Housing Market under the pump provides an upside for canny buyers
It’s a tough outlook for residential property – but there can be opportunities for the serious long-term investor at times like these, according to Stuart Wemyss.
Auction clearance rates have also fallen dramatically over the past year, especially in Melbourne and Sydney, where they were above 80 per cent this time last year. Recent figures suggest that auction clearance rates have fallen below 50 per cent in Sydney and Melbourne.
When you get to the heart of what’s been happening in residential property, the trigger for the squeeze has been the tightening in prudential lending standards and the banks raising interest rates on investment and interest-only loans. In my experience, most peoples’ borrowing capacities have been reduced by 20-40 per cent or more over the past 24 months, which is the most severe contraction in credit policy in the 16 years I have been in business.
Typically, experienced property professionals consider an auction clearance rate of about 60 per cent to represent a balanced property market. That is, a market that is neither dominated by buyers nor sellers. To put it another way, the balance of power probably rests slightly in favour of property buyers, not sellers. Also, it appears that prices are relatively stable for Sydney, which has experienced a price correction.
Most property buyers don’t appreciate that property prices tend to move in a non-linear fashion rather than incrementally over time. As economist Don Stammer has mentioned, the history of property prices is closer to a “step-like-path”.
For example, the price of an average two-bedroom apartment in a particular suburb might consistently be around $500,000 as supported by several sales over many months.
Without any warning, due to market demand, the price of a comparable two-bedroom apartment might suddenly jump to say, $530,000 over the course of only one to two weekends.
However, property buyers tend to struggle to adjust their personal expectations in line with these market movements. That is, they struggle to reconcile why ostensibly the same property now costs $30,000 more than it did a week ago. But this is how the property market tends to behave.
That is, prices can jump significantly over very short periods of time and as such, set a new benchmark. If property buyers don’t quickly adjust their price expectations in line with the new market levels, they risk getting left behind.
Therefore, it stands to reason that operating in a cooler market or a market where prices are relatively stable, makes it far easier for property buyers to assess the fair market value of real estate.
Understandably, a bullish property market tends to instil confidence in the minds of property buyers whereas a falling market can make property buyers feel uneasy and, as a result, delay or forfeit purchasing.
People think: “If everyone is out buying property, then it must be a good time to do so. “However, when it comes to investing, such social proof is often unhelpful. A contrarian approach typically produces superior investment outcomes. As Warren Buffet says: “Buy when others are fearful.” That makes sense in the property market, too.
Interestingly, according to the Russell Investments/ASX Long-term Investing Report (it is typically used by investors to rank the best-performing asset class for the past 10 and 20 years) residential property investment returns have compared favourably to other asset classes over the 20 years to the end of last year. Residential property has returned 10.2 per cent, Australian shares 8.8 per cent and global shares 7.4 per cent over the past 20 years.
This report suggests that, if you invest in an investment-grade property, you could enjoy very healthy investment returns if history repeats itself…and it invariably does in every investment class.
Article by Stuart Wemyss – The Australian. July 2018
Stuart is an independent financial advisor and author of Investopoly: The 8 Rules for Mastering the Game of Building Wealth.