To make sense of the property market we must separate opinion from fact. Opinions will always be heard… just in greater numbers now perhaps. If you are prepared to “drill deeper” and dissect the evidence available; the facts will speak for themselves. There’s no reason for allowing the conflicting voices of opinion to keep you confused!
In the current round of Web Seminars we are offering, I highlight four key factors that are a MUST… if you expect to draw any credible conclusions.
1. Record Population Growth
2. Investors Have Fled The Market
3. Home Ownership Unattractive
4. New Construction Has Stalled Badly
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As an ‘aggressive’ property investor and someone leading others, I am very mindful of my responsibility to be sober and considered in my views.
Successful people swim against the tide of popular opinion. They carefully consider facts before making decisions of far reaching consequence. As the events in America bring on a feeding frenzy for those with an opinion (and often an agenda); the need for sobriety is needed now more than ever.
My Considered Opinion:
Recent global events in the credit market haven’t altered my long standing confidence in selective residential real estate. I expect my investment strategy will ultimately defy some of the broad-brushed statements being tossed about by a few pessimistic economists; who ironically have had most of the recent television and radio airplay.
Many hours have gone into penning this article… I trust the few minutes it’ll take you to read will deliver real benefit.
Let me start with some background to put into context my thoughts…
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“Nothing travels faster than the speed of light with the possible exception of bad news; which obeys its own special laws.”
Douglas Adams, “The Hitchhiker’s Guide to the Galaxy”
Bad news surrounding the two largest U.S. mortgage companies has been circulating in recent weeks. Suddenly, Fannie May and Freddie Mac, have bust onto the global stage ‘branding’ themselves in places (such as Australia) where they were previously unheard of. Together these two companies own or guarantee about half of the U.S. $12 trillion mortgage market.
When you first heard the names Fannie May and Freddie Mac did you chuckle and think “who thought to call those companies such silly names?” They are types of acronyms:
- Fannie May: Federal National Mortgage Association (FNMA)
- Freddie Mac: Federal Home Loan Mortgage Corporation
The U.S. Government has recently announced plans to “prop up” these companies.
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Time Flies Like An Arrow. Fruit Flies Like A Banana!
Groucho Marx (1890 – 1977)
From the same newspaper on the same day… but do the following two articles sound like a contradiction to you?
City To Boom Again
Townsville Bulletin 08/07/08
TOWNSVILLE could be on the cusp of another housing market boom. Property experts predict the current softening of the market is about to turn, despite a slowing national economy and rising interest rates. A BIS Shrapnel Residential Property Prospects report forecasts a 22 per cent increase in median house prices from 2008 to 2011.
REMAX Excellence sales agents Lyn Griffiths and Rohan Banning are predicting that will have a significant effect in Townsville. Ms Griffiths said Townsville’s real estate market generally lagged behind Brisbane trends by around 12 months. “Townsville’s property market has softened after more than six years of growth but we believe this is the calm before the next boom”, he said. “We firmly believe the next 12 to 18 months will provide a real window of opportunity for buyers to get in on the ground floor before the next wave of price rises. “It is fairly safe to say Townsville property won’t be getting much cheaper in the future”.
Townsville Housing Sales Drop
Townsville Bulletin 08/07/08
TOWNSVILLE’S residential property market is declining and its industrial sector is at its peak, new research has confirmed. The Herron Todd White property market indicators last month show what many in the industry had thought – rising interest rates and inflation have taken hold.
So… is it just me, or do these two articles seem at odds to you too?
Although most property investors say they understand that real estate is a “long term” investment, it is surprising how many will be overly influenced by the short term changes to the market.
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“Man was born to be rich, or grow rich by use of his faculties, by the union of thought with nature. Property is an intellectual production. The game requires coolness, right reasoning, promptness, and patience in the players.”
(Ralph Waldo Emerson – philosopher: 1803 to 1882)
Yes; the “game” requires coolness and right reasoning. Several months ago I had someone tell me that they would not consider an investment property in the Cairns or Townsville area, “because it was too hot and sticky”. Understandably, my response was “but you are not going to live in it, and there are thousands of people moving into the area who will want to live there!”
