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October 11, 2011

Come out winning in a soft market


Statistics are beginning to show an increase in the number of property investors taking advantage of what has widely been spruiked as a buyers’ market.

BY CATHERINE CASHMORE

Not only is this evident in the increased numbers of buyers lining up outside ‘open for inspections’ and attending auctions, Australian Finance Group (the country’s largest mortgage brokering group) reported their mortgage sales hitting an 18-month high in August – that’s some $2.7 billion, with 38 per cent going directly to property investors.

Owner occupiers are also on the increase and according to the Australian Bureau of Statistics, they have been for the past four months. Even first homebuyers are coming back to the fold. Mortgage Choice recently reported a marked increase in first home loans making up 35 per cent of all loan approvals in June compared to an average of 27 per cent.

Considering all the evidence points towards purchaser numbers increasing, not decreasing, why then is turnover 20 per cent down on this time last year and also roughly six per cent lower than the same time during arguably the worst period of the global financial crisis in 2008?

It’s true there’s still a lot of overpriced stock and a lot of vendors unwilling to reduce expectation. These are the vendors that don’t ‘need’ to sell and therefore can afford to hang out for weeks on end hoping some hapless purchaser will love the home so much they’ll be prepared to pay a premium. Vendors love reaping the benefit while the market is suffering unsustainable booms such as the 20 per cent rise we had at the beginning of 2010 – however these booms are always followed by market corrections as part of the typical ebb and flow of the property cycle and thus leave many unprepared to moderate expectation. It’s easy to spot the overpriced listings – just watch for the properties that change agency hands every four to six weeks as each agent attempts to ‘educate’ the vendor on price so they can earn their fee. In the end they often have no choice but to shed the listing and concentrate on the stock they can sell.

However there’s another problem hounding the market – an abundance of poor quality stock which is marketed principally for investors and has little attraction for owner-occupiers. It’s an old adage in real estate, but one that holds up to scrutiny: ‘Good real estate sells well in all markets’ and in the current market there’s a dearth of quality property, hence the reason turnover has been so low. There’s plenty of stock available but with the emphasis firmly focused on low quality rather than low quantity.

The Australian Housing and Urban Research Institute recently reported that 25 per cent of investors sell within a year of purchasing. The exact reason for such a high percentage isn’t specified, however it’s a concerning statistic and an indication large numbers aren’t seeking the right advice. If a vendor is trying to sell after only one or two years of property ownership a market correction can have serious implications on their profit and loss scenario. It’s one of the reasons property ownership should always be viewed with long-term spectacles. Until you’ve held property through all stages of a market cycle, you can’t call yourself a seasoned investor and you risk your best intentions of property ownership failing miserably. Building wealth in property has its key firmly locked in long-term capital appreciation and considering owner-occupiers principally fuel the market, it’s imperative to focus on property which holds lasting appeal for this demographic. Get this formula right, and even on the sliding side of the property cycle, loses will be minimised and gains maximised.

As a property investor you’ll face a mine field of advice from financial advisors, sales agents, property planners and developers, not to mention numerous magazines and books all promising the road to riches – and never more so than in a downward phase of the property cycle. Some advocate buying apartments, others land, and everyone has their own opinion on the ‘hot’ suburbs. But understand there’s no one golden egg to property investment and everyone’s individual needs must be assessed based on their own financial circumstances. Furthermore, the landscape has changed rapidly over the past few years with a marked increase in high-rise accommodation which is mainly marketed at investors and over standard single-level subdivisions, which is where most homebuyers would rather locate.

However, it may not be wise to hold back, because if you think we’re heading for further falls any time soon, think again. We live in a country with a rising population, where the best seats in our major cities have been taken and no one’s all that eager to move into the outer metropolitan or regional areas, where land is arguably overpriced due to hefty development overlays. The housing market is both fragmented and fickle. It’s made up of individuals like you and me with different needs and different budgets. Each piece of real estate has its own intrinsic quality and with a lack of good stock, it’s reasonable to assess that there are always going to be areas of the market that outperform. Therefore, before you purchase take some time to think about what stands out about the property you’re interested in. It could be located in the best street in the suburb, or situated on the largest north facing block of land, have the best light and biggest balcony in the block, or hold the lasting attraction of period appeal. Whatever the reason, be careful about what you choose and if you do find yourself selling in a soft market, it’s more likely you’ll still come out winning.

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