Club Property

Buying your next home, especially if it’s your first home can be a daunting task. It’s exciting but full of complexities.

While it’s likely to be the largest financial transaction you will ever make, we’ve found that many home buyers are poorly prepared to ensure they make a good purchase decision.

And it’s not their fault. The system is stacked against them, with much of the power being on the side of the seller.

To help you, let’s look at 13 Common Mistakes made by Home Buyers – ones that you should avoid.

1.       Not doing proper research and preparation

Understand your family’s finances and needs.  The wise home buyer will analyse assets, decipher debts and get pre approved for finance before plunging into the house hunt.

Get to know the neighborhood – remember you’re not just buying a house; you’re also buying a location. It’s important to find out about the quality of schools, the crime level, transport and possibly upcoming zoning issues. Not all parts of every suburb are ideal spots to live.

2. Choosing the wrong mortgage

To put you in the best negotiating position, it’s critical to have your loan preapproved (not just pre qualified) before going house hunting.

Find out how much house you can afford – but you can’t simply go to a bank’s Internet site, use the calculators to see how much you can borrow and assume you’ll get a loan. There’s a big difference between what the banks indicate they can lend you and what they actually will.

It’s important to pick your finance package carefully. Don’t just go to one bank; instead use an independent finance broker who has access to a range of lenders and finance products.

3.       Being influenced by “The Market”

Don’t be influenced by “the market” more than by your own needs.

Sure the property market moves in cycles and there are times when they suit buyers and there are sellers markets when prices are booming. However, waiting for the “right time” or prices to go down is gambling with your family’s future.

At times the mixed messages in the media may confuse you and you’ll be tempted to put off the decision to buy. If you know your budget, have your finance organised and thought about your current and future needs, then you should rarely let short term market conditions influence what will be a long term lifestyle decision.

4. Going beyond your budget

Every homebuyer knows the feeling – you’re looking for a home that fits your budget, but that much more expensive property just looks that much more appealing. However buying a home that’s way out of your price range could well derail your finances in the future.

It’s human nature for us to want a little more than we can afford, and there’s always a real estate agent who’ll talk you to the next level

But don’t be tempted – the bank has usually offered you a borrowing limit for good reasons based on your ability to repay the loan. Spending more than you can sensibly afford leaves you exposed to potential financial shocks, including rises in interest rates. You must also allow for changes in your future circumstances.

5. Falling in love

If you think a house is ideal, don’t let the seller’s agents know. Agents are good at reading emotions and negotiating the last cent out of prospective purchasers.

A wise home buyer knows there’s lots of houses — and there’s one out there that’s the right house at the right price. If you can’t afford it, move on and keep looking.

6. It’s not all about price

We all know you make your money in property when you buy, but that doesn’t mean you must buy cheaply. You make your money by buying the right property not a cheap property.

Price is what you pay, value is what you get.

This means you don’t make your buying decision purely on price. You can always buy cheap properties in secondary locations or on main roads, but you’ll be stuck with a secondary property – not a good idea.

However, when you’ve found the right property – it’s important to make a proper offer. One that secures your home, but that does not overpay.

Don’t base your offer on the seller’s asking price. Instead, get a comparative market analysis from your buyers’ agent. This analysis will reveal recent asking and sales prices of similar homes in the neighborhood. With this type of knowledge, a wise home buyer can make an offer that is appropriate

7. Not having the right protection clauses inserted in the contract of sale.

Don’t sign anything until you are sure your interests are protected.

While the standard contract to purchase a property will give you a “3 day cooling off period” smart purchasers request additional clauses to protect their interests.

Don’t be fooled by an agent who says you can always ask for changes or an extension later. That’s not the way it works. The only way to get changes to a contract once it’s been signed is to end the existing contract and renegotiate a new one. And the seller doesn’t have to agree to your requests.