It is too easy for investors to allow their emotions, likes and dislikes to affect an investment decision. My opinion, however, is that I’m looking for the best opportunity for capital growth. With this focus in mind, I concentrate on those areas showing fundamental reasons for increasing, ongoing demand (population growth); yet with a limited supply of available land.
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As with most things in property investing you are dealing with a free and open market. Within this market the forces of supply and demand will always apply. Obviously, if there is a shortage of properties available for rent and an increasing tenant pool, rents will rise and vacancy rates will fall. While the rental market in general is very tight at the moment with insufficient properties available for rent there are isolated areas where this is not the case in the short term…
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As with any free market, the Australian housing market is governed by the forces of supply and demand. Think of it as a pendulum that constantly swings from a position of excess supply to one of excess demand. The centre (or vertical) position of the pendulum is that point where the two forces are balanced. This is Market Equilibrium. The pendulum will never rest in this position… but rather continue to swing to each extremity.
These extremities are caused largely by “the herd mentality”. Let me explain…
- People, inspired by others making money from rising property prices, decide to do likewise
- Demand increases, thus pushing prices higher
- Higher prices mean reduced rental returns (rental yields are determined as a percentage of the purchase price)
- This downward influence on rental returns decreases demand (the number of able and/or willing buyers diminishes)
- The decreasing demand takes the heat out of the market
- As supply slows, demand for existing rental property steadily increases
- Rental returns improve, buyers are attracted back to the market (and the cycle continues)
Those who ignorantly rush into an overheated market, without much planning or assistance, may find themselves overextended. These ‘sensational’ stories sell… and so are quickly taken up by our media.
The one overriding factor that makes residential real estate such a great investment class (stable and predictable) is this:
No matter what the state of the economy… (rent or buy) everybody has to live somewhere! They cannot leave the market, as with the stock market or even the commercial property market. This rock that residential property investing is built upon provides a level of certainty that other asset classes do not (in my opinion).
Market forces will always prevail. Economic conditions may alter… but that will either result in an increase in values or rents. Either way, things always return to the centre point or Market Equilibrium… and we win!
Property investing ought to be seen as a long term strategy. It’s important to keep your eyes on the end result and not be spooked by events that happen along the way (anything that does happen between now and then is just “market noise”). Keep your support team close, continue to educate yourself and be sure to have your finances structured correctly. With a long term mind set, doing these things will act like suspension against any bumps in the road… and you will come to agree that the destination is well worth the journey.
Happy Investing,
Nick Lockhart
In life there are indisputable laws that we have to contend with.
There are laws of chemistry and physics, laws of nature and there are also financial laws.
If you fight the laws of physics you will lose every time. Have you ever tried to fight the law of gravity? It’s painful when you land with a thud! Gravity wins every time. NB: While the law of aerodynamics supersedes the law of gravity… it does not do away with it!
Did you ever try to grow a plant that was totally unsuited to the local climate? No doubt, you didn’t have much success! How silly would it be to mix two explosive chemicals together… and no reaction?
People drown fighting rips… but anyone can swim with the tide.
LAWS GOVERNING THE FINANCIAL WORLD:
As there are laws governing most things about us… so too it is with the financial world. Two obvious laws that I want to consider here are (1) Time and (2) Inflation. In my experience, most people fight these financial laws like the swimmer in the rip. They drown financially… but it does not have to be that way!
Once we accept that there are laws governing time & inflation, we can learn how to harness them to our advantage; it’s that simple! It can be like having the wind at your back, rather than running into a headwind.
Therefore, my strong suggestion is: “Quit fighting natural laws; rather learn how they work… and how to use them to your advantage”.
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SYDNEY is in the grip of a second property crisis with the supply of new houses falling to levels not seen since 1975 and research forecasting rents to rise by as much as 40 per cent within two years.The results of a study, by BIS Shrapnel, has shown construction of new homes in Sydney has hit an historical low, rivalled only by the slump of the mid 70s.
Coupled with housing affordability, low to middle income earners are being warned that prices are likely to spike again within four years with “steep price increases”.
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