’t crash as quickly as shares do, says Nathan.
“When stocks fall they tend to fall very abruptly,” he says.
But this isn’t the case with property. While shares and commodities such as oil have dropped by as much as 50% overnight, property goes down over a much longer period of time.
Governments like to keep property prices stable.
When recessions hit, governments and central banks tend to introduce measures to prop up the economy through the property market.
For example, says Nathan, during the GFC of 2008-2009, the Government introduced incentives to build new property through the first homeowner grant.
This meant more employment opportunities for those in the construction industry which had a trickle-down effect on the economy.
The Government also opened the doors to overseas investors in order to bring more buyers into the market and push up property prices.
The RBA lowered interest rates to make it more affordable to buy property and to put existing mortgage holders in a better financial position with more spending money in hand. This also had a trickle-down effect on the economy.
Property is a fundamental asset.
Several companies and institutions rely on the property market to make money. Banks, real estate agencies, builders, developers and governments all have a vested interest in keeping property prices rising and relatively stable.
So, when the economy starts to crack, these key players rush to protect its foundation.
“Property is the foundation of the economy,” says Nathan.
He says that people have been using their houses like ATMs in order to pull out money for things such as new furniture, cars and holidays. This has been great for the retail market. However, now that less people are able to access their equity, less money is being spent on buying luxuries. So, property has a direct effect on the performance of several other markets too.
Why it’s good to own property during a liquidity crisis.
Nathan says that when liquidity dries up and less people are able to buy properties, rents tend to rise. This is because more tenants enter the market and compete against each other to secure a place to live. This has the potential to improve cashflow.
Rents have softened in Sydney thanks to the recent construction boom, says Nathan. But, now that the liquidity crisis has brought the boom to an end things are set to change. Since Sydney tends to have consistently strong population growth, the lack of new stock being built will eventually create a void of reduced supply once all the old stock is gobbled up. Nathan says this situation will create “the perfect storm for prices to rise in value.”
Creating leveraged gains.
By investing only 20% of the property’s value in the form of a deposit, it is possible to create leveraged gains when prices go up. In other words, you might invest $50,000 in a property worth $250,000. If the property has a neutral cashflow, the tenant will be the one who pays off the loan. When the property goes up in value, the investor makes a gain on the entire amount – not just on the $50,000 they invested.
This, and the fact that the investment is a longer term play, is what makes property the best asset to invest in says Nathan.
Making the most out of economic uncertainty.
In order to reap the most out of an economic crisis, Nathan recommends using the doom and gloom stories of the media to negotiate a low purchase price. He says that a lot of sellers are fearful. Many people can’t get finance at the moment and there are people out there who are forced to sell.
When it comes to getting ahead in this economic climate, it is important to find the glitches in the matrix, says Nathan. Once liquidity comes back into the market, it will filter through property into the economy at large and prices will start to rise once more.