8. Underestimating the full costs of buying a home

Many homebuyers fail to budget for the full costs associated with buying a house. Firstly there’s the acquisition costs. Things like stamp duties, rates, valuation costs, loan application fees and mortgage insurance.

Apart from budgeting for moving costs, be prepared for the unexpected when you move into your new home. It’s funny how things that have been working for years seem to break down, as if they knew there was a new owner. Set aside a budget for those irritating and sometimes costly breakdowns.

Then…don’t underestimate the ongoing costs of owning your property. Owning can cost much more than renting with expenses like rates, insurance and maintenance.

9. The “Fed Up” Purchase

You’ve been looking for a few months but haven’t found your dream home. The agents are misleading you; you may have been out bid by someone who had deeper pockets than you. You’re Fed Up!

One big mistake home buyers make is to buy a property in desperation. They buy something reasonable rather than something that really suits their needs because they’re sick of the emotional rollercoaster of home buying.

This is a decision you may live to regret for a long time.

Rather than buying out of frustration, stop looking for a while, or better still get a buyers agent on your side to save you time, to look in nooks and crannies you wouldn’t have thought of and to find those silent sales for you – the off market properties.

For more information on buyers’ agents, read the article “The home buyers’ secret weapon.” 

10. Not organizing a professional building inspection

It’s important to engage a competent and independent (not one recommended by the selling agent) professional to check your potential new home.

Remember… these inspectors are trained to find faults, so don’t freak out when they produce a long list. Look out for major faults but don’t let minor faults that are easily repaired trouble you too much.

If you’re not sure how to interpret the report, have a chat with the building inspector and ask questions like – would you buy this property?

11. Misunderstanding the real estate agent’s role

Real estate agents are friendly people and in the course of shopping for a house, you will spend a lot of time with various agents. However, the wise home buyer understands who’s working for whom. Unless you have engaged an exclusive buyers’ agent, then the agents are working for the sellers.

Don’t be mistaken – a selling agent can’t work in the interests of both the buyer and the seller. In fact they’re legally and morally obliged to work for their client the seller.

However wise home buyers know how to level the playing field by engaging a buyers’ agent to represent their interests. For more information on buyers’ agents, read the article “The home buyers’ secret weapon.” 

12. Going Solo

The sellers have an agent protecting them, looking after their interests and advising them, but most home buyer’s go solo.

Sure you’ve read some articles and done your research on the Internet, but this is likely to be your largest purchase ever. And that emotions will cloud some of your decisions.

You wouldn’t go to court without a solicitor on your side – would you?

You probably have a good head on your shoulders and may even have a good working knowledge of the home buying process. What you probably don’ t have, however, is perspective.

If, how and when you buy a home are all decisions that will have major consequences. That’s why it’s important to have the same protection on your side that the seller has. That’s why it’s critical to engage a professional buyers’ agent to represent your interests.

For more information on buyers’ agents, read the article “The home buyers’ secret weapon.” Link to this new article

13.  Thinking this list is exhaustive

It’s not. There are many other issues to consider. But, hopefully, this will help you avoid a few common mistakes as you contemplate buying your next home.

via propertyupdate.com.au

What is a buyers’ agent?

A buyers’ agent or buyers’ advocate is the opposite of a selling agent, because they work for and are paid by the buyer. They are licensed real estate agents and their job is to work for you and protect your interests. They help you buy the right property for your needs, at the right price, on the right terms and with unbiased advice.

Why pay money for something you can do yourself?
Good question… We’ll give you 5 reasons a good buyers’ agent will help you;

• Their research saves you money – they know what’s really going on in the property market – after all they’re in it all day.
• Their skills reduce your stress. Buying a home or investment property can be about as nerve-racking as it gets. It’s emotional, exhausting and sometimes terribly discouraging. A buyers’ agent’s job is to make the process as hassle free as possible for you.
• Their experience saves you time – and this is one of your most precious assets. Using a buyers’ agent will give you back your weekends.
• Their industry knowledge levels the playing field – selling agents are not your friend, they represent their client – the seller.
• Their industry contacts widen your options – they have access to every property for sale and a good buyers’ agent even has access to silent – “off market sales” that you may never find out about.

