If there is one thing we learned from the Global Financial Crisis it is that debt makes you fragile. Let me be clear on this. I am not saying debt is necessarily bad per se. I am saying it makes you fragile – it limits your ability to adapt to swift changes in the economy. I think we can all agree on that?

nassim-taleb

The Turkey Problem

Nicholas Nassim Taleb says it best in his discussion about the turkey problem: A turkey on a farm believes it is loved by its owner because each day it is fed and nothing is asked of it in return. With every day, and every meal, the turkey’s hypothesis is strengthened. That is until three days before Christmas when the food stops coming. And on the day before Christmas – well – the turkey finds out just how wrong it was.

And this, I am afraid, is a parable for the debt infatuation we had during the eighties, nineties and early part of this decade before the GFC.

Yes, hindsight is a wonderful thing.

The question is, ‘What do we do now?’

Fragile or not, debt is useful. It allows you to take risks you otherwise mightn’t be able to. And without risk there is no reward.

A lot of people stung by the GFC have begun to look at financial risk in a new way. Where shares simply evaporate when a company goes into liquidation property still exists.

Turkey or Butcher?

Property has qualities shares do not. First, people have to live somewhere. Regardless of the value of your home it is still a roof over your head. Second, a slump in property prices only affects you if you sell during that time. Millions of people have simply ridden out property slumps, waiting for the market to recover before listing. Third, there will always be more people than there are homes. This means there will always be demand for homes.

But what about property investment for wealth building? One has to wonder if property investment, by its very nature, inflates the price of homes beyond their intrinsic worth.

Well, of course it does. I suppose the real question is whether or not the downstream effects of property investment do more good than harm? What would happen to the building industry if property investment was outlawed? Houses would become cheaper overnight, but many builders would go bust because of it. And so too would the people who service and rely upon those builders.

Known Unknowns

Damian Collins, Managing Director of Momentum Wealth, a property investment consultancy, understand this better than most. That’s why the471725-momentum-wealth-managing-director-damian-collins government introduced a First Homeowners Grant. Otherwise we’d be a nation of renters. Damian Collins specializes in commercial investment properties; this at a time when the banks (and everyone else for that matter) are highly risk-averse. If people are risk-averse, truly risk-averse, then why do they invest in properties without speaking to experts? Momentum Wealth knows better than anyone the risks associated with property investment. It’s their job to see you protected from them.

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