The start of 2017 has been amazing, with so much good news happening. Yet, we have questions coming up again about the challenge that Australians are having in owning a home.
I personally believe that home ownership is the foundation to wealth for most people. People who own their homes statistically have more wealth at retirement age than those who don’t. Governments know this and if the citizens have a certain level of wealth they are less likely to need government support for the remainder of their lives – this is one of the reasons why incentives have been offered to people to invest in property. Another reason is that investors can provide housing for the rental market, meaning the government does not need to spend so much on public housing. Yet these incentives, including negative gearing, are once again under attack.
Well it’s almost Christmas again – another year passed. Sometimes I wonder where the time goes.
For many people, at this time of year, they start thinking about life, the universe and everything. I know I spend time reflecting and reviewing on the year past, trying to determine what was fabulous about the year, and what I could have done better. I also turn my mind to the coming 12 months, looking forward, planning and setting goals as to what I want to achieve. I really do want the best life I can have for myself, my family and those around me. To do this I need to take heed of a couple of “secrets” to having a great life. You know as well as I that there are no real “secrets” to life, but for some, these simple “secrets” are not known to them or readily understood. These two simple points hold the key to your great life.
To become wealthy over time, you need to own assets, preferably plenty of real assets like property. The process to buy a house or apartment is relatively simple on the face of it. Show up at a home open and make an offer or wave your arm around at an auction until the auctioneer smiles and bangs down the hammer at you.
Overpaying for your property is a sure way to dramatically slow the growth of your wealth creation. If you pay $600,000 for something that will value up at $550,000, then you are already $50,000 plus transaction costs behind. That could take several years just to catch up to the price you paid.
How would you spend a billion dollars? It’s a mind blowing question that few of us would even consider since it seems so far out of the realm of possibility, that we give it no thought.
Yet for nearly 2,000 people on the planet, it is a question that they need to answer as they do indeed have a billion dollars or more. A few of them many billions.
Unless you have been living in a cave over the last 18 months, you will know all about the incredible U.S. political campaign and Presidential victory of Donald J. Trump. He proved to be one of the most divisive and controversial characters ever to run, let alone win the Presidency of the most powerful country on our planet.
His campaign, which seemed perpetually on a massive rollercoaster ride, ultimately proved incredibly insightful – he appealed to the people who have felt left out of the economic prosperity and to those who felt marginalised by globalisation. And he tapped in to the dissent of the voters with the political hierarchy – the system and the people pulling the strings – the lingering dissatisfaction with the lying, corruption and lack of leadership demonstrated by some career politicians.
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.
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.
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.