Why doesn’t everybody use a buyers’ agent?

Actually, many people do, especially overseas. In Sydney, Melbourne and Brisbane the numbers are growing and we have seen estimates that up to 1 in 5 buyers now use an advocate or seek independent professional advice.

Why can’t a selling agent help me?

A selling agent must act in the best interests of their client – the seller. They do not, and should not, work for you – the buyer.  We know some agents would like to work for both sides and have it both ways, but when you think about it, they cannot possibly do both effectively as this would create a clear conflict of interest.

How do I find a good buyers’ agent

Not all buyers’ agents are the same. Here are some questions you could ask your buyers’ agent before engaging them:

1. Are you a fully licensed real estate agent?
Be wary of hiring someone who doesn’t hold a real estate licence and hasn’t had extensive experience in the property industry.

There are many people out there calling themselves a buyers’ agent or buyers’ advocate who are not licensed estate agents. Don’t risk putting what could be one of the largest purchases in your life in the hands of somebody who hasn’t had the years of experience necessary to negotiate on your behalf. Don’t be tempted to engage somebody just because they offer lower fees. If they can provide great service and add real value for their clients, they wouldn’t have to win new business by offering low fees.

2. Are you a member of the State Real Estate Institute?
This should give you the reassurance that they are operating to professional industry standards.

3. Do you have current professional indemnity insurance?
If something goes wrong with your property purchase you will have absolutely no recourse if this is not the case.

4. Are you a dedicated buyers’ agent?
Or are they just a division of a real estate agency or a one man band working from home or out of a post office box? They can’t offer a high standard of service when searching and negotiating for properties for their clients unless they are dedicated professionals focused on this process.

5. Do you specialize in the geographic location and the price range I am looking at?
If the buyers’ agent doesn’t have a strong recent track record of buying in the area you are looking at purchasing in, we suggest you don’t engage their services. Don’t be shy to ask them for the results of at least four recent purchases in the area you are looking at buying in.

6. Do you have access to “silent sales?”
Many properties that are sold never hit the public market. It is imperative that your buyers’ agent has years of personal relationships with all of the real estate agents in the area you are looking at purchasing in, so as soon as properties come up for sale you have access to these before they go to the general public.

What do I pay a buyers’ agent?

Generally buyers’ agents charge a registration fee between $1,000 and $2,000 and will then charge a success fee when they find the right property for you and successfully negotiate its purchase on your behalf. This can be a fixed fee, but it is usually a percentage of the final property purchase price.

Their fees should cover:

• All communications and meetings with you.
• Referrals to appropriate consultants such as finance, accounting and legal professionals if necessary.
• Property searching for a suitable property including communications and meetings with agents.
• Use of all their research databases.
• Evaluating properties to ensure they suit your criteria.
• Preparation of property reports to help you evaluate the properties they recommend to you.
• Communications with your finance broker, solicitor and accountant.
• Arranging further due diligence checks – including strata, building and pest inspections as required (you will be required to pay for these separately).
• Execution of strategies to purchase the property for you at the best price and then negotiating your property purchase.
• Checking final contracts.
• Pre settlement inspections.

If you are considering buying a home in the near future, why not employ this secret weapon

via propertyupdate.com.au

You know I like to keep a watch on the Australian market for clues on what is happening in terms of investment, strategy and possible direction which is why I think this article is a good one to take a look at.
New Zealand is closely correlated to Australia in many things so have a read and ponder.

Australia is on the brink of an unemployment challenge, with up to 100,000 jobs set to be slashed in the months after Christmas. And interest rates will drop again next year bringing the cash rate to 3.5%.

These are the thoughts of Westpac chief economist Bill Evans, one of the few economists who correctly predicted a rate cut in November.

