2009 - Cash is trash!

There is no doubt about it, 2008 was a shocking year for investors. Equity markets tumbled globally, in some markets property prices fell dramatically and safe havens such as gold and even treasury bonds (which returned NEGATIVE yields in the US!!!) didn’t seem so safe anymore. All over the world Governments tried to appease people by offering guarantees on deposits, in Australia this guarantee spread to deposits of up to one million dollars. With everyone so spooked, the catch phrase of 2008 became “cash is king!”

Why wouldn’t it be? Nobody knew when the equity markets would stop tumbling (heck, even Warren Buffett was wrong as evidenced with his premature buying into of Goldman Sachs) and with interest rates so high, the return on deposits in Australia were actually decent. Coupled with the fact that cash reserves offered investors a chance to re-enter the equity markets on the cheap, and you could see its appeal.

Now let’s fast forward to 2009. Equity markets are still tumbling globally. Governments around the world are fumbling through various stimulus packages, previously unheard of GDP falls are occurring in Japan, and consumers are still completely spooked and there is no sign that the end is near. With interest rates cut in every major economy, the return for cash in Australia is now practically non-existent. Money sitting in the bank will be dead money, making next to nothing.

For some people this is fine. A dollar in the bank is better than a dollar down the drain one may rightly argue. The equity markets are so screwed that anyone considering a re-entry in the near future as their key investment strategy should consult their Doctor and have their brain checked, or alternatively go to an ATM, withdraw all their money and flush it down the toilet (it will have the same effect.)

So in this terrible economic climate, what is the best course of action? In my opinion, it is property. Not just any property, but lower end property, generally <450k.

Yes, it may seem crazy to enter the property market when all we can see overseas is capital values plunging, and closer to home it is much harder to get credit than it once was. However, one must consider the facts. With interest rates falling so rapidly and rental yields still remaining strong, positive cash flow properties are becoming more common. Rental is still strong due to the lack of supply in the market and the lack of development which has been taking part in this market to ease this lack of supply. The cheap end of town is still in demand while the Government’s first home buyer’s grants continue and there is all the upside for rental properties of negative gearing/depreciation, and in the future the upside capital growth potential.

Consider for a moment the worst case scenarios. The economy continues to spiral out of control and people continue to lose jobs. Due to the lack of supply, unless we enter a depression where people start living on the streets, rental will still remain solid. It is the top end of the market which in my opinion should be avoided, as poor rental yields and not much demand means the floor for prices is quite a way down.

Positive cashflow properties or properties close to positive cashflow – they are out there!

DS