Real estate secrets

There are many different housing markets, and waiting for a price correction can be a dangerous strategy

Is now the time to buy property? Not according to Shane Oliver, AMP’s chief economist, who recently wrote: “If you look at past cyclic patterns in house prices, periods of strength are often followed by periods of weakness. So after such a huge run-up, the likelihood is we would go through a period of weakness, which would then provide opportunities for buyers where they can buy at a much lower price than what is currently the case.”

There is an old saying, “The best time to buy was 10 years ago and the second-best time is today.” It’s not far off the mark. If your property had key attributes you should look for, then whatever you bought 10 years ago would have done well for you.

What are these attributes? For an investment property, most investors should stick to:

Residential property.

Appealing to home owners.

Good location for home owners – near jobs, schools and transport.

A balance of capital growth and cash flow that works for you.

What the location demands, not what you think it needs. The questions to ask are “Which property market was Shane Oliver speaking about?” and “What end of the market, above or below the median price, for the location?” But first let’s consider another important point: “Where is the property market located?”

The answer is there’s no single property market in Australia. But that doesn’t stop people from referring to one market. There’s a collection of markets in different locations all over the country. Within those locations are a range of sub-markets. This can mean that one property can be a worthwhile purchase in one location and not advisable just a few kilometres away.

There are even different markets in the same location with the same type of property; sometimes there are different property markets in the same building.

With so many different property markets in this country, it’s unreasonable (and often flawed) to make blanket recommendations for a specific type of investment property to buy.

Take the Melbourne apartment market. Sure, there’s a looming oversupply of these in the inner city. But just a few kilometres away a good apartment in a boutique complex near a shopping strip with good transport may be a viable option.

Or, for example, a new housing estate might have lots of land available. But just a short distance away in a quality estate it’s sold out. And if you do find a block, you will need to wait 12 months for it to settle. In Victoria some of the better estates now sell through a ballot. For others you will need to start queuing 18 hours before the land is released to get your block of choice.

So what section of the market is Shane Oliver referring to when he issued this warning, and could he be right?

First, he has said that it’s important not to generalise about housing affordability in particular. After all, no matter what arguments he makes, it’s just his opinion after all.

In my view, he may be right about one section of the market and wrong about another. I know I have fallen into the trap of speaking about one property market but I believe my comments are valid for most locations that

have seen significant capital growth in the past decade.

The upper end of the market – properties that are significantly above the median price for the area – are at a much higher risk of a price fall. That’s because there’s perceived value in those properties.

Take a Melbourne house selling for $1.5 million, $700,000 above the $800,000 median. Why will it sell for so much? Because the market demand says it will. That is the perceived value the market has set – it doesn’t mean the bricks and mortar are really worth that much – and that perception can change. A 10% or 20% correction means a drop in value of $150,000 to $300,000.

At the other end of the market, a $500,000 house-and-land package is $300,000 below the median price for Melbourne. That price is the cost of the land, the cost to build the property and a reasonable margin for the builder.

There’s not much perceived value at that range and, I think, little chance of that property having a 10% to 20% price correction. I believe this end of the market has a much lower risk of a price fall. Waiting for a price correction so you can pick up a bargain later is a dangerous strategy that may cost you when prices keep increasing.

If you are in the market to buy right now, my advice is to: Look in Queensland and Victoria, as both locations will catch up to Sydney prices some day.

Stick to prices that are well below the median price for the location.

Stay true to the fundamentals listed here and make sure the cash flow works for you.

Make sure you can hold the property for at least 10 years, or don’t buy at all.

Negative or positive cash flow doesn’t matter but it needs to work for your individual circumstances so you can hold the property if there are tough times along the way.

Get the fundamentals right and you won’t be kicking yourself in 10 years if you buy now. But staying out of the market and waiting for prices to drop could cost you big time.