Checked your super fund balance lately?
How’s your share portfolio doing?
Regretting that advice from your broker last year to invest directly in US shares, like Tesla?
President Donald Trump’s “Liberation Day” move to impose sweeping tariffs on imports into the United States has roiled global stock markets, with trillions of dollars in value wiped off the value of companies around the globe.
It’s the biggest rout on stock markets since the onset of the Covid-19 pandemic in 2020.
Who pays for tariffs?
While political leaders, including our own, have decried the imposition of the trade measures as “unfair” or “not the act of a friend”, the fact that often gets lost in all this rhetoric is that these tariffs are essentially a new tax on American consumers.
“When tariffs are imposed on imported goods, American businesses necessarily pass these additional costs on to their customers through higher prices,” explains Nerida Conisbee, the Chief Economist at Ray White.
“The economic consensus is clear - while some domestic industries may see short-term benefits, the overall impact on the US economy is negative, leading to higher inflation and reduced purchasing power.”
The impact for exporters in Australia and other countries is that our goods suddenly become more expensive, and therefore less competitive, in the world’s largest consumer market.
While Australian goods have been hit with 10% tariffs, Nerida Conisbee says the more significant concern for our nation is the indirect impact through China.
“If China cannot sell as many goods to the US due to their 34% tariff, their economy may slow further.
“As our largest trading partner, any economic contraction in China would have substantial flow-on effects for Australia,” she says.
Where to put your money
Shares - including here in Australia - have taken a beating after Mr Trump’s “Liberation Day” announcement, primarily because stock markets don’t like uncertainty.
In board rooms around the world, they are struggling to answer questions like: “What do these tariffs actually mean for our company?” “Are these trade measures permanent or are they negotiable?” “What will happen if our government retaliates - will that make things worse?”
Even economists see contradictory forces at play.
“In the short term, some goods may become cheaper for Australian consumers as Chinese manufacturers look for alternative markets for products they can no longer sell competitively to the US,” Ray White’s Nerida Conisbee says.
“Over time, however, global inflation pressures will likely feed through to Australia as production costs rise worldwide.”
In times of uncertainty, there’s usually a flight to safe investments like gold.
However, in the Australian context, I’d argue there’s nothing more effective than residential investment property.
Research prepared earlier this year by CoreLogic showed housing has outperformed equities in six of the past ten years and, cumulatively, has delivered total returns of 132.6% compared to 126.4% for equities over the past decade.
That was a comparison between the S&P/ASX 200 accumulation index, comparing total returns including capital gains as well as the reinvested yield/dividend.
Looking to the future, analysts have pointed to the long-term factors at play in the Australian property market: a continued undersupply of housing in the face of continued population growth.
That’s a recipe for continued price growth.
So what impact will all these new tariffs have on Australian housing?
“The good news…particularly those with a mortgage, is that they will likely result in lower interest rates,” says independent property economist Cameron Kusher.
“The bad news is that it will likely result in faster price rises for housing.”
Spooked by the prospect of lower global economic growth, money markets certainly are betting on lower interest rates - much more so than they were just a few days ago.
As of Monday the 7th of April, traders had fully priced in one 0.25% at next month’s Reserve Bank of Australia meeting, and then no less than three more over the next year.
Looking back at recent history, an RBA rate easing cycle is almost always accompanied by a spike in Australian housing prices.
Fans of share-trading will often point out that it’s far easier to buy and sell shares than buying and selling property.
But these are usually people who have a relatively modest share portfolio built from savings - not a much larger portfolio sourced from borrowings.
Leverage
What CoreLogic’s property versus equities comparison also doesn’t take into account is leverage.
There is a very real reason the amount of money Australians have tied up in residential property is three and a half times the amount they have invested in the stock market (excluding shares held by super funds on behalf of working Aussies).
Leverage, in financial terms, is the use of borrowed capital to fund an investment.
For the investor, it works like this:
The safer an asset, the more money a bank or a financial institution will lend you to invest in it.
Generally, banks will lend most buyers and investors the 80% balance to buy a residential property if they come up with a 20% deposit.
In some cases, such as with government guarantee schemes, you only have to put up a tiny 2% deposit, while banks lend you an astounding 98% of the cost of a home.
So, what about shares?
If you borrow money to invest in a share portfolio, most banks will loan you an absolute maximum of 70% loan-to-value ratio (LVR) in the form of a “margin loan”.
In other words, you have to put up at least - usually a lot more - a 30% deposit.
So, you are already at a disadvantage against many property owners, as you have had to save up for longer to fund a similar-sized investment.
There can also be consequences if the value of the shares in your portfolio drops.
“This will trigger a ‘margin call’ and you’ll be required to either reduce your loan amount, contribute additional security or sell part of your investment until your LVR is below the maximum,” Australia’s largest bank, CBA, explains.
Expect plenty of serious share investors to be getting margin calls from the bank about now.
While this happens quite often with share portfolios, Australian residential mortgage customers almost never get a “margin call” from the bank if the current value of their property drops below the bank’s maximum LVR.
Another point worth noting is that of the 2,200 stocks and securities traded on the Australian stock exchange, banks will only consider lending you money against a fraction of these.
On the other hand, if you have a 20% deposit and evidence of means to service a mortgage, banks will pretty much give you a loan to buy a home or invest anywhere in Australia’s 15,353 suburbs.
Interest rates for geared share portfolios are also usually higher than rates for housing investment, because the bank perceives there is more risk for this asset class than Australian residential property.
The turmoil on stock markets in recent days, with one major index falling 6% in just one trading session in New York after Donald Trump’s tariff announcement, gives you a good idea why.
As for property?
Have a look at CoreLogic’s Daily Home Value Index for the 4th of April for our five biggest cities - the day after “Liberation Day”.
Chugging along quietly, with barely a ripple.
The truth is that unless you were born wealthy, the only real way for most ordinary Australians to achieve financial freedom is to leverage residential property - whether it be an investment property or your own home - essentially using the bank’s money to build your own wealth slowly and steadily over time, no matter who occupies the White House.