The so called economic guru’s are very quick with their opinions and commentary on the state of economic affairs; but remember they are only expressing their opinions. While I don’t profess to offer financial advice, or to have the answers to “life, the universe & everything”, I too have opinions.
In the lead up to the end of the 06/07 tax year, when “the experts” were promoting the virtues of investing into the Howard/Costello “tax effective Superannuation offer”, I didn’t believe them. Today I hear economic guru’s peddling the fear that our property market will follow the US lead and fall by up to 20%. Guess what, I don’t believe them!
Certain classes of property may see across the board falls as could residential real estate in certain areas; that’s why it is so important that we block out the noise and look at the fundamentals.
Yes, I too have opinions and I would appreciate a moment to throw some ideas your way for consideration.
The credit crunch has caused real challenges for real people. While I am on record as consistently promoting responsibility surrounding any form of investment, my confidence in the mrd strategy remains solid. We call it “Set ‘n’ Forget”; for busy people and the best evidence of my confidence and comfort level is in the purchasing of 3 additional properties since the subprime crisis hit.
Katrina and I purchased a property in November last year, another in February this year and we are settling a third next Tuesday; 7th October.
If you don’t ask the right questions you cannot expect to get the right answers and when it comes to understanding the likely impact of the U.S. economic crisis and global credit crunch on property values; it’s not sensation or emotion but rather the fundamentals we must draw counsel from.
My narrow investment strategy is challenged from time to time. Personally I don’t invest in superannuation, the stock market, managed funds or property trusts… nor do I invest in property outside of permanently let, median priced residential real estate in areas where the demand is increasing (i.e. where demographic change highlights that people want to live) and where the supply is limited. This latter point is why my preference is for areas that are predominantly built out and close to infrastructure and services (rather than the outskirts of suburbia… or “the mortgage belt”).
About a year ago a gentleman mused that I ought to have a more diversified or balanced investment strategy. I replied by asking: “By that do you mean a mix of investments that are likely to perform well, along with others that don’t”? Cheeky maybe; but I stick by the point I was trying to convey. It is my belief that The Safest Asset Class to Invest Into Will Always Be That Which Is NOT Dominated By Investors. And that pretty well eliminates everything other than what I outlined above.
The rural, commercial and industrial property sectors are dominated by investors; as is holiday let, student accommodation and retirement villages (although retirement villages are a whole other subject for another day). The stock market, superannuation… and whatever else you care to suggest are all asset classes that are dominated by investors. Now I am not suggesting that these other sectors are not valid or that you should not invest in them… it’s just that I don’t because they are subject to the ups and downs of the market; as you probably need no convincing of right now!
According to RP Data National Research Director Tim Lawless the property market has proven to be remarkably resilient with national dwelling values remaining positive over the 12 months ending August 2008. Over the three months to August 2008 there was a modest decline with property values down by just 0.96 per cent over this period.
In my opinion it is not that difficult to ensure my investment dollar will perform if I understand the fundamental law of “Supply & Demand” and stick to my narrow, conservative strategy.
Let me explain…
In good times and bad everybody needs a roof over their head. They may close their commercial business or stop holidaying but they will either own or rent a place to live. In Australia we already have a housing shortfall of 50,000 a year (about a thousand dwellings a week) and with the immigration intake increasing by 20% this year as our government works overtime to attract skilled migrants to help us with our skills shortage… the pressure on residential housing will only increase; regardless of what happens in the global economy!
ANZ Australian Property Outlook 2008 reported that In risk-adjusted terms, residential property has delivered vastly superior returns to all other broad asset classes. In risk-adjusted terms since 1984, residential property returns have more than tripled those of equities and more than doubled those of commercial property and government bonds.
More recently, total returns on residential property have accelerated, underpinned by a sharp tightening in the housing demand/supply balance that is driving both rents and house prices sharply higher. Heightened uncertainty in global credit markets following the meltdown in US sub-prime mortgages has seen risk aversion rise sharply. Fears of recession in the US will continue to weigh on global equity markets and a ‘flight to quality’ will add to the weight of money that is driving residential (and other) property markets higher. Using a simple volatility adjustment more fundamentally, a severe and potentially intractable shortage of housing will continue to drive house prices and rents sharply higher in the years ahead.
So back to my comment that “If You Don’t Ask The Right Questions You Will Not Get The Right Answers”… I am often asked what’s the best type of property to invest in; houses or townhouses and apartments? Wrong question… It’s not what should I invest in but where should I invest? Personally I look for the following in a property:
- Is it priced within my capacity to borrow the necessary funds
- Are the holding costs (post settlement) affordable
- Is it a median priced property for the area
- Is it livable
- Is it located in an area that is attracting people
- Is it fairly built out around the said property
- Is it conveniently located close to infrastructure, employment & lifestyle options
- What future investment, that will drive the local economy for years to come, has been planned, approved and/or commenced
Your research ought to focus on changing demographics. I am not so concerned with the attitudes and trends that drove property prices in the 1970′s, 80′s or even 90′s; that’s history. I consider the attitudes that currently prevail and are likely to prevail into the future. Petrol prices, greenhouse gasses, water restrictions, “Generation Y” and so on, etc. Such research will undoubtedly lead you to areas where houses are old and being replaced with higher density living. I have said more on this in other blogs, but I repeat that I avoid high density in preference for medium density. Position or location rather than the product is what primarily drives my decisions.
See also RP Data – Rismark Property Value Index Release: “Property Market Results Defy Doom & Gloom Merchants”
Happy Investing,
Nick Lockhart
