To produce a resilient financial plan, investors need to understand the political and regulatory climate domestically and abroad, says Financial Mappers.
According to Glenis Phillips, designer of Financial Mappers, many investors don’t know how to minimise borrowing risk and are not familiar with the risks they are currently facing. Ms Phillips also noted that having an understanding of “looming” issues could help investors be on the lookout for solutions before the problem becomes too severe.
She added: “Looking at how housing affordability is being addressed in certain comparable overseas markets gives a clue to what is happening in Australia, and where it could be heading.”
The housing market in Australia and its associated issues are comparable to the challenges facing Toronto and Vancouver in Canada, Ms Phillips said. As such, investors should be watching the Canadian response for clues on how the Australian market will react.
Pointing to freely available credit, an expectation that rates will remain low “forever” and an influx of Chinese investors, Ms Phillips said that the typical response had been to release more land and incentives for first home buyers.
For Canada, the response included “rent control on private rental units in Ontario, and restrictions on landlord evictions. Beware Australian property investors!”
Subsequent knock-on effects, such as an over-exposure to a “topping” residential market and possible ratings downgrades for banks, were likely outcomes, Ms Phillips added.
As a result of the shifting landscape, mortgage brokers and financial planners need to ensure that clients’ positions and financial outlooks are robust, “and that an interest rise or other unexpected event would not impair their client’s ability to service their loans”.
The investment professional added that the “key success determinant” for investment was the ability to model and test the plan for several years into the future, as well as its reaction to changes to interest rates or borrowing capacity.
Ms Phillips concluded: “The best investment plans have realistic buffers built in, and the only way to finely tune this is with sophisticated calculation that considers the many elements of one’s investment strategy and risk capacity.”
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