‘Dinner party’ homes a trap
EGO can be a dirty word in the world of real estate investment. Many people aspire to buy a property in a flashy area but putting this ahead of common sense can be dangerous to their financial health – particularly in today’s market.
I’ve always been a fan of ‘‘bite off more than you can chew then chew like hell’’ when it comes to investing, and I’ve been chewing humble pie in recent years with property going nowhere and shares going backwards.
Historically, buying big gave you bigger returns. Real estate agents have long said Adelaide’s best capital growth comes from near-city and beachside suburbs.
The numbers also stack up. A 10 per cent annual gain on a $500,000 property gives you $50,000 while the same gain on a $300,000 property is just $30,000.
But when markets are stagnant or in reverse, repayments on a much larger loan can turn into a horror movie for investors and owner-occupiers.
Smart Property Adviser director Kevin Lee says people often buy real estate in a perceived affluent area because of their own prejudices, a mistaken view it will deliver better capital growth, or because of their ego.
‘‘Too many people purchase an investment property driven by the desire to impress their friends at the next dinner party, instead of making a sound investment decision,’’ he says.
‘‘Generally speaking, these dinner party properties end up being massively negatively geared. Negative gearing to this extent is not a smart strategy and it’s the number one reason why so many Australians own only one investment property.’’
Mr Lee recommends investors seek cheaper properties further away from the CBD, where 80 per cent of the population can afford to rent and 80 per cent can afford to buy it. ‘‘Buying a property that is considerably negatively geared means that you’re hoping and praying the property will enjoy good capital growth in the coming years to offset the considerable amount of money you’ve been out of pocket funding it week-in, week-out,’’ he says.
Changing demographics are another concern. The first Baby Boomers turn 65 this year and may soon look to downsize their expensive homes. At the same time, younger generations are not viewing property like their parents did and some have given up on home ownership because of the high cost.
Laws of supply and demand suggest a flood of high-priced properties on the market will push those prices down, as cheaper homes enjoy some time in the sun.
Real estate delivered great long-term gains to investors living in the 1970s and 1980s, when house prices were below $50,000. Now everyone’s on the property bandwagon, so the gains will take longer.
Property investment should have a minimum 10-year time-frame. So prices better rise over the next eight years. Or else.