Expert Advice with Kate Forbes 29/06/2017
The lion’s share of your property’s value is in the land, therefore you should always buy houses instead of apartments.
Have you heard that one before?
It’s an oldie but a goodie, and harks back to those days when everyone believed a house on a quarter-acre would always be the most sought after property possible.
Generally speaking, houses are more valuable than apartments.
But that doesn’t mean houses are always the best investment, or that apartments are not capable of delivering big profits.
Try telling that to the investor I was talking to recently, who bought an apartment just outside of Sydney’s CBD in a prestigious development for $1.35m in 2014, and sold it for $2.47m last year…
A profit of around $1m in less than three years is quite an achievement – and it highlights the fact that there are many misconceptions doing the rounds about property, many of which people blindly believe.
Here are three of the most common:
Property lie: There is one single property market
It always makes me chuckle when I hear someone talk about the ‘Australian property market’, or the ‘Victorian property market’.
In actual fact, even referring to the ‘Melbourne property market’ is a fallacy.
Melbourne is comprised of dozens and dozens of suburbs, and each one operates with different supply and demand drivers and varying fundamentals, which combine to determine the performance of the market.
To drill down even further, within each suburb there are varying factors related to location that can impact a property’s value.
A house on the water with uninterrupted ocean views, in a street full of multi-million dollar homes?
Obviously, that’s going to be worth more than a house of exactly the same size, age and quality that is located three streets away in an unkempt cul-de-sac, where the only views are of housing commission flats.
Fact: There is no such thing as ‘one’ property market. And any property “expert” that tries to tell you otherwise is misguided.
Property lie: House values double every decade or so
Around 10 to 15 years ago, one of the biggest property lies doing the rounds was considered a property truth.
“Properties double every 7 to 10 years,” property pundits proclaimed – and historically, for the most part, they were right.
If you track growth figures in most property markets, house values did tend to double every 10 years or so.
But nowadays, we can’t rely on the assumption that all property values will lift eventually.
To secure a genuine profit-spinner in real estate terms, you need to do extensive due diligence and assess the market’s growth drivers to ensure a solid growth projection ahead.
Fact: Not every property is created equal and not every property will grow in value. The secret is getting your property selection right.
In today’s lower inflationary, lower interest rate environment, it is s unrealistic to expect continual double digit capital growth of your property
Property lie: You should always buy at the bottom of the property cycle
You’ve probably heard about or read about the much hyped ‘property clock’ or ‘property cycle’.
It's an interesting form of data that is often used to help us compare where different cities are in terms of their growth, with 12 midnight representing the very peak of the ‘hot market’, and 6 o’clock representing the bottom of the market.
At a very simplistic, basic level, it makes sense to buy at the bottom of the market.
But that’s not the only factor that matters.
There are dozens of property market fundamentals you need to take into consideration when investing, including past performance, local employment, and growth in infrastructure, amenities and population size.
Buying at the bottom of the cycle may many that you score a bargain – but if that same market stays in the doldrums for several years (or longer), then what have you really achieved?
Furthermore, timing your purchase to the low end isn’t always the most important quality to seek out.
Look at Sydney’s recent performance; many parts of the city have increased by 10-20% per year for the last four years.
It has been a rising market for several years in a row. According to this wisdom, buyers should have stay away once the market started rising – but if you had listened to this advice, you would have missed out on substantial profits.
Many investors try to identify areas at the bottom of the cycle as they present prime investment opportunities.
Fact: You make your money when you buy your property – not because you bought it cheaply, but because you bought the right property!
Buying at the bottom of the cycle may seem like a great idea, but it’s not the be all and end all. Size up the overall property opportunity, not the market it’s in, before you buy.
These are just some of the most common lies being perpetrated about property – there are dozens more to be wary of.
My point to you is to be careful about what ‘wisdom’ you believe when analysing the property market and the potential deals within it, as it’s easy to be fooled by fiction dressed up as fact.
Kate Forbes is a National Director at Metropole Property Strategists. She has 15 years of investment experience in financial markets in two continents, is qualified in multiple disciplines and is also a chartered financial analyst (CFA).
She is a regular commentator for Michael Yardney’s Property Update
Read more Expert Advice from Kate here!
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.