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.
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 was overpriced 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 houses 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.
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 creep up in value.
If you’ve owned real estate for awhile you would 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.
Last week both RPData and Australian Property Monitors released their latest property stats and they showed that around Australia some markets 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.
Looking ahead I see that there could be local consequences from the overseas problems some of us are worried about and for property investors these will hit hardest in the areas of the availability of finance and higher interest rates.
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. We are at a time in the cycle when we won’t experience extraordinary property growth for awhile, but I’ve invested and prospered through times like this before.
What this means is that to be a successful property investor over the next few years, it is likely you are going to need to take a different approach to the one you took over the last few years.
Now, when there are fewer buyers and competition is reduced, is a good time for cashed up investors to undertake thorough research; then take advantage of the opportunities the current market presents by negotiating well and buying the right type of property.
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. He also writes the Property Investment Update blog.
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