Barefoot Investor: Now is the time to sit and wait
IT’S only a matter of time before interest rates rise, and with predictions saying this would cause mortgage stress to a million households, it’s clear that Aussies are borrowing too much, writes the Barefoot Investor.
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“PROPERTY prices have plunged for the ninth month in a row”, warned the newsreader the other night on the telly.
Well, one man’s “plunge” is another man’s “pffff”.
Across the country, prices are down a terrifying … 1.3 per cent since the market peaked in September 2017.
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But, as the old saying in the media goes, if it bleeds (or, in this case, gets a paper-cut), it leads!
Yet there was some property research this week that I did take notice of, and it was genuinely terrifying.
Digital Finance Analytics released its Mortgage Stress Report. They’re predicting that if the banks increase their mortgage rates by as little as 0.1 per cent to 0.15 per cent, it would cause one million households to be in mortgage stress, and tens of thousands to be on the edge of defaulting.
And here’s the really interesting thing: DFA says it’s not just beer-swilling bogans feeling the pinch.
The report also calls out “exclusive professionals” — well-to-do working stiffs in Mercedes with homes worth between $2 million and $5 million.
DFA chief analyst Martin North says the reason they’re in trouble is the same as everyone else: they’ve borrowed too much.
So the big question is: when will the banks raise interest rates?
Soon.
While the Reserve Bank has kept interest rates on hold for almost two years, it’s the wholesale funding costs that are increasing.
The cynic in me suggests the banks will wait until the royal commission is over — although that didn’t stop AMP this week from hiking its rates by 0.17 per cent!
My take-out from the Mortgage Stress Report is that, as an investor, now is a very good time to be sitting and waiting. Really, who needs the stress?
Tread Your Own Path!
WISH YOU WERE HERE
SS ASKS: We recently went to an investment seminar where we were offered a chance to buy into a vacation club with an international resort group called Wyndham. There are a number of different options, but the one we are looking at is the mid-range offer: we pay $22,146 upfront (financed at an interest rate of 13.15 per cent over five years), plus a $746 annual levy. That entitles us to “7000 credits”, which equates to 12 nights’ accommodation in their hotels, every year, for a lifetime. What are your thoughts?
BAREFOOT REPLIES: I thought timeshare died out in the ’80s, along with windsurfing, mullets, and Reef Oil coconut tanning lotion … but apparently not.
Let’s get one thing clear: this is an investment like a Shane Warne commemorative ashtray is an investment.
And the only thing “mid-range” about this offer is the hotel room you’ll be staying at (with the bolted-to-the-floor TV).
I spent an hour of my life that I’ll never get back reading through the Wyndham product disclosure statement (PDS), and by the end of it I seriously wanted to swig some coconut oil.
To the numbers!
After five years, you’ll have paid $34,066.
Yet it gets worse. Much. Much. Worse. The real rub of the coconut is that annual fee.
The PDS states that you’re signing a legally binding contract that commits you to pay the $746 annual fee until … wait for it … 2080.
Regardless of whether you actually use a hotel.
And the annual fee can be increased every year. Based on a 2 per cent increase (the PDS states they can go as high as 5 per cent, or CPI), the total cost of this timeshare will be $122,909.
And there’s all sorts of restrictions around when you can book rooms, and additional fees you’ll be slugged.
Let me put it another way:
If you had invested $22,146 plus $746 a year over the same period into a share
fund, you’d end up with $3.7 million in your back pocket. Yes, you wouldn’t get the benefit of staying in the hotels over the 62 years, but at least you’d have used your coconut.
Postscript: Wyndham Vacation Clubs Asia Pacific kindly provided me with the following quote, which I’ve edited for length:
“We note this is an investment column, however Club membership is never promoted as an investment choice, but rather a lifestyle product providing a
number of benefits to its members each year for the life of the Club.”
It may not be promoted as an investment choice, but it is a “managed investment scheme” that involves entering into a 62-year contract with no termination clause. However, they are right about their “benefits”. Some of these timeshare outfits lure holiday-goers with free tickets to Wet’n’Wild just to get them to sit through their pitch.
And those who sign up get completely hosed, and end up wet and wild: a quick look on Gumtree shows people selling their $22,146 upfront timeshare payment for $10,000.*
* “Negotiable”
THE REALITY CHECK
FIONA ASKS: I’m in trouble. I am 33 with three young kids, and waiting for my divorce. The thing that is holding it up is our family home, which has been on the market for eight months. My kids and I moved out six months ago to live with my parents in Brisbane, so it is sitting vacant. We took advice from our first real estate agent, who said that we could get $720,000. He was hopeless. After five months we did not get one offer!
The new agent started out all happy and confident. He convinced us to list it for $670,000. So far, the only offer has been $570,000! We have a $660,000 mortgage — I cannot leave with debt. This week he suddenly changed his tune and is now saying the property is at risk of going “stale” and we need to drop our price. I am sick to the back teeth of real estate agents! What can I do?
BAREFOOT REPLIES: A divorce doesn’t happen overnight, right?
It can take years of bulldust, blaming and baggage before you finally admit to each other that it’s over — and make the decision to move on with your life.
It’s the same situation with your home: it’s time to break up … with your price.
It’s been on the market for eight months with two different agents, and the only offer you’ve received is 20 per cent below your original price. That’s the (real estate) universe telling you that your price is too high. Buyers don’t give a toss what the house has cost you, only how it compares with other properties on the market.
So what should you do?
Focus on the things you can control.
Your real estate agent’s job isn’t to dig you out of your financial hole. His job is to go out and find you the very best price in the current market.
Your job (and your ex-husband’s) is to decide what to do next.
Houses aren’t like bread: they don’t go stale.
However, it is true that, if a home sits on the market for months, buyers may start to think there’s something wrong with the property, or something wrong with the vendors.
And they’ll lower their offers accordingly.
Sitting around waiting to break even sounds like it’s already broken you.
It’s time to act.
I’M ON MY WAY!
DINA ASKS: I’ve just closed the last page of your book (I read it in one sitting, couldn’t put it down). I left an abusive relationship and my three kids and I live on the very edge of poverty. I can tell you now that if it wasn’t for my kids, I wouldn’t be here. A big part of that is living hand to mouth and being afraid of not making the rent.
I felt like my kids had the worst draw ever when it came to me. Tonight is the first night I have felt positive in a very long time. Your book is uplifting and amazing and I feel I suddenly have a clear path lit up for me. I have booked my first “date night” for this Saturday.
I’m taking the very first step right now. I will write again in a year. Thank you!
BAREFOOT REPLIES: Thank you for writing … and for talking to me on the phone just now. (I called Dina up after I read her letter.)
The Barefoot community is looking forward to celebrating your story when you update us in July 2019.
You Got This!
If you’ve got a burning money question, or you want to win a fight with your hubby, go to barefootinvestor.com and ask a question.
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The Barefoot Investor holds an Australian Financial Services Licence (302081).
This is general advice only. It should not replace individual, independent, personal financial advice.
Originally published as Barefoot Investor: Now is the time to sit and wait
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