API Online

August 10, 2011

Block your ears!


From what we’re hearing on the television and radio, and reading in newspapers and websites, it’s all doom and gloom out there at the moment.

BY VANESSA DE GROOT

Consumer confidence has been down for some time and the renewed turmoil in the global economy really isn’t helping. People are scared, understandably. They’re not sure if another global financial crisis (GFC) is around the corner. And the uncertain political situation in Australia, with a government throwing around something as controversial as a carbon tax at a time like this, is making matters worse. Even some property experts are starting to waver on their staunch optimism faced with these current conditions.

Last week when the first signs of a stockmarket crash were starting to show, I was asked if I was concerned, seeing as I’ve recently entered into a contract to buy an investment property. Until I was asked, it hadn’t even occurred to me to be concerned. And I’m not worried. If anything, I’m relieved to have my money in property. I’d be concerned if it was in shares! The reality is that even though property prices have stagnated or fallen marginally, they haven’t dropped significantly like shares have and it’s proven, once again, that property is the safest place to put your money.

While I have no concerns about my property investments, I asked my partner whether he was worried and he reasoned that another GFC might actually be a good thing for us as property investors (although I cringe to write that, because for many it won’t be good news) because interest rates would likely drop and as we intend to hold our investment for the long term (probably around 20 years) any short term fluctuations in the market won’t affect us.

A few days later I was asked again, this time by a different person, if I was worried buying property at a time like this. And again, my response was no. And having this question posed by yet another person really drove home for me that as an investor, in order to make money you have to take a risk. And as we all know, fear of taking that risk is what prevents many people from investing in property and furthering their wealth prospects.

At the end of the day there’s always risk in investing, but in fact there’s actually more when the market is up and almost peaking. Now prices are down and we know that even if they drop a little further, we’re fairly close to the bottom and the only way really is up. That means we’ve bought at one of the lowest prices, and when the market picks up again (and it will) we believe the value of our property can only go up.

If you educate yourself properly and you know the market you can make a good decision and buy a good investment. You just have to believe in your investment and the history of the property cycle, which shows that while there are down times, it always goes back up. Ignore what’s going on in the media – believe in the fundamentals and forge ahead!

I’d be urging people to go out and buy a property now. If you can afford it and you’re in a secure position financially, take advantage of the lack of confidence out there creating buying opportunities for savvy investors.

If you don’t, when all is said and done and the market is booming again, you’ll be saying (as we’ve heard a million times): ‘If only I’d bought when the market was down…’

What do you think about the current global economic turmoil? Does it worry you? Are you running scared and thinking about putting your properties up for sale, or are you looking to capitalise on everyone else’s fear and buy?

Vanessa De Groot is the deputy editor of Australian Property Investor magazine, www.apimagazine.com.au

14 Comments

  1. Hi Vanessa I bought a Victorian terrace in Annandale early 2009 during the last GFC. The combined capital growth & rental yields are 11% pa (this house was very recently valued by one of the Big 4 banks, as part of my refinancing efforts). Then in Dec 2010, I bought another Victorian terrace this time in Surry Hills, at the bottom of the Sydney market. After minor cosmetic renos, the same bank revalued it at 5.3% capital growth in 5 months. Combined capital growth & rental yields are apx 10% in 5 months. I am very glad I bought during the last GFC & in Dec 2010. So in taking a long term view, I say, BUY NOW – subject to proper due diligence.

    Comment by Ann — August 10, 2011 @ 3:15 pm

  2. G’day Vanessa, 2 thumbs up, could not agree anymore, as a real estate agent, and a property owner in Toowoomba, Qld – Australia’s 5th most affordable city

    Comment by Matt Hammond — August 11, 2011 @ 11:50 am

  3. Hi Ann – Wow, looks like you are definitely forging ahead in these times! It just proves to the naysayers all out there at the moment claiming that the bottom is falling out of the property market are wrong! If you buy the right property in the right location you can still make capital gains in these market.

    Comment by Vanessa De Groot — August 12, 2011 @ 10:21 am

  4. Thanks Matt – Toowoomba looks like a good spot to be at the moment, there’s plenty happening, especially with mining projects in the works. It’s one to keep an eye on for investors looking for good growth in the next few years.

    Comment by Vanessa De Groot — August 12, 2011 @ 10:22 am

  5. Hi
    I have a lovely home on beautiful Lake Macquarrie between Morisset and Toronto. We have had it up for sale now over a period of 3 years or so, off and on, with only 3 inspections and one offer which we accepted but didn’t go through due to the buyers own sale falling over.

    The main reason for our selling is illness, and the need to cash up because of that, otherwise we would definitely be staying put.

    Can anyone please tell me why this area does not seem to be on many peoples radar. It’s less than 1 hr to Hornsby 50 mins to Newcastle airport, an hour to the Hunter Valley and locally we have trains, buses, medical, dental, and some of the best schooling facilities within a stones throw, whilst being only 15 minutes to beautiful beaches if the lake doesn’t quite do it for you.

