March 14, 2013 by Dymphna 7 Comments

Seeing the Big Picture Means Seeing Big Profits

As you must know by now, in my view, education is the key that unlocks the opportunities that lead to our success.  Without knowledge in hand about what we’re doing or why, then we’re simply rolling the dice on succeeding rather than taking deliberate steps based upon real knowledge.  Of course, this applies to any endeavor, not just real estate investing!

But as you also know, real estate investing is what I’m all about, and providing you with the education and the knowledge to succeed is my main objective with I Love Real Estate. Understanding where the real estate market is headed, what the macroeconomic conditions really are, and not just taking on board what the mainstream media tells us what they are, is an important distinction that can help you maximize your success.

Now, I’m not here to beat on the media with a stick—although they might just deserve it from time to time–but it does make sense to understand their role.  Their job is to sell advertising and newspapers and the like, so they will do that however they think is best for them.  That’s where their interests lie—no pun intended.

Getting the right information

But getting the right information can be a trial to say the least if you don’t know where to go or who to talk to.  A reliable and knowledgeable source is a must in order to get the real picture of not only where things are today, but just as importantly, where the economy is going to be down the road.  If you have a pretty good idea of where the economy is trending in the next six, twelve or twenty-four months, then you can act accordingly today.

To get a good idea of where things are headed in the macroeconomy, I often turn to my good friend Jason Andersen. Jason is an economist who works or has worked with some of the biggest names in real estate development in Australia.  He’s the guy they go to when they want to know whether the time is right to begin their next multi-million dollar project, and just as crucial, where to do it.

In a recent conversation, Jason and I talked about the importance of being able to see the opportunities that come with understanding of where the macro trends are headed.  It’s a simple fact that because the big developers need to commit much more time (and money) to get a project off the ground to completion than a small investor, they therefore have a very understandable need to be able to see down the macroeconomic road quite a bit to be as certain as they can be that the development will be a success.

Luckily, as smaller real estate investors, we can benefit as well from what Jason sees in term of when and where the economy will be most favorable—or not—in the near future.  Of course, as an economist, Jason looks at many factors when he makes his assessment of where the economy is going.  But one way of looking at the macroeconomic picture is to look at what’s happening in Australia versus what’s happening in other parts of the world.

It’s a global economy

This is a smart way of going about it because the fact is that we live in a global economy, don’t we?  What happens in Europe, in America, or elsewhere ultimately ends up affecting us here in Australia doesn’t it?  Therefore, Jason is just as likely to be analyzing what’s happening in the U.S.A. or Europe or other parts as he is in Australia to inform his economic outlook.

Although there are many variable opinions on what’s happening in those places, and how it will affect us here in Australia, and specifically our housing market, Jason sees the primary impact those areas will have is through the financial markets.  That is, the cost of funds will eventually become a big issue. Big players are preparing for higher funding costs coming down the road.  The global cost of funds will likely rise over the next few years, and large developers are preparing for that.

What does that mean for us today as real estate investors?

It means that Jason expects the interest rates to rise down the road.  Not today, perhaps, but in the foreseeable future. That tells me that a smart investor would borrow money today while it’s relatively inexpensive, invest that money in quality income properties, and use the relatively higher yielding income from those investments to pay down the debt while the rates are favorable.

How will the American housing market affect us here?

What happens in the U.S. impacts the entire world. Fortunately, there is some traction in the U.S. real estate market today.  Residential building has begun to recover, and if it continues—and Jason thinks it will–then the American economy will be on the way to some kind of recovery.  And it is.  That means that the U.S. economy will have some growth, which will in turn help Europe begin to be able to better manage its economic problems.

The other affect of the U.S. economy beginning to recover is that the U.S. dollar and dollar-denominated assets have not been as devalued as the euro has.  U.S. dollar strength has been a key factor in the continued strength of the Australian dollar.  Jason pointed out that if the U. S. can stay on the positive side of growth, then the future cost of funds increase will be moderated.  The U.S. recovery is happening gradually, which is a good thing, because it allows for a smoother path for our own economy.

The elephant in the room

And what about China?  Their demand for commodities has been great for Australia, and will likely continue to be, especially in liquid natural gas (LNG). LNG usage is not so correlated to growth the way iron ore is, for example. China’s existing energy needs simply include LNG, which is playing out to huge benefit to Australia, fueling growth and development here.

But not only is China providing growing demand for Australia’s energy reserves, but other Asian nations like Korea and Japan are providing demand as well.  This all translates to Australia’s economy continuing to grow, with energy and infrastructure development as a result.

But Jason also sees two trends in China’s banking system.  The Chinese central bank is very sharp in their policies, but there is also a very active private or local banking system there that is indeed in danger of running off the rails like it did in the U.S.  China is taking steps to curb that trend. They are also running a middle line between having their economy running too hot or too cold and doing a pretty good job.

India’s future is good for Australia

Proportionately, India has more poverty than China, but is still a major trading partner with us.  Like China, energy generation will continue to be a big part of India’s economic picture, and Australia’s LNG generation will play a big role in India’s growth and will also drive development here.

Food as a commodity will also be a big part in India’s growth needs. As the drought conditions give way to more favorable weather patterns, Australia will be well positioned to meet some of that demand.  There again is terrific opportunity for Australia to grow from helping to meet India’s energy and food needs.

So contrary to what you might hear in the media, things aren’t so bad.  The big picture is not all gloom and doom, is it?  It’s not a perfect world either, but then it never was.  But it is still a world full of opportunity, so take advantage of it!