“We would expect the unemployment rate to edge up to 5.75 over the next six months,” Mr Evans warned.

“But on the flipside, the Reserve Bank would have to cut the cash rate by at least half a per cent to counter (the job losses).”

The comments come as research firm CoreData suggested the number of unemployed people in Australia will jump by nearly 106,000 next year, assuming the labour force grows at its current rate and the unemployment rate rose to 5.75 per cent, as predicted.

CoreData boss Andrew Inwood was reported in news.com saying the problem would be felt nationwide.

“One in five Australians now think they are going to lose their jobs in the next 12 months,” Mr Inwood said.

Watch the latest market update video from Westpac chief economist Bill Evans.

Economist Steven Keen is at it again. This time he’s predicting house prices will drop 5 to 10 percent in 2012.

Is he right?

Well…2012 will be a tough year for property, but before I answer the question I posed, I’d like to mention that I find it interesting that Professor Keen is only predicting a 10% drop.

In the past he saw houses prices falling 40%. He made a public statement and put his money where his mouth was selling his home in Sydney a few years ago just before prices boomed.

Keen, who was forced to take a hike up Mt Kosciuszko in 2010 after losing a bet that house prices would fall 40 per cent, recently forecast a drop of between 5 and 10 per cent next year because buyers would opt to pay off loans rather than take on more debt.

In an article in the Sydney Morning Herald experts were lining up to contradict the extremist property analyst Steve Keen’s prediction with most forecasting moderate growth.

Releasing the Australian Property Monitors‘ property market outlook, senior economist Andrew Wilson tipped 3 to 5 per cent growth in median house prices nationally and for Sydney.

Dr Wilson believes ”demand for housing will intensify”, pushing up prices.

Median house prices nationally had dropped 4.2 per cent over 2011, he said, and 1.6 per cent in the October quarter.

Of course we’ve had two interest arte drops recently, but concerns about the European economy are taking their toll, with most Australian’s preferring to stash their cash or pay down debt as they see how things play out overseas. Many potential property buyers are waiting to make sure house prices don’t fall further.

Looking ahead, Dr Wilson said that since Australia’s economic fundamentals were strong, the nation was well positioned to weather any downturn in international markets.

”This, coupled with renewed buyer confidence, will be the key to driving prices growth in the new year,” he said.

Brisbane and Perth to do well

He said that Brisbane, the worst performer this year with prices down almost 7 per cent mainly due to the devastating January floods, would bounce back between 5 and 10 per cent off the back of the resources boom.

Likewise, Perth and Darwin. But Melbourne, due to big price rises in 2009 and 2010 and an apartment oversupply, could expect growth of between 0 and 3 per cent.

Shane Oliver, the head of investment strategy and chief economist at AMP Capital Investors, also disagreed with Keen. ”Didn’t he forecast a 40 per cent drop a few years ago?” he joked.

However, Oliver isn’t as upbeat as the others, expecting a weak start to 2012 because of economic uncertainty. Over the year, he says prices could drop 1 or 2 per cent nationally but he is more optimistic about Sydney. ”I’m expecting modest gains over the year of maybe 1 or 2 per cent for Sydney,” he said.

via propertyupdate.com.au

He is a wise man who does not grieve for the things which he has not, but rejoices for those which he has.

Housing affordability has been in the headlines again, but this time around some seriously good research is the cause.

A new study for AHURI (Australian Housing and Urban Research Institute) strongly suggests that the traditional method of calculating housing affordability is out-dated and should be considered in conjunction with other ways of weighing up whether people can afford their mortgage or rent.

We have been banging on about this for close to a decade and this missive pulls together some of our thoughts on this matter.

The most commonly used benchmark to determine whether housing is affordable, is if it costs less than 30% of a household’s income.  However, few know that the 30% benchmark was established at the Government’s 1992 National Housing Strategy and was intended to apply to lower-income households only.  However, it is more often than not now quoted in reference to all households – even those on higher incomes.

