With so much recent bad press about the state of the property market you could be excused for feeling a little ‘down’ about property prices. But, so we don’t confuse the ‘wood’ for the ‘trees’, let’s look at what’s really being said…
Volume – loud and unclear
The first part of this relates to volume, as in volume of sales. In good times and bad there are always people who have to sell and will take a lower price to achieve that. Many investors hunt down these type of deals as their sole strategy, buy low and sell at a fair price with or without improvements (ie. money made in the purchase price). In the bottom of a market cycle the volume of sales is at its lowest level which is why its known as a ‘buyer’s market’. Given that the average home has approximately 80% of equity, most people who might like to sell their home are not going to do so if they don’t have to, they simply hold on and wait for the market to rise. Therefore, those in a position where they must sell become a greater percentage of the market artificially bringing down the overall median. Likewise, builders with ‘speccys’ and developers who need to maintain cash flow and reduce their margins to divest stock to create cash.
As an example, I made comment recently about how the reporting around the Sunshine Coast having the most expensive land in the country was incorrect as it didn’t account for the drastically reduced volume in the accounting period reported. The data was based on the December quarter and I suggested we wait for the March quarter given sales were approximately 80% below their average. With more accurate number from higher volumes in the March quarter we could have argued that the price had fallen by 14.6%. Saying that the Sunshine Coast has the most expensive land in the country based on the December results is just as erroneous as saying that prices dropped over 14% in the March quarter as neither takes into account market specifics such as volume. Be careful of unqualified comment or worse… journalistic opinion!
So, a low or negative capital growth number in a particular market and especially in the macro sense certainly doesn’t mean we should panic. But it does mean we should ensure our investment strategy is correct.
Median – it’s just the middle
Many people forget that a median is just that. It’s the ‘middle’ of all sales in the sample. That means that some properties and areas have done much better and others much worse. What is important is to find opportunities in areas where there are great deals today but have all the factors to support being one of the better areas into the future. For example we have been able to broker deals for our clients in this current climate at prices more than 10% below the median for that type of property in an area that has a local economy that is about to expand by over 15% in the next 4-5 years in one project alone (in an area almost as populous as the ACT). These clients are not just making money today by leveraging the ‘buyer’s market’ opportunity, they’re also reinforcing their long term strategy by investing in high potential growth areas.
Time – it’s underestimated
The reality is that we can’t treat short term adjustment in market cycles in property the same way we do in shares. Any real wealth creation plan should have a foundation of acquiring and holding assets not only on the basis of what the market is or has done, but the long term potential for growth and return.
So, how do we move forward?… for now maybe we should just tune out the voices of negativity and focus on the facts. As volume returns to sales later this year and into the next I’m sure the media will be playing a very different tune but that’s still irrelevant to our long term strategy. As for the doomsayers, they’ve been preaching the same message for the last decade and probably will be for the next (its in their interest to do so) – they’re not deaf, just blind and those of us that take advantage of today’s opportunities and hold onto them will have the last laugh!