By ALBERT SY
Our residential property markets have moved into a new era. We have moved from property boom conditions to a phase of slower growth. The market has now been slowed due to multiple rises in interest rates thereby increasing unaffordability and falling consumer confidence.
Yes, we have moved into the next phase of the property cycle. Last year, properties in some of our suburbs increased in value by over 20% per annum. Many of us stopped thinking of their home primarily as shelter and a long term investment and had begun thinking their house either as a get-rich scheme or a very large automatic teller machine with full of money inside. This created on by rising property values and all the hype in the media, but this has changed now and the days of double digit property value growth are gone for a while. This is not new and has happened many times in the past but an average growth of around 9% is seen over last 100 years of investing in properties in Australia.
Many investors are concerned about what’s ahead for property. I try to reassure them that the property market is behaving normally. This is not the end of the property cycle. It is a mid cycle slow down but again this does not mean growth in values has stopped, it means the markets in the major cities are growing more constantly for the time being and at the same time rents are rising. This equation of high rent is a sign that for investors there is less competition as fewer houses are in the market for tenants.
Properties in the lower socio economic areas and many outer suburbs tend not to perform anywhere near as properties closer to the CBD and the water. Families in these areas are suffering more from rising interest rates as they take up a larger portion of their disposable income.
Again, Von Thunen’s theory (an Austrian Economist in 1850) who has clearly explained that the highest rent, the highest gain in capital value are realized in those areas closer to the centre of large metropolis cities like Sydney and Melbourne.
The property markets have always moved in cycles of rapid upward movements, followed by periods of flat or even negative growth and then followed by another move upwards. This has exactly happened in Melbourne in the year 2004 when the news in the paper baffled every one by the statement that the property value has increased in the last seven years by 106 percent but in the year 2004 it went down by 24%. Many of my customers were upset and worried but after having analysed the situation and discussion with them, I explained to them the growth pattern, is for a long term investment and anybody who purchased property seven years ago are still better off as their property gave them a capital growth of 82% and not 63% in the last seven years even though there was a fall of 24% in the year 2004. This is based on assumption of capital growth of 9% per annum over last 100 years of capital growth in Australia as predicted by the Statistics.
I have often invested in properties through a downward cycle and as a result have always been better off than those who invested in cycles of rapid upward movements. This way, I understand that slower phases in the property cycle, such as the one we are currently experiencing are normal and “I take advantage of it”. I know that the best time to buy is not when the market is hot, when buyers are out in droves competing for properties that are raise up the prices by an alarming rate, but I wait and buy when the market slows down.
Again, to my best interest, I know this is the best time to buy for the simple reason that we are going through a phase of extreme short supply of around 200,000 dwellings. We need around 160,000 dwellings every year. We are building only 135,000 thereby adding further burden of 25,000 dwellings short to our existing short supply of around 200,000 dwellings.
Again, much is said about migration. Even if we have zero migration which in fact is not possible for the economy of Australia, we can’t cope up with the existing shortage of dwellings as we are having children, we live longer due to better medical facilities. The wise investors work on numbers and statistics and are not carried away by the media or papers. Again, I repeat in a boom market, buyers often find themselves losing out to another buyer who is driven by fear and greed; the fear of missing out on the property boom and the greed of wanting to own more properties- both natural human emotions.
But, the truth is that our economy will perform strongly over the next many years driven by a resources boom and our property markets will be underwritten by this strong economy, rising consumer confidence, the huge deficiency of housing at a time of increasing demand and most importantly rising cost of construction. What this means to you and to me is that to be a successful property investor, take advantage of the opportunities this changing market will present over the next few years, it is very likely that we need to take different approach to the one you look over the last few years. I have always said and will repeat again that you will never buy the property at the same price again in future. Please remember my statement.
If you have any question, please be free to call me on 0409 952 994 or e-mail at albert@mbic.com.au.