Another point of contention is the source of the “household income” information.  Most commentary on this issue uses median weekly family income.  A family is defined as a married couple with or without dependent children.  Such a definition is quite prescriptive and precludes a large number of home buyers.  No consideration is given to age, for example, which provides a much better basis on which to analyse housing affordability.

Also contentious is that the income data is derived from the ABS Census and updated on the basis of movements in average weekly earnings.  We remain sceptical about certain elements of the Census and the income data concerns us the most.   One in eight households across Australia do not state their income on their census form; resulting, we believe, in a lower median household income than is really the case.

In our experience, using income figures sourced from the Australian Tax Office provides a more accurate picture.  And the statistics here don’t lie with median household income, across Queensland for example, being 21% higher when measured by the ATO against the Census.  In short, it is harder to lie to the ATO than it is to the statistical bureau.

Some better measures

The first one looks at income left over after debt servicing.  This approach paints a different picture to that obtained simply by calculating the proportion of income devoted to repayments.  Rising incomes have allowed households to meet rising loan repayments whilst maintaining, and often increasing, living standards.  Rising household incomes mean that the 30% traditional affordability benchmark is now out-dated.  In fact, given higher income levels now, households can devote as much as half of their income to debt servicing, whilst maintaining the same standard of living.  The AHURI study found similar results.

Another approach recognises the shortcomings of using median incomes of all households (or families) and instead considers the incomes of households in the age bracket of typical first-home buyers.  In this case, this relates to households in the 25 to 39 age bracket.  When looking at the proportion of residential sales by price range and taking into account interest rates and borrowing capacity, the typical first-home buyer could afford to buy one-third of the dwellings for sale across the country.  We estimate that this figure lifts to just under 40% for Queensland.  Now, while this is down on the long-term average of 45%, housing affordability measured by this series appears far less stressed than the traditional measures.

The big problem here is that first-home buyers these days want everything that opens and shuts in their first home.  A recent ABS study shows that three out of four first-home buyers bought either three or four-bedroom dwellings last year, with 26% buying a property with four or more bedrooms – as their first home!  It probably had fully ducted air, secured off-street parking and a swimming pool, too.

A third of first-home buyers are couples and another 25% live alone.

The last measure involves taking into account investment assets and income.  Ratios of household debt to assets have been much more stable over recent years than the ratios of debt to income.  It needs to be noted that traditional measures of affordability fail to take into account investment income.  When you do so, affordability measures appear far less stretched.

These three measures suggest that housing affordability is not as dire as many fear.  This is borne out by Australia’s very low housing loan arrears rate.  Whilst the housing loan arrears rate has risen over the five years, it still remains low by international comparison.

Anecdotal evidence also suggests that housing affordability is not as constrained as some would have us believe.  If you remain sceptical, spend a few hours in a major shopping centre and watch how many potential first-home buyers are spending up – and big.  Or visit your local airport on the weekend and see how many young couples are off for a weekend away.  The same applies when dining in some of our better restaurants.

Housing affordability is at nowhere near crisis level in this country.  Instead of the government giving ‘hand outs’ to first home buyers – which only lifts price – policy should address structural factors that lead to excessive housing demand and/or inadequate supply.  And please don’t get me started on the baby bonus!

In the meantime, some “plain speak” is needed.  Potential first-home buyers need to be told that buying your first property is not easy; it involves sacrifice and compromise to your current lifestyle.

To renters (and first-home buyers alike) paying 30% of your income for shelter is not outrageous.

via matusikmissive.wordpress.com

People who fail to achieve their goals usually get stopped by frustration. They allow frustration to keep them from taking the necessary actions that would support them in achieving their desire. You get through this roadblock by plowing through frustration, taking each setback as feedback you can learn from, and pushing ahead. I doubt you’ll find many successful people who have not experienced this. All successful people learn that success is buried on the other side of frustration.” –Tony Robbins

As you know I have spent a large part of my time living in Australia and investing there.
Even though we like to think of ourselves as different to those aussies, the reality is that when it comes to investing in real estate we pretty well follow the same rules.

