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The Fierce Girl's Guide to Finance

Get your shit together with money

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The property market right now: headed for a full-blown Britney meltdown?

If the residential property market was a person, it would be an Instagram influencer selling you slimming tea right now.

Any article about house prices is clickbait gold for publishers.

If you have a property, you want to know what it’s doing.

If you don’t, you want to know if you’ll ever afford one.

(If you’re a communist hoping for the proletariat to expropriate the bourgeoisie from private property, it’s less relevant).

So it’s in the media’s interests to run story after story predicting housing Armageddon.

The other night, a story on 60 Minutes proclaimed the end of days for property. It was alarmist claptrap. Some of the points were accurate, but the tone and conclusion was an irresponsible media beat-up.

Making sense of the drama

I work in an investment firm specialising in real estate, and I spent last year working in the mortgage broking industry. So I’ve seen it from a few angles.

Nobody has all the answers (and don’t trust anyone who says they do). But this post will hopefully give you a bit of insight into the headlines.

Are we heading for a property market crash?

Nobody knows for sure. But it’s important to remember that property follows a cycle. Just like sharemarkets, property prices rise for a while, get so high they are unsustainable and then come back down.

This is as normal as your menstrual cycle. Home prices will moderate eventually, just as sure as I will turn into a bloated eating machine a week out from my period. (Hey, I did the sums in MyFitnessPal today and was totally allowed to eat that TimTam).

But the crazy thing about cycles is that when they’re peaking, people forget they end.

You know how when you’re drunk at 2am and having the best time of your life, you assume you’re gonna feel like this forever. Life is ah-mazing.

Well, house prices in Sydney, Melbourne and Brisbane have had a long, intense party. Many tequilas were slammed. Many tables were danced on. But in the end, the ugly lights have come on and the bouncers are shooing us out.

What we do know about these cycles is that the pain will be unevenly shared. Some areas will fall faster and further. Outer suburbs and regional towns are often in the firing line.

Inner city areas and premium areas will fall a bit, but it’s very unlikely we will see the 40% price falls one analyst mentioned (although he only said there was a 1 in 5 chance of that).

For one thing, our population is growing at 2.6% a year (ABS stats), which creates ongoing demand for housing. There is also pent-up demand from buyers who have been priced out of the market until now. When prices cool, first-home-buyers and upsizers pounce on the discounted properties.

Long story short, most industry people see this as a market cooling – not crashing.

Is there a massive debt bubble that will burst and cause havoc?

Probably not. But there may be some pain ahead for people who are stretched to the limit. One of the big issues is interest-only loans. Strap yourself in for a quick primer on this – it’s kind of important.

A normal principal-and-interest (P&I) mortgage sets the minimum repayments based on the interest, plus the amount you borrowed – remembering that in a 25-year mortgage you can end up paying almost as much in interest as you borrowed originally.

mmm, cheesecake…

So if you think of it like eating a cheesecake – in a P&I loan, you eat some of the cheesy goodness (interest) and the crumbly base (the principal) all on one delicious spoonful, a mouthful at a time.

But in an interest-only loan, you just eat the filling and leave the crust till later. Sure you’ve spent less calories but now you’re stuck with a dry old base.

This is where the analogy probably falls apart, but the outcome of interest-only (IO) is it’s cheaper at first, but somewhere down the line you probably have to stump up for the principal repayments.

Traditionally these IO loans were given to investors for tax reasons. They can also be good if you have temporary cashflow issues like two small kids in daycare.

But they became much more popular when property prices went through the roof. Why? Because it’s hard to afford the repayments on million-dollar mortgage.

So some greedy/stupid/careless lenders and brokers have shoveled a bunch of people into these loans. And the regulator, APRA, took a look at it and was like:

So they told the banks to dial it down as part of several ‘macroprudential reforms’.

And the best way to reduce demand for a product? Make it more expensive. IO rates went up, the loans were harder to get and APRA was happy with the reduction in new loans.

However, there are literally millions of old IO loans kicking around. Two-thirds of these are going to hit the end of their five-year IO period by 2020 (source).

Some borrowers will be able to roll those into another interest-only period, but others won’t. And some will be shocked and/or disappointed about this, as it can be a big jump in costs. Some people may be forced to sell if they can’t afford it.

Either way, it’s going to be a period of transition in coming years.

If you’re interested, I recommend this speech by the RBA’s Christopher Kent. But the TL;DR is that it’s not going to be a total disaster. He is pretty chill: “For the household sector as a whole, however, the cash flow effect of the transition is likely to be moderate.”

There are other commentators out there saying otherwise, because they like drama and headlines. But if our nation’s central bank is chill, then I’m chill.

If you personally have an IO loan and you haven’t thought about how you’ll afford it when it rolls onto P&I, then you’d better start. Because there’s no guarantee you’ll get another crack at IO.

What’s the verdict then?

Is the housing market about to do a Britney: mess up at the VMA’s and shave its head in public?

I don’t think so. It will go through some tough times. Gain a few kilos. Have a few drunk nights. Marry a random in Vegas maybe. But it always does that when it’s stressed.

Overall, it will be ok.

You know, I really could go on and on about this stuff because I find it super interesting. But I’ll stop here, and encourage you to get in contact with me if you have questions or ideas for related posts.

Is doing nothing worse than doing the wrong thing with money?

I want to confess something. I’m probably wrong.

Some view I hold, some article of faith, some strongly held opinion. It’s completely wrong.

Because you know what? We’re all wrong, some of the time. I was wrong about Trump being unelectable (me, and a bazillion other political junkies).

I was wrong about Beyonce being the only viable winner of Album of the Year at the Grammy’s. (Adele. Huh. Who knew).

