Residential property is going through a crisis of confidence at present. The market has been stalled by a continual conveyor belt of concerns. We’re worrying about the rising cost of living, the threat of a housing bubble, the direction of interest rates, the state of our economy, an overseas sovereign default, the carbon tax and a whole lot more.
Currently the market remains balanced between positive forces (our strong fundamentals) and negative forces (poor consumer confidence) and until some of the uncertainty clears we’ll see many home buyers and investors sitting on the sidelines waiting to see how things pan out. They’re scared of making a mistake and either buying the wrong property or over-committing to something that could slide in value.
I recently read a good analogy: If a fortune teller told you that there was a 10% chance of dying in a car crash today, many would stay home or catch a train. It’s much the same with property at present. The chances of our markets crashing are small, but the average Aussie is playing it cautious.
So is this a new era for our property markets?
Over the last couple of years our property markets were similar to all the other cycles I have invested through. Fear and greed got out of balance and the price of some properties rose by over 20% a year for a few years.
Many Australians stopped thinking of their home primarily as shelter and a long-term investment, and had begun to think of their house either as a get rich quick scheme or a very large automatic teller machine. This was spurred on by rising property values and relatively easy credit. Banks were lending money at low interest rates and high loan to value ratios, but much of this has changed now.
More recently many of us have found a renewed enthusiasm for filling our financial coffers. We’ve entered an era where we’re saving rather than consuming.
The fact is we’re now saving 10% to 12% of what we earn, which is very different to a few years ago where we were spending more than we were earning by borrowing more and more.
This renewed thrift is a good thing. Higher household savings, lower credit card debt and paying off our mortgages sooner is a sign of strength (rather than weakness) that will protect us if our economy hits some speed bumps.
Where are we in the property cycle?
Today when I hear from investors who are concerned with the negative media about the property markets and the world financial markets, I try to reassure them that the property market is behaving normally.
Let’s be clear… the property cycle peaked over a year ago now, but that doesn’t mean growth in values has stopped forever. It means the markets in our major cities are taking a breather, allowing fundamentals to catch up. Some properties will continue to fall in value, others will hold their prices and yet others will creeping up in value.
If you’ve owned real estate for a while you would have realised that property markets have always moved in cycles of rapid upward movements, followed by periods of flat or even negative growth, followed by another move upwards.
I have often suggested that the sooner an investor has traded or invested through a cycle or two, the better an investor they will be. They will then understand that slower phases in the property cycle, such as the one we are currently experiencing, are normal and they will know how to take advantage of it.
And the good news for property investors is that while prices remain flat, rents keep rising and investment yields are moving up.
The market is correcting, not collapsing
Last week both RPData www.RPdata.com and Australian Property Monitors www.apm.com released there latest property stats that they showed some markets around Australia have stalled, while others are correcting. But other than the Gold Coast, our markets are not collapsing like many doomsayers were predicting.
Of course these overall figures don’t really indicate what is really happening…
I accept that as our cities mature, they become more unaffordable to some. But as you look deeper into the figures you realise that in every state we have multiple property markets with some properties still increasing in value while others are falling in value.
These different submarkets are defined by different geographic locations as well as different price points.
Recently the higher end properties have been suffering and the more affordable end of the market has held its values better. This is no real surprise as over the long term, lower value properties have always had lower price volatility (their prices don’t fluctuate as much as high value properties) but in general they also have lower capital growth.
Over the last few months I have spent a lot of time researching our property markets, the world of economics and financial matters. I have done this to protect my own property portfolio, to help our private clients and to educate the readers of this newsletter.
I have spoken to as many experts as I could (not theorists, but experienced authorities) and I have poured over large amounts of research data and compared my conclusions with my “inner circle network” of property friends.
We have come to some interesting conclusions;
1. We are probably going to have a property crash some time in the future – but this isn’t it! Our current strong economic and property fundamentals won’t allow this to happen.
In due course, when fear and greed get out of kilter once again, it’s possible our markets will soar to heights that will see them fall, but currently there are some great opportunities out there and the markets will reward those who know how to take advantage of them.
If you sit on your hands worrying and waiting for a crash you will miss out on some great investment opportunities right now!
2. The property investment strategy used by the vast majority of property investors in the past will not work over the next few years (and I’m not talking about positive cash flow, as in my opinion that never worked well anyway!).
But there is a strategy that will work well in our forthcoming turbulent times and I will explain it in detail at our upcoming How to prosper in a flat or falling property market 1 day training seminars that I am conducting around Australia with finance strategist Rolf Schaefer and property tax accountant Ken Raiss.
3. We are in a new era of property investing. We won’t have extraordinary property growth for a while, but I’ve invested through these times before and have prospered through them. In the last year I’ve sold a number of properties and have recently committed to others. At my How to prosper in a flat or falling property market 1-day training seminar, I’ll explain exactly what I’m doing.
4. I have recently seen or spoken with a number of investors who are hurting from the changing credit criteria from the banks. Some have had to sell their investment properties. Others are worried they may have to in the future. Clearly their investment strategy did not work for them. Rolf Schaefer will show you what the banks are looking for today when you join us at our How to prosper in a flat or falling property market 1-day training seminars.
5. There will be local consequences from the overseas problems and for property investors these will hit hardest in the areas of interest rates and the availability of finance. However overall, our property markets will be underwritten by our generally strong economy, the deficiency of housing at a time of increasing demand from our growing population and changing demographics, rising cost of construction and possibly the new carbon tax – which is likely to make new housing more expensive. But I’m not suggesting we are in for another boom – not just yet anyway.
What this means is that to be a successful property investor over the next few years and to take advantage of the opportunities this changing market will present, it is very likely you are going to need to take a different approach to the one you took over the last few years.
Some readers will definitely need to do different things to protect their current property portfolio. And I’ll be explaining exactly what I’m doing about it at our How to prosper in a flat or falling property market 1-day training seminars. Click here to find out all about them and reserve your place now.
I’ll keep you up to date with how to take advantage of the changes happening in our property markets in future updates, but it is probably appropriate to remind you that in changing times like we are experiencing, no one can help you quite like the independent property investment strategists at Metropole.
Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is independent and unbiased. If you want to find out a bit more about what is happening in your local market and what our research suggests is in store for us, join us at a free property briefing in Melbourne, Sydney and Brisbane or with our associates in Perth. Just click on this link to find out more and reserve your place.
As so much is happening in property nowadays I’ll keep you updated 2 or 3 times a week in my blog – just click Michael’s blog in the top menu items on this page and subscribe to it – that’s a different subscription to my regular newsletter – it gives you my short daily updates.
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