Off The Plan investments have always been popular in Australia and for a few people in NZ the same can be said so I thought this article from the Matusik Missive would be particularly relevant.

There have been several short reports for public consumption of late, discussing off-the-plan buying.  Most have been masquerading as buyer tips or advice, but they take a very pro-developer side of things.

Now, without wanting to peeve too many of our developer clients – we have helped, after all, over 550 new residential developments (nearly all of which involved pre-selling) come to fruition over the past 15 years – below are my thoughts as to what a buyer should be asking when considering buying a dwelling before it has started construction.

I haven’t bothered to comment on the obvious here – stamp duty concessions; building depreciation; potential for growth before settlement (don’t we all wish!); time to sell your house or other investments or even the need to match the dwelling type to demographic/economic demand – but have touched on some less covered ground.

There can be great benefits to buying off the plan, but inherent in such purchases is risk.

One of the biggest risks is that the project is cancelled – or that the completion date will be delayed for lengthy periods of time, during which you may be required to commence paying fees without the ability to live in or rent out the property.

Another risk is that the development will not be built to a high enough standard to reflect the price you paid.

A third risk – which applies to investors – is that your property won’t attract the actual rent and yield you were told it would.

It is important to do your own homework in order to limit your risks – ascertain information regarding the property you are interested in and comparable sales/rents in the area.   It is also important to seek legal advice regarding the terms of any contract.  Okay, now that the basic caveats are out of the way, here we go.

Risk 1 – the building is late or doesn’t happen

Right off the bat, a buyer should question the number of sales being reported.  A fast sales rate, with only a few remaining for sale, is one of the oldest spruiks in the book – it’s project marketing 101.

It used to be that a new off-the-plan dwelling sale was only reported as “sold” when a contract went unconditional, the full deposit was paid and all the necessary documentation was signed by both parties.  Too often today a “sale” is reported, based on a holding deposit only – sometimes as little as $1,000.

One service my business conducts is “mystery shopping”.  We send buyers to new projects to critique sales techniques and to ascertain the real sales status.  Often, and increasingly of late, our mystery shoppers have been able to purchase “sold” stock.  Sometimes up to a third of the sales claimed to be made had not really occurred at all.

In addition to challenging the number of reported sales, a buyer should also ask if the proposed project has all the necessary development and building approvals to go ahead.

Another good thing to query relates to multiple sales being made to the same buyer.  Also, ask if any sales have been made internally i.e. to people directly associated with the development; and whether any of the reported sales actually reflect unsold stock taken off the market.

A buyer should also question the time period for the reported sales.  Often developers will “soft” launch their new project to interested buyer groups many months before going to the open market.  Many of the sales might have been made during this period, yet the sales spruiking is often based on the public launch date.  Don’t always believe the “50 sales made in the first two weeks” or similar headlines.  Fifty sales might have been made but our experience is that they took many months, if not up to a year, to make.

Finally, in relation to this first risk, a buyer should ask about the financial conditions needed to be met before start of construction.  And although somewhat obvious, too few ask about the exact planned start and finishing dates.

Risk 2 – building standard

First and foremost, make sure you know the answers to these questions:  Who is the developer and/or builder?  What are their track records?  Have they developed/built buildings before, and do they have any history of being sued over defects?

Also important is to check that the three-Fs (fixtures, fittings and finishings) in the display and printed material are guaranteed.  Beware of glossy leaflets with annotations along the lines of “artist impression” and “subject to change or availability”.

Ask, too, whether the construction will merely meet Australian standards.  These standards are, in the main, inadequate for the realities of modern urban living; and in particular, for those residing in large apartment complexes.  You are better off paying for higher than the prescribed building standard. 

