Ian Thomson - Homestudy Graduate Testimonial

By Terry Ryder, 16th July 2008

You make money in real estate when you buy, not when you sell. The essence of good property investment is buying well.

That’s why I’ve become a buyer since the market and the mood of the public turned south. The current economic and real estate climate is, for me, the ideal circumstance to secure the real estate which will grow my financial security in the future.

Fortunately for me, everyone else seems to be doing the opposite. There’s been a stampede in the wrong direction and I’m happy to be running against the herd. I seem to have the whole territory to myself.

For reasons I’ve never understood, most people seek to create wealth by doing what the masses are doing. They wait until a market is booming before buying. They follow the pack into the frenetic market and buy at or near the peak. No one ever secured their future behaving like this.

One of the oldest maxims in wealth creation is that you buy when everyone is selling and sell when everyone is buying. If there’s a common denominator among the histories of people who have made serious money, it’s that they detached themselves from the herd and moved independently, often counter-cyclically. They did the opposite of the masses.

Most people, however, like the comfort of the herd, even when it’s stampeding towards a precipice. When the market goes cold, buyers go into hibernation. And, inexplicably, home owners suddenly want to become sellers.

The number of homes listed for sale in Perth has trebled since the WA property boom ended. Listings have risen in Brisbane and elsewhere since the market went pear-shaped. People who bought in the boom want to be sellers in a declining market. It baffles me.

I want to be a buyer now because the heat is gone from the market, there’s no competition for the properties that interest me and I can negotiate from a position of strength. I know interest rates have risen but I also know that rental markets are tight and rental increases are compensating for higher borrowing costs. I also know that every time interest rates rise, the balance of power tips more in favour of investors - the outcome is fewer home owners and more renters. And, with too few homes being built, the already-serious housing shortage will continue to push up rents

People too easily allow themselves to be affected by negative news. There’s no shortage of it lately. Home lending has fallen for four consecutive months. Survey shows consumer sentiment is at its lowest since the early Nineties. We’ve even had one research company, hungry for a bit of publicity, claiming Australia is heading for a one-in-100-years slump.

This kind of media has added to public pain from too many rises in interest rates, petrol prices and grocery bills. It’s had a dramatic impact on the public psyche and property markets have braked sharply.

Brisbane research analyst Michael Matusik says today’s climate feels a lot like 2005. He says: “The residential market is going through a consolidation period - similar to that experienced in late 2005. The market improved considerably between mid-2006 and the end of calendar 2007, surprising many with the strength of this recovery. Despite forecasts of price falls (infamously by over 10%, according to one Aussie icon) and a general market crash, residential prices and weekly rents are up around 30% since late 2006.”

Matusik says the fundamentals now are the same as they were in 2005 and forecasts that residential property prices will increase on average about 8% a year over the next three years. He expects price growth to be stronger in Queensland and Victoria because of higher migration intakes.

The analogy with 2005 is a good one. In 2005 a pack follower would have avoided Melbourne property. The market was flat, prices were stagnating and sentiment was low. But the individual hunter would have been on the prowl at that time. After a couple of busy and buoyant years, the Melbourne market was quiet and it was taking a long time for property to sell.

This represented opportunity to the switched-on investor. Opportunity to take your time, do thorough research and buy without pressure. Opportunity to find good property without competition from others and to negotiate hard. A buyer’s market.

These are the successful investors - the ones who ignore the present and consider the future.

Investors who bought in Footscray in 2005 or 2006, when things were quiet, are smiling now. Values have risen steadily since then, including a 20% rise in the 12 months to March. The individual would have bought in 2005, the pack animal early in 2008, just before the market went into decline.

The market in Frankston touched bottom around 2005. Those who bought then have seen their values rising strongly over the past 2-3 years, including 13% in the year to March. Ditto near-city Carlton, where median prices for both houses and units dropped in 2005 but have climbed sharply since.

The thing Footscray, Frankston and Carlton (suburbs I’ve chosen at random) have in common is a long-term growth average around 12% (average capital growth over 10 years) and identifiable reasons for prices to grow. It’s the future that’s important, not the present.

The climate today presents similar opportunities for investors able to think and act independently. Consider the fundamentals. Migration into Australia is at record highs, providing record overall population growth. Economic and employment growth remains strong - and is widespread, not just confined to the resources states.

At the same time, the housing market is under-supplied. We continue to build homes in numbers that are well below underlying demand. Vacancies are extremely low and rents have been rising - and rising.

Matusik says: “New dwelling supply is under-supplied by 32% across Australia - and more so in NSW and Queensland. The under-supply of new stock is expected to get worse in coming years and some forecast it could remain so for the next decade and beyond. We anticipate annual rental growth of around 12% a year over the next three years.”

These views are supported by many other commentators, including CommSec’s chief economist Craig Jamers, who says: “Australia is experiencing the biggest migration boom on record and the rental market is as tight as a drum - but home buyers are in short supply. There must be a lot more people in shared accommodation or at least staying at home with their parents longer.”

I’ll give the final word to the Herald Sun which reported earlier this week: “Melbourne’s rental market is the tightest it’s been for years. This is a landlords’ market with tenants bidding to rent properties and open-for-inspections crowded with potential applicants.

“As sharemarkets become more volatile, property investment is increasing as an alternative. Although there is strong and growing demand for rental housing by tenants, there are not enough investors in the market.

“So, it could be the right time to invest in residential real estate, with the aim of becoming a landlord.”