Despite all the ups and downs of the real estate market, the excitement and apprehension and the greed and fear, I believe that owning property, over the long term will bring most people the best possible investment returns.
And in particular, owning land.
Mark Twain shares this idea with us in a famous quote – “buy land, they’re not making it anymore.”
In his time, this quote would have been entirely accurate. These days, through herculean and very expensive feats of engineering, new land can be created to extend boundaries by reclamation, as has occurred in places like the tiny island nation of Singapore and very ambitious real estate developers in Dubai.
I invest a significant proportion of my time on property market research. I really want to be informed and to understand what is happening and form a rational opinion on what could happen. But honestly, no one really knows what is going to happen in the months and years ahead. There are indicators (I named eight of them in last week’s article) certainly, and past real estate cycles can also give us clues. I always take note when I see a warning and I seek to dig deeper in to the thinking and research behind any warning before I give it any credence.
The Reserve Bank of Australia (RBA) recently issued a “storm warning” to inner city apartment buyers, owners, developers and their lenders. The RBA also cites growing concerns with debt levels in China as a big threat to the global financial system, saying smaller & mid-sized Chinese banks could be at risk. They went on to pose the question as to what would happen – if prices dropped 50% – to the lenders who have loaned as much as $85BN to apartment purchasers? The RBA followed on to say that while they don’t believe that the booming Sydney, Melbourne & Brisbane markets could suffer the same type of catastrophe that afflicted Ireland and Spain after the GFC, officials believe the surge in new supply could lead to a price slide, leaving investors & banks exposed. The RBA noted that there are increasing signs of off-the-plan purchases taking longer to settle and valuations coming in below the contracted prices.
Maybe you have existing property investments and years of experience or maybe you are just starting out. Either way, you need to develop a way to monitor the market factors that could affect the growth or decline of property values.
And not only do you need to monitor them, you need to be able to understand what these factors could mean and then act accordingly. That could mean acquiring more property, selling some, refinancing loans, increasing or decreasing the rent on your properties.
You see property is much less about what has happened than what will happen. When you buy a property you may have done so based on past performance, but what you will own is what will happen with growth and income in the future.
I imagine if you are taking the time to read what I have to share with you, that you want more from life. To have more in our modern first world economy, it really helps to have money.
People who have more money, tend to focus on a few key factors towards generating wealth. They know that making money is not a sometime thing – it’s an every day journey that can take many years. There are few shortcuts, even for those who are lucky enough to win the lottery. Studies show that many of the winners have little or nothing to show after five years of winning their money. That is because they never learned about money and on which key factors to focus upon.
There are many factors that go to making up what affects the rate of change of real estate prices. Any real estate investment decision you make must consider these factors in terms of your timing, where and how much you can (or should) reasonably pay for your future property.
- Interest rates – lower rates for a better chance of upwardly moving prices, higher rates tend to flatten or drop markets.
- Finance availability – the more money available, the more people can spend – prices move up. If money is tighter, people have less money to pay with – property doesn’t get sold and prices stagnate or move down.
- Number of listings – the more listings on market, the more choice and less competition, prices move sideways or down. If there are fewer listings for the same number of buyers, bunfights can happen and prices can move up.
- Vacancy rates – below 3% is considered tight for the market and rents can move up, meaning values may move up. Above 3%, rents can ease leading to lowering in values.
Ever since I was a child I have been interesting in flying, particularly to outer space – hence my decision as a nine year old to become an astronaut. Because of that and shows like Star Trek, I have always been fascinated with our planet, its place in our solar system and our Milky Way’s place in our universe. We really are just a speck of dust in the universal scheme of things. Some think that we are an experiment in some alien’s petri dish. A few believe that a higher power – call it what you will – has a lot to do with us being here on the 3rd planet from the Sun.
So when I read an article recently that clearly explained that our world was going to end, and that it would be because of our own Sun, curiosity took over and naturally I read it. Just in case you are interested in the full article, here is the link.
When I was seven, I decided I wanted to be an Astronaut, right after the moon landings. Then a few years later, I realized I could never be an Astronaut because I wasn’t an American (though in the last decade or so that has changed). So I thought I would be a fighter pilot instead. I reached Year 11 in High School and enrolled in all the classes I needed, including the double maths classes. I quickly realized that I could not cope with the x’s and y’z over z’s. I was only any good with numbers that had dollar signs in front of them. So I dropped out of the high level maths, to the mid-level maths class and so ended my fighter pilot ambitions. I toyed with the idea of being an air traffic controller but that didn’t work because I didn’t have the multi-tasking skills required. Two years after I finished high school, the Air Force changed the maths requirements – the mid level maths would have been enough for me to qualify as a pilot.
But for the sake of an administrative policy I may have had a career flying F-111 or F-18’s and maybe retired to fly Jumbo jets as a commercial pilot. And I would not have had a career that included real estate sales – new homes and established, finance broking, financial planning, property investing, renovating and finally real estate development. And I would not have written five books on real estate investing, nor spent years educating thousands of people on how to achieve wealth via property.
I continue to be fascinated with people who have achieved success in their lives, reasoning that there are always lessons to learn and inspiration to glean from studying their lives. One such person I have followed with great interest is Mr Frank Lowy.
Ever since the very first publication of the Australian Rich 200 list in 1983, Frank Lowy has appeared among its members. In recent years his net wealth is estimated as in excess of $8 Billion AUD, which is enough to place him 3rd on the list of wealthiest Australians of 2016, behind Harry Triguboff and the Pratt Family.
Most investors are aware that housing markets across most parts of the country (Perth & Darwin excepted) have been in a prolonged state of price increases. The more aware will have drilled down to what has been driving the boom and will know that in answer to the demand, developers have been building apartments in record numbers, for record prices.
What is currently causing jitters is that no one seems to know if the number of apartments that have been constructed, are under construction or approved to be constructed, will ultimately prove to be too many for the demand. If so, many fear that could lead to a downward price spiral and a protracted period of flat growth in prices.
Let’s have a look at the situation from a macro viewpoint and see if we can make sense of it.
Last week in my Radio Wealth Episode 14 podcast, I shared with you some really exciting information about a home loan product that had an interest rate potentially as low as 2%.
Yes, TWO percent.
Needless to say it has caused quite a stir and there are lots of investors out there who have been emailing in asking questions.
One in all in I say, so I am going to reproduce a few of the best questions, and the answers here so that you can get a better feel for what the product is.