Finance Market Update - 15 January 21
In this first fortnightly update for the year we talk about the challenges and opportunities small businesses have, and why now might be a good time to invest in property.
Small business going strong
It might not always seem like it but now is an excellent time to be running your own business.
During the virus crisis the government imposed shut the door orders heavily impacted everyone and especially small business owners. Fortunately, the government also established the largest financial assistance package ever created to support those businesses which did its job of building a financial bridge over the virus lake to the other side.
We are now pretty much at the other side.
Many business owners are extremely optimistic about this year and rightly so.
They have never been busier, more profitable (see above government money), had so many customers looking to buy from them and available staff to help them deliver the work.
On top of that the economic climate is repairing from the first recession in three decades incredibly quickly under the uncommon snap back forecast rather than recovery dragging along.
We talked in September last year that the economic recovery could be lead by a recovery in (residential) property prices and a large part of this is that peoples wealth is largely tied to their home. As property prices rise so does their confidence and that translates into spending which means income for small businesses.
Of course, there are industries and areas more deeply affected than others. Travel is an obvious one. Larger businesses are and will continue to struggle but smaller businesses that pivoted or focus on domestic travel are not going to get to take holidays anytime soon because everyone that would have spent money in Bali is now looking to go to Byron Bay or another beach depending on politicians closing the gates.
We have also seen that politicians (rightly or wrongly) are quick to slam the boarders shut and put people and businesses into lockdown which can markedly impact small businesses.
Pending the virus rollout (which could take a year) and few to no clusters and mutant strains causing snap lock downs and shut doors, things are looking very bright.
Missed the dip
Property prices will reach or exceed previous record highs this year.
While this is a fairly common view now as we enter 2021 last year it was far from the consensus view. This is understandable given the global pandemic, rising illness and death tolls and bleak economic forecasts from most professional prediction makers.
You might recall in June last year in one of these updates we talked about property prices and I forecasted prices to recover in 2020 and reach new highs in 2021. This was an uncommon view but one I felt very realistic given low rates, high demand, low supply, ‘FOMO’ and government incentives.
It appears that the low point, the dip, in the property market was around the middle to third quarter of last year but fear not as the high point is yet to come.
Now is as good a time to buy than ever.
According to Core Logic, in 2020 national residential property prices rose 3% and regional prices are up 6.9% which was largely driven by demand from people wanting a sea change. The common forecast from economists is that we will see prices up about 5% to 10% in 2021 but I dare say it could be slightly higher than that.
A key thing to remember is that in aggregate value property prices are still about 7% below the peak prices achieved in 2017.
This means there is still a lot of upside left before previous records are met and even higher records are struck.
On top of that attractive capital growth story, for the right investment properties the gross yield from can outweigh the finance costs and could generate substantial positively geared returns.
For example, if you can borrow at a rate of 2.5% for an investment property and get 4.5% gross (rental) yield that is making an investor a positive cashflow and a profit.
In certain suburbs and certain types of properties the yield can be double that used in this simple example.
Add on top capital gains which could be 5% a year and it is a compelling investment scenario.
Further, smart investors could acquire multiple properties by leveraging their existing equity or cash which compounds their overall return.
If you would like to understand your investment options, how to structure the loan to maximise returns and where and what to buy Let’s Talk.