    I have been told by the agents that things in the upper end here are very slow but geez this is ridiculous. We have never had this situation occur before and right when we need to sell the most it just doesn’t seem like it will ever happen. Can anyone out there shed some light on why this may be the case apart from maybe the obvious that this isn’t Sydney I can’t understand what it could be.

    Comment by Trish — August 16, 2011 @ 12:42 pm

  6. The sounds of ‘praying’ and ‘hoping’ from property investors across this country are deafening. Wishing and willing that prices will soon rise in order to break-even with all those neg gearing interest payments accruing month by month.

    It comes across as very desperate – almost as if property investors are ‘forcing’ themselves to take the optimistic outlook on their situation. Property investors seem to lack the cruicial ability to call a ‘spade a spade’. Instead, they bury their heads in the sand and resign themselves to pure hope – “block your ears!”, “don’t listen to anyone who tells you otherwise”, “we will all be OK in the end, I’m sure”. What an interesting investment strategy – relying on hope and speculation. Maybe if you all block your ears, everything will turn out OK? My gosh. Tell it like it is, and clarity will prevail.

    Comment by Tony Cuevas — August 18, 2011 @ 7:37 pm

  7. Hi Tony,

    Thanks for your thoughts. I can absolutely see your point of view – and I think there are many people out there who would agree with you. But I stick to my guns in believing that much of what we currently think about the property market is influenced by the media – and they’re only telling us the bad stuff. A few years ago when things were booming they were only telling us the good stuff. And it’s amazing how much of an impact sentiment has. Funnily enough, we believe what the media feeds us, without thinking that perhaps it may not be the whole truth.

    I do believe that now isn’t the best time ever for property – unless you’re buying, and then I believe it’s excellent, because prices are low. If you’re holding it’s also a good time, because rents are good and that’s what matters for negative gearing – price rises aren’t so important. And I think most of us are pretty realistic about the current market – no one I’ve spoken to recently believes – or is holding out hope – that prices will rise anytime soon. Most property investors take a long term view – I can certainly say that’s what I do – I plan to hold my properties for at least 10 years, more likely 20, and I think we can pretty safely say that in that time their values will rise.

    I think we’ve gone through this in the property market plenty of times. Values start to drop a little, or move sideways, and everyone panics and thinks prices will never rise again, claiming property investing is not a good idea. But then all of a sudden prices boom and we all complain that prices are too high. But in that scenario, investors who got in during the market softening are thanking their lucky stars they did, and watching their property values rise. The funny thing is that those people who are currently shaking their head at the ‘optimism’ of property investors will actually be shaking their head in 10 years’ time, wondering why they didn’t get into the market when prices were down. Like I said, fear holds people back from investing and furthering their wealth prospects.

    You’re right, property investors are taking the optimistic view, but I don’t think they’re being forced to. I think if you’re educated enough about the market you know that this is all part of the cycle and prices will eventually rise again… whether it be in two months, or two years.

    Please tell me your thoughts – does anyone out there think that prices are yet to see huge drops, and that they’re unlikely to rise again in the future? Is there anytime in recent history where the Australian property market has seen huge falls in prices, with no recovery?

    Comment by Vanessa De Groot — August 19, 2011 @ 9:19 am

  8. Hi Trish,

    Sorry, I don’t know too much about Lake Macquarie, so unfortunately I can’t shed too much light on your situation.

    It sounds like the area has many of the right ingredients to create demand, such as amenity, but what about employment? Is there much around? That could be a reason why there isn’t as much demand in the area – perhaps people are choosing to live closer to Sydney because that’s where jobs are more plentiful?

    I have no idea what your property is priced at, but perhaps that’s something you could look at? I’ve been told that properties that are priced right in this market are selling… as your agent said though, the upper end is probably the slowest sector at the moment. Especially in the past 3 years, when you’ve been trying to sell. The upper end slowed up during the GFC and now with the recent stockmarket falls, it’s again the sector that will be most affected.

    I hope you have more luck soon. Please let us know how you go! And we’ll look into Lake Macquarie – perhaps API can look at this area sometime in the future so investors can see what’s going on there.

    Comment by Vanessa De Groot — August 19, 2011 @ 9:25 am

  9. Regarding comment #6…

    Actually Tony, the only deafening sounds of ‘praying’ and ‘hoping’ I’m hearing are coming from the “house price crash / buyers strike” crowd who keep desperately wishing for a house price crash that will never come.

    Yes, housing prices are easing a bit at the moment, which is a good thing as it will help improve affordability and set the stage for the next property boom down the track. What happens to rental yields when rents rise and house prices are flat? That’s right – they rise. Combined with rising wages and the likelihood of stable or possibly falling interest rates, and you’ve got the perfect time to invest in property.

    House price crash? You’ve GOT to be kidding. The only ‘crashing’ going on is with the sharemarket… thankfully my money is in property. If Australian house prices were going to crash they would have done so during the GFC… but they didn’t.

    As it becomes more and more obvious to everyone that house prices in Australia are not going to fall substantially, the endless attempts to “talk down” the market by the house price crash crowd are beginning to sound increasingly pitiful, desperate and feeble. But it’s creating a great “buyer’s market” for investors to drive hard bargains and quietly snap up properties at great prices.

