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Lock, stock and home

The rate debate has made a comeback with comments from Reserve Bank Government Glenn Stevens prompting discussion about the next rate move rising rather than falling.

Investment strategist Brian Parker from MLC joins Peter Switzer to view on how the domestic economy and the recovery is tracking in a global sense, as well as his views on the stock market.

Home sweet home

Recently released home sales figures showed that first homebuyers are piling in to the market, prompted by the First Home Owners Grant (FHOG) and low interest rates, but investors and developers aren’t so active. But talking about the Australian property market as a whole could be considered redundant because of its diversity.

“I think it doesn’t make a lot of sense even to talk about the Australian property market, because it is just so diverse,” he says. “I’m not sure it even makes a lot of sense to talk about the Sydney property market.”

Low to middle areas of the market have seen rises due to the FHOG, but Parker says he thinks “the housing market is fundamentally overvalued.”

He has a warning for first homebuyers.

“I do hope that today’s first homebuyers are factoring in more of a buffer and are actually fronting up with more of their own money and not just relying on unsustainably low interest rates and government handouts to get into this market,” he says. Parker also argues that stress tests on new applicants for home loans have not been “stressful” enough, considering where interest rates were last year.

Having said that, Parker is not a subscriber of the Professor Steve Keen view that real estate prices could fall 40 per cent. He says when interest rates were going up, the “mortgage belt” areas were doing it tough, while the “share market sensitive areas” were booming.

“Now that’s kind of reversing. The share market sensitive areas have kind of struggled for a while, but the typical first home buyer territory has enjoyed a bit of recovery,” he says.

More financial education needed

Financial literacy is also of the utmost importance. Parker says that when people leave school, they don’t have the financial literacy that will allow them to make sound and educated decisions about their investments.

“I think the only financial education most of us grew up with was something along the lines of you can’t go wrong with bricks and mortar,” he says. “The reality is, you can go wrong with bricks and mortar, terribly wrong with bricks and mortar, but we gloss over that little bit.”

Diversification is key

Parker says some people have been scared out of equity markets, but there is opportunity there. Referring to a chart of rolling 10 year real equity returns, he says if someone followed the US share market only, “you’d feel pretty ordinary right now”.

Don’t put all your eggs in one basket: Parker says it’s prudent to collect globally “as diversified a portfolio of businesses as you could possibly collect.”

“If you are going to invest in shares, and if you’re in the business of trying to build long-term wealth, it’s very hard to escape the conclusion that you’re going to have to have at least some exposure business, which inevitably means the share market,” he says, adding if you go down that path, it’s important to be aware that while the value of the business will increase over time, prices will vary tremendously on a daily, monthly or year basis.

“At the end of the day, you’re going to have to be prepared for the idea that once in a while, share markets are going to go through a crisis, markets can fall for an extended period of time, 20, 30 or 40 per cent, [and] that these sort of bear markets happen with almost monotonous regularity,” he says.

Parker says he believes “active management rules at the end of the day.” But how do you go about picking an active manager?

“If you pick an active manager based on their past performance alone, then you’re asking for trouble, because at the end of the day, very good investment managers will go through good times and bad times,” he says. “You’ve got to look at things like the turnover that they use – are they terribly tax effective, and cost effective? So there’s a whole range of criteria you need to use to pick a good investment house.”

For advice you can trust contact, Switzer Financial Services.

For more from the best brains in property, shares, superannuation, the economy, financial markets and business, head to www.switzer.com.au. Also check out Peter Switzer’s SWITZER on Sky News Business Channel, Monday to Thursday from 7pm.

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.

 

Published on: Friday, August 14, 2009

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