This week we talk interest rates, shares and house prices in 2022…

How great was it when Ash Barty became the first Aussie woman in 44 years to win the Australian Open!
Sport is funny like that – it can positively influence the nation’s mood – be it socially, economically, and even politically.
We really needed a bit of positivity too.
Newspapers for the first month of 2022 have been littered with headlines like, Interest Rates to Rise, Share Market to Take Massive Hit and Housing Boom Set to End In 2022.
It does make you start question what is really going on out there? What can we expect to happen to investment values in 2022?
I can assure you it’s not all doom and gloom like some of those headlines suggest.
The share market finished 2021 up 13 per cent while house prices finished 2021 up 22 per cent. The share market is reported on by the minute, while house prices are reported on monthly. Both have had slightly slower starts to 2022 than they did in 2021.
I think you are destined for failure and anxiety if you focus on the daily and monthly movements of investment values. It’s important to take notice but it’s more important to focus on the long-term perspective.
Will interest rates go up?
They are at a record low, so they have to go up at some point and no one truly knows when and by how much. My best guess is that they will go up by 0.5 per cent to 1.0 per cent in the next 12 to 24 months which won’t make a huge difference to most household budgets.
Will the share market crash? What about house prices?
It’s not possible for the share market and housing market to sustain 13 per cent and 22 per cent annual growth. The rate of growth has to slow down at some point. I don’t know anything about shares, but when it comes to house prices, I focus on the fact that land will be worth more in 10- and 20-years’ time than it is today (I wrote a whole chapter on my rationale for that in my book Bulletproof Investing).
That’s where your focus needs to be on what the outcome will be in 10- and 20-years’ time, not this time next week or month.
I mentioned in my last blog of 2021 that I would be doing a bunch of reading over the break, catching up on books that had been recommended to me throughout the year. My favourite was a little book called The Psychology of Money by Morgan Housel.
The book explores why we have made little progress in terms of our personal finances despite centuries of literature (tens of thousands of books, in fact) dedicated to the topic. Housel concludes:
“The premise of this book is that doing well with money has little to do with how smart you are and a lot to do with how you behave. And behaviour is hard to teach, even to really smart people.”
Housel goes on to pick apart a bunch of case studies on people who have managed to do well with money – build their wealth and keep it – and those who haven’t, trying to understand what separates the two kinds.
He concludes it is not “growth or brains or insight” but instead “the ability to stick around for a long time, without wiping out or being forced to give up”.
In Bulletproof Investing I called compound growth the ‘secret sauce of investing’, a reference borrowed from Warren Buffett, who is worth $112 billion and regarded as the most successful investor of all time.
Compound growth is essentially financial speak for sticking around for a long time without selling or giving up.
The average property investor sells their property after holding it for five to six years. In a 10-year cycle house prices might double, yet 60 per cent to 80 per cent of that growth happens in just a two- to four-year window, meaning the other six to eight years have flat to modest growth.
How many investors would have sold their investment properties at the start of the pandemic, only to miss out on more than 20 per cent growth over the past 12 months?
Not surprisingly, Housel’s book also has a lot of references to Buffett. My favourite quote in the book was one he used in referencing Warren Buffet’s amazing success with money:
“Less hard but equally important is pointing out what he (Buffett) didn’t do. He didn’t get carried away with debt. He didn’t panic and sell during the 14 recessions he’s lived through… He didn’t burn himself out and quit or retire. He survived.”
That’s the attitude we should take into each day, week, and year.
Becoming ­financially successful is a marathon, not a sprint. Despite what you might read, there is no such thing as an overnight success story, it takes time.
Warren Buffett is worth $112 billion. Of that, $111.5 billion of his wealth was accumulated after his 50th birthday, and $109 billion after his 65th birthday.
That’s because he’s been disciplined, hasn’t got too caught up in the daily or weekly movements of investment values, and has been able to survive and hang on during the ups and downs that inevitably happen with investments.
Having said all that, I don’t think house prices will fall in the short term. We’ve never seen our housing market crash, and that’s because it’s so strong. Total housing in Australia is worth $9.6 trillion against total debt of $2.1 trillion.
The biggest risk when it comes to investing is cash flow. My rule of thumb is to make sure the cost of holding my investments, even if interest rates increased by 2 per cent, won’t exceed 10 per cent of my after-tax pay. That way, even if (when) interest rates go up, I can afford to tread water even in times where there isn’t growth in my investments.
I think that’s where we’re better off focusing our attention, rather than getting bogged down in daily and monthly movements of investment values.
My extended budget tool can help you work all those numbers out if you’re stuck!




Worth the wait?

Q – We are in the market looking for a house in Brisbane. We have pre-approval from the bank and deposit saved but haven’t found anything that suits us. We read that house prices might be going down, and more listings come onto the market later this year so wondered if we’re better off waiting for a few months?

A – First of all, there are a third less homes for sale today than the five-year average. In other words, you are not alone in finding it tough to buy a home over the past year or so.

It’s always going to be easier to talk yourself out of doing something, than into doing. 

I don’t think house prices will drop. Particularly in the more affordable capital cities like Brisbane and Adelaide where houses cost 50 per cent to 60 per cent of what they cost in Sydney, and yet household incomes in those cities aren’t 50 per cent to 60 per cent of Sydney incomes. That’s why we’re seeing record interstate migration in those cities.

I think you should do what you can, while you can. No one knows what’s around the corner. 

We could see it become harder to get loans, meaning you’re able to borrow less in a few months’ time. We could see prices continue to go up, meaning you need more savings for a deposit. The home you were looking for might get listed in the next couple of weeks. You get my point…

If I were you, I’d hang in there and keep persisting in your search. Good luck! 

James Fitzgerald