Investors may have to resign themselves to continue to invest under a cloud of uncertainty, whether in shares or property. Even though pressures may remain to keep interest rates low and supportive, investors continue to get warnings from authorities and thought bubbles from market commentators – whether the markets are rising or falling. The important thing is to plan not to panic.

Clearly, the Reserve Bank of Australia still has some worries about risks posed by the rise in housing borrowings. In the latest warning, deputy governor Philip Lowe said “these events [a slowing in the growth of rents and a high ratio of housing prices to income] . . . are leading to some increase in overall risk.”

While there isn’t much inflation in consumer prices, there is plenty of heat in house prices. The property market isn’t any different to the stock market: when prices rise and prospective rent yields decline, this produces lower prospective returns.

Studies have shown, time and time again, that the biggest factor driving future returns is whether or not investors have bought at reasonable or low prices and high yields. The property market isn’t immune from this rule.

This penny clearly hasn’t dropped in the housing market. While there is still debate on the extent of participation of SMSFs in the housing boom, it is clear that there is an unprecedented amount of speculative money going into housing.

Now everyone hopes that any setback in the housing market won’t turn out like the US collapse; but the linkages through to security markets simply aren’t the same here. However, any fallout from the clouds of uncertainty is likely to fall on both property speculators and homeowners alike.

Combine this with the near certainty that the next move in bank lending rates (whenever it comes) will be a rise in rates, plus the danger that prudential changes might cause banks to tighten lending, and there is cause for concern. Some commentators worry this could put a dampener on bank shares – but before that happens, housing speculators may suffer.

Not that share investors can breathe easier. The bears can preach doom from either a rising market (“this makes the inevitable adjustment for over-pricing nearer”) or from a falling market (“this is the start of a correction, or worse.”)

If things turn bearish, share investors need to determine how they will react: what are the odds of a big fall?; should they lighten off or sell, or can they wait out any paper capital losses? It’s better to do this in relatively calm times, rather than be panicked into rash action in a downturn.

After the GFC scare, big investors want to manage for risk rather than for return. They realise that in a low return market, there are dangers in chasing riskier, high yielding returns. Not only are markets potentially more risky but it is harder to know where risks are coming from. And when risks are unpredictable, it is very hard to know how to protect portfolios.

At least share investors usually have a more liquid market in which to trade their investments. A bear market in housing (with easing prices, few buyers and potential pressure from bank lenders to sell) is not a pretty prospect, but if the Reserve Bank and APRA are telling the banks to do stress tests, housing investors should be doing the same.

With share portfolios, no one wants to lose money, especially if the fund is in pension mode. But, unless investors have perfect foresight on markets, the only known way to minimise capital losses (hopefully temporary ones) is to invest across a range of diversified assets – and then hope not all assets are hit at once.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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