And I have been wrong about the romantic suitability of more men than I care to remember (although some of them are burnt into my heart: from Doug the 15-year-old drop-out to Mr Darcy, the 40-something divorcé).

Nobody has all the answers – regardless of how much conviction they show when giving you those answers. (In fact, the more conviction the higher the chance they’re wrong).

This is really important to know when it comes to money, for two reasons:

1. You should run all advice through your own bullshit filter (mine included)

2. You don’t want to let fear stop you from acting

Let’s look at the first one. As a woman, you’re going to come across a bunch of people offering free advice about money. Your folks want you to buy property. Some bloke at work wants to mansplain why you should invest in shares. Some blogger wants to tell you to stop getting eyelash extensions  (oh, that’s me).

Some of it will sound legit. Some of it will make perfect sense. And some of it won’t sit well with you at all.

One of the best ways to increase the sensitivity of your BS filter is to find your own information. Read widely and get a feel for different viewpoints. And then …

Pay attention to the numbers

I work with a wide range of fund managers and they all have a different approach. Every time I sit down with them I totally believe that they have found the holy grail of investment theory. Most of them are indeed pretty good, but it’s their numbers that tell the real story. And those numbers show that some are definitely better than others.

Key take-out? Numbers don’t lie – always look at performance figures. And not just the last year, but the last three and five years – and longer if possible.

Someone can tell you that buying an apartment off the plan and renting it out is THE best way to make a solid investment. But it’s pretty easy to test that theory. Take the purchase price, and divide it by the rent it brings in. This is the rental yield, and it tells you a lot about the return on investment.

An apartment that costs $800K and is rented out at $500 per week, gives a gross yield of 3.25% (before costs such as maintenance and strata). Yield also doesn’t take into the cost of interest on the loan, so it’s a pretty blunt instrument to work out our return on investment.

The great unknown is how much capital growth it will get – i.e. how much the value will go up. Same deal with shares – you can broadly predict the yield on those (as dividends tend to be similar every year), but less so what the share price will do.

So like every decision in life, you have some things you know and some things you just hope for the best on. Everything we do is a calculated risk.

I bought a pair of navy suede ankle boots this week, and there is a risk that I might not get as much wear as I hope out of them. But I took a risk, because they are really cute and they were on sale and I have wanted blue boots for months.

(Side note, I broke my own promise not to go to Wittner. I have a problem).

Key take-out: you can and should run the numbers on an investment, but you also have to accept there is no perfect answer and no guaranteed outcome. You need to identify and manage the risk, through things such as diversification or building in a buffer. (Read this piece about risk if you are interested).

And this brings me to another point. When you are trying to run all these numbers, you may want some help. So, should you use a financial planner?

Probably. Like colouring your hair or getting a spray tan, you can do an ok job yourself, but you will probably get a better result with a professional.

It’s the same reason I pay a stupid amount of money to a powerlifting coach. Sure I could read a book on training, but that book isn’t going to stand in front of me and shout ‘knees out, chest up!’ when my form goes to shit.

So yeah, do the basics on your own. Learn some stuff, read a book or two, get your budget and savings sorted. But if you want to move up from messing around in the weights room to actually building some serious muscle, you need a coach. In this case, a money coach.

How do you find one? Well, asking other people is a good start. But if you don’t have any recommendations to go on, take a look at the FPA website.

But let me explain the industry a bit, so you know what to look out for.

Most planners will be attached to a bank, a big financial institution or something called a ‘Dealer Group’. It’s a complicated thing where they need to be part of an organisation that holds a license. The Licensee takes all the heat of the admin and compliance (there is a shit-ton of it in this industry). The people who work under this license are called Authorised Representatives.

So the person you deal with has some sort of network behind them, whether it’s a bank or a dealer group, and that institution may or may not want to sell you some of their products. What products? Managed funds, margin loans, life insurance, mortgages. Financial products.

Now, these may be right for you. Or there could be something better out there. If you get your make-up done at the Mac counter, they’re hardly going to point you over to the Estee Lauder counter are they? Well, actually there was this one time when the Estee Lauder girl at Nordstrom recommended the Smashbox mascara she was wearing (and it was awesome). So it’s all about finding someone with your best interests at heart, and won’t just push their products on you.

Luckily, there is a law that says they have to do this – i.e. act in the client’s best interests. So regardless of whether they have their own products, an adviser will generally recommend things from an Approved Product List – a list that their Dealer Group has checked out and made sure they are legit. It’s like going to Mecca Cosmetica or Sephora, where they just give you the best of the best regardless of brand.

Key take-out: Make sure you ask lots of questions about why they are recommending one product over another. Think about how long you spend choosing a foundation – and then maybe double it.

The important thing is that you do something. Don’t fall into the trap of thinking it’s all too hard, there’s too much to know, so you’d better not do anything. That’s how you miss out on building wealth, and instead just let your life run ahead of you and your goals.

So if you are a bit scared about getting started on the finance thing, here are some tips:

  1. Do some basic research. Google is your friend. Read Warren Buffet – he makes a lot of sense and is also one of the richest guys in the world.
  2. Speak to a few grown-up people you trust (and who have money) and get their input
  3. Ask around and find a professional you like and trust. You generally get a first session free, so if you don’t click, don’t go ahead. It’s like Tinder, but less awks.
  4. Use the process to think about your goals, priorities and plans. Then map your finances against these.
  5. Ask questions,  don’t be afraid to be annoying and demanding. If you can’t understand it or it doesn’t feel right, don’t do it.

And of course, you can always cruise around the Fierce Girl blog and enjoy its truth-bombs.

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