Why you shouldn’t worry about interest rates and elections

27 April 2022

Why should you worry about interest rates and elections? Will interest rates will go up? They probably will. The stock market will ebb and flow but gradually grow over the long term. It probably will. House prices will continue to rise. They probably will. We are really good are forecasting things that we can see coming except for the surprises, which may not be necessarily big. But can really knock us off our horse. COVID kick-started one of the biggest growth periods in the Australian housing market in history.

The Biggest Risks in Life seem Crazy

The biggest risks in life are the things that we don’t see coming. If we don’t see them coming the damage is far worst if we are unprepared to face these risks. These risks have a very low probability of occurring which is why we don’t see them coming. The risks with higher probabilities of occurring have already been considered and accounted for in our decision making and therefore their impact is minimised or mitigated.

Did you see any of the following events coming before they happened? COVID, 9/11, the GFC, The Great Depression. Probably not, no one had these events on their radar but look how these unforeseen events have affected us.

I don’t blame anyone for not being prepared for such events. Being prepared for COVID would seem crazy before COVID. Imagine specifically looking for a property with a study and mentioning to the agent that you were going to be locked indoors working from home for months. Imagine the look on the cashier’s face when bulk-buying face masks or toilet paper.

As we saw in the Hollywood film The Big Short, there is a scene where Christian Bale’s character Michael Burry goes to all the big banks to buy credit default swaps on mortgage-backed securities effectively betting against the housing market. They laughed at him.

Did you know Russia would have invaded Ukraine this year?

When you plan and prepare, you prepare for everything that makes sense up until the point that something happens that you couldn’t possibly conceive. Did anyone mention anything about Russia invading Ukraine in January?

Has there ever been a cash rate decision that really damaged the economy? Has there been an election that has truly changed the direction of this country in the short term? The answer is simply ‘no’ because everyone has prepared for it.

How do you buy property knowing that you can only prepare for the risks that you can envision? Simple, do not worry too much about these risks because if or when they do occur, it’s a relatively small impact on property prices. The biggest impacts on the property market you can’t see coming, so don’t worry about it. Recognise that there is unforeseen risk and account for that in your borrowing capacity or the type of property that you purchase.

Your decision-making should be pointed inward at your current personal circumstances and goals. As this is a far better indicator of whether you should or should not buy property

These questions should help you come to that conclusion

Why do you want to purchase a property?

Is the property for an investment that may put you in further strife, is this a family home for the next twenty years?

Can you comfortably afford to buy the property you want considering your personal circumstances?

If you are stretching to borrow finance to purchase the property you want, then you must understand that you are more open to short term risks that could lead to lifestyle changes to remain in the property or even selling the property if mortgage repayments can’t be made

Do you understand that every decision we make comes with risk, to purchase property and even not to purchase property is considered a risk?

Understanding your risk profile whether averse or welcoming, can help you place a contingency that helps you sleep at night, like borrowing below your maximum capacity.

If you can comfortably answer these questions with a defined purpose for the property, accept the costs of the property, and understand that the risks that you can’t see are the ones that will affect you the most. Things like elections, cash rates, and inflation shouldn’t really affect your decision to purchase or not purchase a property.

Alexander Gibson

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