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The RBA Governor on property

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by Peter Switzer

Beware Reserve Bank Governors giving advice as they could come with the best of intentions but still leave behind the wrong message. This was my reaction when media reports warned that Glenn Stevens said don’t just think that buying property will make you rich.

It’s possibly the problem of media sound bites but when a Governor of the RBA breaks with history and goes on TV for an interview, there’s an intention to get the maximum public relations bang for the Big Bank’s buck.

Hostility control

There are those who thought the reason Stevens gave the interview was because it was the 50^th anniversary of the RBA as our central bank. Before its inception, the Commonwealth Bank was the central bank.

However, for someone like the Governor, who is no media tart, to go very public with these interviews there’s a much greater goal. And that goal is to diffuse the community hostility that has been building with the Bank’s aggressive interest rate rises since October.

What’s normal?

Things have been made worse because banks have broken with a quasi-tradition by raising rates by more than the RBA and this has happened with expectations that the Bank could raise by between 0.5 to one per cent by the end of the year.

This will bring the cash rate, which the RBA sets, back to something often called “normal”. That said, there’s debate on what normal is nowadays.

Dr John Hewson, who not only led the Federal Opposition but was also was one of the country’s top academic economists, posed the question on my Sky News Business Channel program SWITZER: “What is normal in these hardly normal circumstances we find ourselves in?”

He still worries about a possible double dip recession and he thinks the RBA is getting ahead of itself — he calls the Bank “bolshie” in raising rates so fast. He could be right, he could be wrong, but I don’t think he’s crazy in raising his concerns. He might end up being right.

Property warnings

But the comment which worried me most was Stevens’ warning on property. He virtually said don’t just buy a property and think it will make you rich in the future.

He’s worried about a property bubble but warnings such as his, and just like ones that over-talk up property’s wonders need to be tempered by fuller commentary. I would hate to think that people were turned off property because of Stevens’ generalisation.

The best warnings have to be the following:

Buy with your head and not your heart.
Do your homework and become a DIY expert.
Get a team of experts to advise you, which could include real estate agents, an accountant, a mortgage broker and even a financial adviser.
Make sure you can service your loan if interest rates rise by two to three per cent.
And don’t over-capitalise in your renovations.

Rewarding over time

Property makes you borrow pretty big but it forces you to save. It forces young people to embrace a more responsible spending life and gets them thinking about the future.

And property doesn’t disappear like Babcock & Brown, Allco and ABC Learning Centres. It also has returns around 10 per cent per annum for great properties in good areas and lesser returns for properties in less attractive areas.

However, Paddington in Sydney and Richmond in Melbourne were once unattractive suburbs, which over time rose substantially in value, making their owners pretty rich.

Property bought well should be a rewarding experience over time and it’s only over time that most of us will make our money out of property, shares and super. The trick is you have to get involved as early as possible allowing time to help you grow the value of your investment.

Beware of RBA Governors being too negative on property!

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, March 30, 2010