Risk 3 – rent and return

Paramount questions when building an off-the-plan apartment or townhouse are: Who will manage the complex?  What is their track record?  And under what circumstances could these arrangements change?

Sometimes the management rights are sold early in the piece.  That is okay, as selling the rights to manage a complex forms an integral part of a developer’s income stream.  But you should be told who they are and make sure that you have full voting rights at the first AGM.

Whilst many buyers ask how much the body corporate fees are; like they do with council rates; too few ask for a breakdown of the body corporate costs.  Nor do they ask about cost projections.

Also, make sure that your view – for which you will pay a premium – is unlikely to be blocked by any future development.  And also ask an independent agent for their opinion on the suggested rent.

In most cases, you will receive honest and satisfactory answers to these questions.  But in those rare examples that you don’t, our experience is that it might be best to move on.

via matusikmissive.wordpress.com

According to The Economist, Australian house prices are more overvalued than the US housing market at its peak.

According to the economic journal, there are two ways to track valuations: price-to-rent ratio and price-to-earnings ratio.  Just as a share price reflects a company’s future profits, house prices should reflect expected return.  If both measures are well above their long-term averages, then the property market is overvalued.

Australian house prices, The Economist says, are 53% overvalued relative to rental return and 38% overvalued relative to income. Australia, today, has more household debt than America at its housing-market peak, which leaves it – again according to The Economist – more vulnerable to a credit crunch, higher mortgage rates or a recession which drives up unemployment.  Either of which, The Economist says, could send house prices tumbling.

What balderdash!

I am not referring to the premise that a credit crunch, higher interest rates or rising unemployment would have a negative impact on the housing market, but rather the two measures used by The Economist to measure housing value.

According to our most recent Matusik Snapshot (Matusik Snapshot 499 – House price update) – how could you not subscribe ? (Snapshot Subscription form 24 issues $100) – Australian housing is becoming quite affordable again.  Falling end prices, coupled with falling interest rates and rising household incomes, have now made housing across Australia – and especially in Queensland, Western Australia, South Australia and Tasmania – much more affordable. For example, it now only takes 30% of household income to buy the median priced dwelling in Brisbane, even less in Perth, Adelaide and Hobart.

Prices are starting to get to the point where people will start buying again.  That doesn’t mean that prices will necessarily rise quickly, but they are unlikely to crash as strongly suggested by The Economist.

The Economist’s other housing value measure – the ratio of average house prices to average rents model – is seriously flawed.

There are several logical reasons why our house price to rent ratio is high; the sum of which dismisses The Economist’s claim.

Now, as recently outlined, the value of investment property (that is, stock held by investors) should be determined by its return (i.e. rent) but not owner-resident or even secondary homes.  Why?

Close to 70% of Australia’s dwellings are held by owner-residents, of which half are owned outright.  A third of Australia’s dwellings are held by investors and are rented out.  We can sell our principal place of residence tax-free.  Investment property is subject to capital gains tax.

In addition, two-thirds of the Australian housing dollar is spent on renovations, a trend which has accelerated since the introduction of GST on new dwellings about a decade ago. We estimate that close to 80% of this renovation money is spent on owner-occupied homes.

In contrast, very little is spent on improving investment dwellings.  Improvements to Australian investment property are done to increase the rental return, not necessarily the sales price.

Given the current tax laws, it makes good economic sense for owner-residents to improve their homes.  Hence, there is a large difference between the price of owner-occupied homes and investment property across Australia.  Many rental properties sell for prices in the mid-to-high $400,000s.  Most owner-occupied properties sell for much more, with close to 70% selling for prices over $500,000 and near to 40% selling for amounts in excess of $600,000.

Owner-residents generally prefer detached houses over attached stock.  The reverse is true for investors.  Attached stock is, more often than not, cheaper than detached housing.  More renters live in attached stock than detached product.  This further exacerbates the reason why end prices – when pooled together – far exceed rents in this country.

