Stay on target
Published in the Daily Telegraph, July 2011 by Karina Barrymore
There are risks but you can prosper, writes Karina Barrymore.
It could be a long and winding road to investment riches this year as fragile financial markets still struggle to break free from the gloom of the global financial crisis.
Most forecasters are predicting stormy weather ahead but there will be a few bursts of sunshine if you know where to look.
Generally, however, the 2012 financial year will be one in which to regroup and pay off as much debt as possible.
The new financial year does hold a bit of promise for investors, as first homebuyers take a back seat, leaving investors with an open playing field.
According to research companies RP Data and Rismark, first homebuyers currently make up only 10 per cent of the total market, down from almost 30 per cent two years ago.
"In contrast (to these figures), investors have continued to dominate," RP Data director Tim Lawless says.
One of the big drawcards is strong rental income, which is acting as an offset for weaker prices and capital values, Lawless says.
"While residential property owners may not have seen any capital growth over the past 12 months, many are realising robust increases in rental yields," he says.
In contrast to the stagnant property prices, rental yields have been growing.
Apartments are now delivering gross returns of 4.9 per cent while houses are returning 4.2 per cent, after steadily increasing rents during the past few years, RP Data analyst Cameron Kusher says.
Apartment rents have returned an average annual rent increase of 7.9 per cent during the past five years, compared with 7.1 per cent for houses, he says.
"This result reflects changing lifestyle patterns and the ongoing densification of inner-city areas and subsequent increasing demand for rental units," Kusher says.
"We expect that rental demand will continue to increase during 2011, resulting in further increases in rental rates."
Despite a flat property market, many buyers are still concerned about future interest rate rises and are sitting out of the current market, analysts say.
However, the jury is starting to waver again on the expectations for rate rises.
Rabo Direct executive manager Greg McAweeney says the forecast has become cloudy again on the direction of interest rates this year.
"It's all a bit uncertain right now. A few months ago, the general consensus was the Reserve Bank of Australia was feeling a bit trigger-happy and was inclined to increase the cash rate - not great for homeowners," he says.
"Money markets are betting on an easing of the cash rate, ignoring the warning from the Reserve Bank of Australia that further increase in rates may be required."
"For most Aussies, it's a case of back to the future, as they take advantage of the many high savings rates on offer.
Cash is king again and many investors are turning to deposits and fixed-interest investments to park their money until the other financial markets find their new direction.
CommSec chief economist Craig James says we're becoming a nation of savers.
"Australia's increasingly cautious consumers and businesses are continuing to hold their wealth in cash or bank deposits," James says.
"The environment is much more akin to the 1950s or 1960s when people chose to live within their means and keep borrowings at low levels in relation to assets."
RaboDirect's Greg McAweeney agrees that term deposits are back in vogue.
"Term deposit rates have never been better and they're very much back in fashion these days," he says.
"Nowadays we see people getting quite savvy with term deposits, putting money on shorter terms, such as three or six months, so they're not locking their money away for too long but also combining this with longer terms out to five years."
The old set-and-forget term deposit is a bit of a thing from the past, McAweeney says.
There are several strategies used these days to help protect savers from both falling interest rates and from losing out when interest rates rise, he says.
Laddering is a strategy where you split your deposit into several different terms and roll them over as each term matures.
For example, in a three-year ladder strategy, you would invest $75,000 in three equal portions of $25,000 in a three-year, two-year and a one-year term. When the initial 12-month term deposit matures, it is rolled over into a new three-year term and so on each time.
For borrowers, the outlook is still one of uncertainty.
"Usually by the time you are advised to fix your mortgage rate, it's often too late," McAweeney says.
"You don't want to get caught with a high-rate fixed mortgage if rates start to decline. That said, if you feel nervous about coping with too many more rate hikes, it could be worth considering fixing your mortgage to give you peace of mind."
Don't be afraid to refinance your mortgage to get a better deal.
"Another option is a split-rate mortgage; it's a bit like sitting on the fence on where you think rates might go."
The sharemarket is not a place for the faint-hearted this year, although it could be OK for bargain hunters. But as usual, the problem will be picking the bottom.
Share prices have already lost about 7 per cent during the past two months and most analysts expect there will be more losses to come.
Wealth Within analyst Janine Cox expects the first quarter to be volatile.
"I wouldn't be hanging my hat on a strong run just yet, as conditions are likely to remain mixed. Banks are likely to come under pressure, particularly in the first quarter," Cox says.
"As is the case with a two-speed economy, we are likely to see a bit of a boost towards the mining sector later in the second half of the year. However, it is likely to take time before any benefits flow through to other areas of the economy."
But there is some light on the horizon for share investors towards December, as a recovery starts to get under way, the analyst says.
However, just how sustainable this recovery will be depends on any ongoing aftershocks from renewed concern about the global debt situation.
"This could see the sharemarket remain below 4800 for some time and investors need to be mindful that there is still a risk of further downside," Cox says.
"Generally, investors need to make sure they have a plan to manage their risk, particularly over the coming quarter. A cautious approach is pertinent."
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