    I do feel sorry for the “follow the herd” people who are too scared to invest. They’ll end up renting forever, continually telling themselves “Don’t buy property now – prices are about to crash!”

    By the time they finally realise they were wrong, that the fabled “property crash” never happened, and their property-investing friends have amassed considerable wealth over the same period, they will have missed the boat entirely.

    Comment by Nick B — August 19, 2011 @ 11:06 am

  10. The one thing that strikes me about the current disposition of property investors – they seem to be very ‘touchy’ right now. They seem to be very much on-edge and will staunchly and aggressively defend their investment.

    Yes, there are many people out there who are suggesting houses price are crashing, but I am not one of them. If house prices merely track sideways for ~5 years, which is what I believe is the most likely scenario, then this is still a loss of nearly 20% in real terms (assuming 3.5% inflation). How long do suffering investors have to wait until their properties recoup all these years of losses, let along start making money?

    It seems like there are so many property investors out there who are yet to actually make any money on their rental houses, but are nervously waiting in hope that prices will soon rise. Current property investors and property ‘authors’ alike are actively encouraging more people to pile into the housing market behind them in order to prop up their own investments.

    With comments such as:

    “With prices falling, now is the time to buy because yields are improving”….what, from 3% yield up to 4%?

    “Prices will rise again, whether it be in 2 months or 2 years” ….or how about 10 months or 10 years? But that wouldn’t sound as encouraging.

    “Go again the herd and buy a rental property now” ….or maybe it was the ‘herd’ who actually loaded up on rental properties in the hope of achiving ‘financial freedom’ or whatever else the seminar speaker promised back in 2006. But now that everyone has bought in, there’s no fresh buyers to support the market at these high prices, hence prices have come off. And as prices come down, there’s no rising equity for investors to accumulate more properties, which creates even less ability to purchase more property, and so on and so forth.

    Sorry to sound negative, but I’m just telling it the way I see it.

    Comment by Tony Cuevas — August 19, 2011 @ 2:19 pm

  11. Hi vanessa

    what about buying a pair of semis in davoren park?

    Regards
    Siva

    Comment by siva — August 24, 2011 @ 4:17 am

  12. Hi Siva,

    Sorry, I’m not familiar with that area, but at the end of the day where and what you buy comes down to doing thorough due diligence for any property investor. Research the area to determine whether there’s demand from renters (and for what type of housing), whether there’s anything that’s going to push prices and rents up (such as population growth, infrastructure development etc) and whether it’s close to amenities and services. Perhaps call some real estate agents and property managers in the area to get their thoughts – that can certainly help. And contact council to find out if there are any plans for various projects or developments that could impact upon the area. I hope that helps! Good luck!

    Comment by Vanessa De Groot — August 24, 2011 @ 5:44 pm

  13. Hi Vanessa I adopt a Buy/ Renovate/ Hold strategy. Which do you think would have better capital growth, a Victorian terrace in Pyrmont or Darlington or Chippendale or East Redfern? My budget is $900k. Thank you.

    Comment by Lyn — August 24, 2011 @ 7:52 pm

  14. While I’m familiar with these areas, I know where they’re located and I could tell you a little bit about them, unfortunately I’ve never invested in them, or studied them to the point that I would be able to confidently give advice as to whether you should buy in these locations, and what you should buy. It’s always best to talk to property professionals that work in the area, as they’ll know the ins and outs and will be able to give you the best advice. Certainly API has looked at some of these areas, but while that may put it in on the radar for some investors, property professionals in the area are best placed to give thorough advice about where and what to buy.
    Attending open inspections in the area you’re thinking about investing in will give you a good feel for what’s around, who’s buying and what they’re paying and it gives you the opportunity to chat to real estate agents and get a feel for the market and its potential for growth.
    You can talk to the relevant council in the area to find out whether there are any plans for the location that may drive up prices, real estate agents and property managers to find out how much demand is around and for what type of property, and consult property data such as vacancy rates, median prices (and growth), median rents and stock on market figures. You can also visit the ABS website, which has lots of demographic information about areas – that too, can help you work out which type of housing is in demand – for instance, if there are lots of families in an area then it’s likely houses will be in demand, while if there’s a lot of Gen Y’s and professionals, it’s likely units will be in demand.
    There are many factors and variables affecting each property market in Australia, so it’s important to thoroughly research any area you’re thinking about buying in. It’s also important to research the state you’re buying in to determine whether it’s next in line for growth, as well as if you should buy in a capital city or regional area.
    At the end of the day what to buy will be specific to each investor, because it needs to suit their budget and goals. Thorough research is the key to investing confidently – never rely on what someone else tells you, always do the leg work yourself to determine if it’s a good investment, looking at all the fundamentals that are necessary for growth, such as infrastructure, population growth and access to services and amenities.
    Good luck with finding the right investment for you!

    Comment by Vanessa De Groot — August 25, 2011 @ 8:49 am

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