So there is little wonder that the average price of Australian houses is much more than the average rent.  Our rental stock is inferior – for the most part – to the dwelling stock held by owner-residents.  A simple drive around any of our cities will illustrate such.

A house of horrors it is not!

via matusikmissive.wordpress.com

5 Property Lessons for 2012

To ensure you don’t get burned in the coming year and to give you a chance to make the most out of our changing property markets, I would now like to share some important lessons I’ve learned from previous cycles.

Probably the most important lesson we can all learn is to never get too carried away when the market is booming or too disenchanted during property slumps. Letting your emotions drive your investments is a sure-fire way to disaster.

Let’s look at 5 big lessons:

Lesson 1 – Booms don’t last forever

During a boom everyone is optimistic and expect the good times to last forever, just as we lose our confidence during a downturn. Our property market behaves cyclically and each boom sets us up for the next downturn, just as each downturn paves the way for the next boom.

Let’s face it…while the news is much less positive today, we know that over the next few years the flatter market conditions will be followed by another property boom and then another downturn. And over the next decade we’ll have another recession (we have one every seven to 10 years) and we’ll most likely have another depression one day.

The lesson from all this is; get prepared for the next phase of the property cycle. During the last cycle, most investors didn’t really have their downside covered or their upsides maximized.

Lesson 2 – Beware of Doomsayers.

For as long as I have been investing, and that’s over 37 years, I remember hearing people with excuses why property prices will stop rising, or even worse, why property values will plummet. However in that time, well located properties have doubled in value every 8 to 10 years.

Fear is a very powerful emotion, and one that the media use to grab our attention. Sadly some people miss out on the opportunity to develop their own financial independence because they listen to the messages of those who want to deflate the financial dreams of their fellow Australians.

Lesson 3 – Follow a System

Smart investors follow a system to take the emotion out of their decisions and ensure they don’t speculate. This may be boring, but it’s profitable. Let’s be honest, almost anyone can make money during a property boom because the market covers up most mistakes. But many investors without a system found themselves in financial trouble when the market turned.

Warren Buffet said it succinctly: “You only find out who is swimming naked when the tide goes out.” In other words, if you aren’t following a system that works in all market conditions you will be caught out when the market changes.

If you prefer to have consistent profits and reduced risk, follow a proven system. Make your investing boring, so the rest of your life can be exciting.

Lesson 4 – Get Rich Quick = Get Poor Quick

Real estate is a long term investment, yet some investors chase the “fast money.” You’ve probably met people like that – they look for that deal that will make them fabulously rich. When you see them a year later, they’re usually no better off financially and still talking about the next deal that will make them rich.

They are often influenced by the latest get-rich-quick artist who has a great story about how you can join them and become stupendously wealthy. Their stories can be very compelling, even hard to resist. They often pander to the wishes of people who would like to give up their day job to get involved in property full time, but in reality it takes most people many years to accumulate sufficient assets to do this.

Patience is an investment virtue. Warren Buffet said it right when he explained that: “Wealth is the transfer on money from the impatient to the patient.”

Lesson 5 – It’s about the property

You’re in the business of property investment, yet during the last boom many investors forgot the age-old property fundamentals of buying the best property they could afford in proven locations. Instead, they got sidetracked by glamorous finance or tax strategies and some lost out.

Smart investors do it differently. They make educated investment decisions based on research and buy a property below it’s intrinsic value, in an area that has above average long term capital growth and then add value, creating some extra capital growth.

These are just 5 of the many lessons that I learned from the recent property downturn.

We know that a few years ago the pendulum swung too far in some regions and the markets are catching their breath. In some areas property prices are flat and in others they have fallen and will continue to languish for a while.

We also know that if history repeats itself, some markets will swing too far into the negative, driven by fear.

If you learn these lessons from previous cycles the rollercoaster ride will not be as dramatic this time around because you won’t let your emotions drive your investment decisions. Remember both fear and greed will drive you down the wrong path.