Some risks ahead for our property markets

I have been very upbeat in my last few blogs explaining how we are now at the beginning of a new property cycle, how fortunes will be made by some property investors and how property prices will once again double over the next decade.

Well, today I’m going to introduce a word of caution…

You see, a couple of days ago I had a chat with David Cohen, one of the buyer’s agents at Metropole and he said: “Michael, I don’t like this market, I’m concerned”.

Now David was a high achieving real estate agent for many years, and for the last few years has been helping investors buy top performing investment properties. He has one of the widest networks of connections in the real estate industry that I know of, he’s in the market all day every day and has probably bought more properties for investors over the last few years that anyone else in this market place and is an avid property investor himself.

So when David says: “Michael I don’t like this market, I’m concerned” I pay attention.

As we chatted more I found out David’s concerns and I agree with them, and hence this message to you.

Last year we experienced a property slump for all the reasons we know, and now in some segments of the market, and in particular the inner and middle ring suburbs of Melbourne, Sydney and Brisbane, we are in boom conditions.

If you follow my comments on the normal sequence of the property cycle, it’s not meant to happen this way. You can read my article about the property cycle here.

After a slump, the next stages of the property cycle are the stabilisation stage and the upturn stage. In general, property prices remain flattish during the stabilisation stage and only increase gently – maybe exhibiting 5-8% growth per annum at the beginning of the upturn stage. However, over the last nine months or so, some parts of our property market have increased in price by a rate equivalent to well over 20% per annum. That’s boom conditions as far as I am concerned, and ultimately, unsustainable.

This type of property increase normally happens in the boom phase of the cycle when fear, greed and speculation kick in.

Fear drives property booms as homebuyers and investors see property prices going up all around them. They are worried that they will miss out on the profits the boom has delivered to others. Many become overconfident, at a time when they probably should be the more cautious, and overpay just to get into the property market, pushing up property prices to levels that are (in the short-term at least) unsustainable.

At this stage of the cycle properties often sell for more than their asking price as eager buyers compete with each other to snap up any property that comes on to the market. Vendors also become greedy, pushing up asking prices and this just feeds the property boom.

Sound familiar?

Isn’t this exactly what is happening in some segments of our property markets today?

So I can see why David is concerned. Because if we are already in boom conditions, the next stage to come is the downturn or bust stage of the cycle.

Don’t get me wrong… I don’t think that’s about to happen for some time yet, because of our booming population and pent up demand, but I am sure that the market can’t keep rising as spectacularly as it has over the last few months. And if it does, the Reserve Bank will bring it to a halt with rising interest rates.

What I do see happening is property values continuing to surge strongly in selected markets for the first half of this year and then growth will slow.

Why?

Well…I see a few issues on the horizon.

Finance will be a big issue for property investors this year, some will have difficulty getting it and others will have to pay more for it as interest rates rise.

I also see more trouble ahead for the world’s economies. The world’s debt binge is become frightening. A number of European economies are starting to unravel and the spotlight is likely to return to the US later this year, as it appears to be a long way from working its ways through its own economic woes. This means that there is a good chance the US stock market will fall again and so will ours.

Remember… right now big government spending, huge borrowings and low official interest rates are driving the American economy. But unemployment remains high in the US and around 25% of households have negative equity in their homes. Add to this a surplus of over two million vacant houses and I come to the conclusion that the US will not recover until Americans feel confident about their jobs, their economy and the value of their homes.

Does this mean you should put your money under the mattress or buy gold bullion rather than invest in property?

You already know what I’m going to say, don’t you?

Property is more than just an investment – it is a fundamental human requirement. Everyone needs a roof over their head, whether they rent or own their home. As a basic necessity, housing will always be in demand – it will always have value because we simply can’t live without it.

The long-term future is assured for those who invest in property. At some stages in the economic cycle property values will rise strongly and at other times they will languish. At those times, when people can’t afford to buy property (the times when price growth slows because of decreased demand) people end up renting, so investors win by getting better returns.

I hope you can see that the take home message from all this is that the short-term future is not all that clear.

Don’t get me wrong, I’m not going back on my long-term predictions of property values doubling again over this decade, I’m just suggesting that the path will be rocky.

Some words of warning:

1. Don’t get carried away by fear or greed. I know many investors feel they missed out over the last year as they watched others make good money in property. So now some are snapping up properties the day they come on the market, sometimes at thousands above the asking price, without doing their due diligence.

Remember the wise words of Warren Buffet: “Wealth is the transfers of money from the impatient to the patient.” There are still good profits left in this property cycle; don’t rush in and make a mistake you will later regret.

2. Don’t speculate. I’ve seen many investors get burned by buying off the plan. While they think they are investing, they are really speculating, as they are buying at above today’s market price (that’s the only way developers can make the projects stack up) and then hoping for capital gains.

So are those who are now considering buying property in America, New Zealand or Dubai. There is no need to buy in these oversupplied markets, no matter what the price, as there are enough opportunities back home.

3. Purchase good properties based on fundamentals and research. Not every property makes a good investment. Not all segments of the market are going to increase in value significantly – the market is moving selectively.

4. Watch out for the spruikers. Every property cycle brings a new band of pretenders explaining how you can become rich overnight and often without any money. The problem is they are getting harder to pick and their message sounds compelling. Unfortunately, the only ones who tend to get rich quick are these “gurus”. There are uncertain times ahead. Now is not the time to test out theories. You need a property investment system that is known, proven and trusted.

It’s too hard to predict the short-term, there are too many variables, but as a long-term investment property is hard to beat and it is by investing over the long journey that the real money is made. Historically, property prices have doubled in the major capital cities of Australia every eight to 10 years. There is no reason to think they will not continue to do the same.

One of the biggest risks out there for property investors is the risk of doing nothing. It’s good to be cautious, but if you concentrate on the fundamentals that are driving property price growth, instead of listening to hyped-up scare stories, then over the long-term the money is there to be made.

It’s impossible to predict if there will be a correction in prices in ‘X’ years’ time … or when the Perth property market will eventually take off… or how far the Darwin property market will fall after its spectacular rise… or if the booming Melbourne, Sydney and Brisbane property markets are off to a false start.

Over the long-term, it really doesn’t matter.

So, put away your crystal ball and invest in property. It has proven itself to be the best long-term investment of all. But you can’t buy just any property – do your research and buy selectively. Don’t look for a bargain – buy the best property you can afford – the sort that will increase in value over the long-term, helping create your financial independence.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.