Stay the course, don’t follow the fad

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Hot-spotting, buying off-the-plan, and land-banking sound like great ways to buy into real estate, but these are some of the dangers involved in investing. So plan right to reap the benefits

In real estate, we won’t see a boom-like condition for some time to come. Instead we will go into a gradual growth of 5% a year in well-located properties. Secondary properties in outer fringes of the city, regional and mining towns will see a deflation next year

Are we expecting a crash in the property market?

Overseas economic gurus have predicted a property crash in Australia. They have been predicting it for the last 20 years.

The market in Australia is not going to crash as they predicted. Our fundamentals are strong. We have low employment of 5.7%, as well as low interest rates and low inflation.

In the 2014-2015 financial year, FIRB has approved $97 billion worth of real estate purchases in Australia. Most of the appetite has come from Chinese buyers. Victoria has taken up the top spot of attracting the most dollars — close to $25 billion.

Approved Chinese investments in Australian residential and commercial real estate have doubled in the last two years. I think they will continue to do so for some years to come.

If not a crash, can we expect a correction?

Corrections do happen all the time in the market. We won’t see a boom-like condition for some time to come. Instead we will go into a gradual growth of 5% a year in well-located properties. Secondary properties in outer fringes of the city, regional and mining towns will see a deflation next year.

Some of the outer fringe suburbs will have some capital due to the ripple effect of the massive growth of middle ring suburbs.

The term deflation, incidentally, has never been used in property market vocabulary. What we might have is deflation in house price.

Now, for some dangers to avoid in the real estate market.

~ Stay clear of buying fads such as hot-spotting the next new town, land banking schemes, next boom suburb so on and on. These trending fads have been coming and going.

Last decade, migrants jumped at the idea of buying properties in the fringes of cities because they looked new and affordable and were expected to boom like any other suburb. Now, most of them want to sell after a decade, still not getting the price they have paid.

~ There is a new scheme in real estate – land banking, where people buy a few acres of land and even before settling on it, pass them onto new buyers. This may be working for the first crop of buyers and sellers but eventually all the land banking gurus and clients will find themselves shirtless. When the tide goes down, we will know who is swimming naked.

~ Overseas investors are buying off the plan properties. So, they must be a good buy. Off the plan apartments come at a premium price, which should be avoided. Overseas investors cannot invest in established properties. So, they have no choice but to invest in properties to develop or off the plan properties. As Australian citizens, we have 6 trillion dollars worth of market to choose from, so why bother to compete with overseas buyers who will pay a premium for off-the-plan properties.

Overseas investors too are keen to invest their money in a secure and safe country. If you have plenty of cash and gold, you would like to save that in the most secure bank in the world. Australian real estate is like a safe haven to for overseas investors to invest their wealth.

By living in Australian capital cities, we have an advantage over overseas investors. So, choose in well sought-out suburbs, where the owner occupied homes are above 70%.

~ Some buyers are tempted to invest in regional towns chasing yields to be found 10 years later. This is not even worth your time and will not recover the amount you have paid for today. Don’t chase fads; they never work for an investor.

So, what works for an investor?

Buy well-positioned properties in good suburbs, with consistent capital growth. Always buy into established properties rather than paying a premium for new properties.

Find an established property, buying below its value. This way you can manufacture growth through renovations or subdividing. You could also consider buying old boutique apartments in well sought out areas. Renovate them to manufacture growth.

Where is Australia heading?

Around 83% of the Australian work force is employed by the service industry and 75% of the total GDP is made up of the services sector.

Manufacturing or mining is not a predominant industry in Australia. So, investors should avoid mining towns.  Property investors should concentrate on where the jobs are located, which is closer to capital cities.

Australia’s GDP is 1.6 trillion, close to India’s GDP of 1.8 trillion. Consider this: 24 million vs 1300 million population with roughly the same GDP.

Australia’s poor are considered the wealthiest in the world. Australians are the wealthiest people in the world. Australia’s four capital cities are in top 10 liveable cities — Melbourne 1st , Adelaide 5th, Sydney 7th , Perth 8th. In coming years the ratings won’t change much as these cities are always evolving to become better.

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