Investing in a ‘What’s worse?’ environment

Investing in a ‘What’s worse?’ environment

Last week, I explained the dangers of owning cash in the bank. That’s not something you’ll often read about. Unless you dig into the legislation that creates the threat.

But this week, we turn to the polar opposite. The two Aussie reasons I’m buying a property in London.

You see, nobody wants to live in London. Not for long, anyway. Especially after experiencing the Sunshine Coast lifestyle. And proper Japanese food (outside Tokyo).

Those are the two places I want to be. But I’m in London. And about to buy a house here.

You heard me.

After almost a decade of warning you about property price crashes, I’m buying a house.

After warning about the findings of the Royal Commission for seven years, I’m going to get a mortgage…

Investing is always about the alternatives

After moving to the UK in anticipation of the Brexit shemozzle, I’m settling down here. For a few years, anyway.

Why?

Well, the first reason is my long-time footnote when writing about property prices. A home is a consumption good, not just an investment. There are plenty of non-financial reasons to own one.

Secondly, I’m getting my savings out of the banking system. For the reasons I went into last week. They aren’t safe there.

But the real reason I’m buying property in London is an Australian reason. Two, actually. I’m punting on property prices in Australia more so than in the UK. And I’m betting on the Aussie dollar’s exchange rate more so than property prices.

In other words, I’m keeping a closer eye on the Aussie economy than the UK’s. I’m expecting an Australian crash, not a UK boom. And when it happens, I’ll come back to where I belong.

It all sounds odd and abstract. But let me explain…

The trouble with investing is that it’s a game of alternatives. If you have savings, you’ve got to do something with them. Especially once you realise how dangerous cash in the bank is.

The super industry is built on an apathetic answer to that problem. Most people don’t want to care about their savings. And so they get dumped into the stock market and leeched by fees.

But what are the alternatives? Well, there is no shortage of ways to invest outside the financial system. That’s been a favourite topic of mine for years.

Buying property to live in happens to be a good option because of the savings it creates. Unless you’re at the peak of a bubble. More on that in a second.

Forced to choose, forced to lose?

Thanks to stupidly low interest rates here in Britain, my offered mortgage would cost me about a third of what it costs to rent the same place! Letting one bedroom to my sister-in-law would pay my mortgage’s interest bill several times over.

It’s a very odd situation.

So why doesn’t everyone buy? Because the Brits had their housing bubble burst in 2008. And they imposed their lending restrictions shortly after.

In 2017, these were updated again. Banks now test whether their borrower can afford rates 3% higher than their variable rate. It’s a form of stress testing. But the results are a very tight constraint on buyers.

My two-year fixed mortgage offer’s interest rate is 1.49%. After that, the rate goes up to the bank base rate plus 3.25%, for a current estimate of 4%. But the bank must assesses my capacity to pay based on interest rates of 7% — four and a half times the two-year fixed rate.

So property is incredibly affordable…but nobody is allowed to buy…

Join me, outside the country, with your money

Why tell you all about this? Because it’s what’s coming to Australia. And that prospect is what’s undermining property prices for dramatic drops right now. In the future, even those who can afford to buy won’t be able to.

So far, falls in Australian property prices come middle of the pack compared to the US, the UK, Spain and Ireland beginning in 2007. And by the same comparison, the falls have barely begun.

Could Australia experience a property bust without the exchange rate plummeting? I don’t think so.

I think you can see what I’m up to now: Buying a London property to escape the banking system, in anticipation of tumbling Aussie house prices and a falling Aussie dollar.

Then, when the time is ripe, I’ll return to the good life in Australia at far cheaper costs.

It all works in theory. But what’s the use to you?

Well, you could follow the same strategy. Investing outside Australia is just as plausible for you. UK property might be a poor choice, but what about other assets?

What I’m really suggesting is for you to short the Aussie dollar and Aussie asset prices. But not by speculating on those specifically. Instead, simply invest in assets priced in foreign currencies.

Gold is the obvious example, but it’s far from the only one.

Jim Rickards and my friend, Shae Russell, are working on a plan of action for just that. Keep an eye on your inbox early next week.

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia

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