By Victor Kumar
New research has highlighted once again that investors who offload too soon will likely walk away with a loss.
The latest CoreLogic Pain and Gain report found sellers who only hold their properties for a handful of years are reporting losses.
In fact, the report showed that the number of profit-making sales is falling.
Over the March quarter, 90.5 per cent of resales of houses and 79.5 per cent of resales of units were at a profit nationally, however, the share of houses resold for a profit was the lowest share of profit-making resales since September 2013, according to the report.
Plus, units are much more likely to resell at a loss with the 79.5 per cent of profit- making resales the lowest share since January 1999 – and down from 82.1 per cent the previous quarter and 85.4 per cent a year earlier.
Holding for the right reasons
Let’s look at one major market in particular to illustrate why impatient investors will end up rueing their decision to sell for a loss.
The majority of property investors are from Sydney and Melbourne, because that is simply where the bulk of our population lives.
During the last cycle, the majority of these investors had been buying in the Brisbane market because they had experienced equity growth in their own homes and there were better yields on offer in the Sunshine State capital as well.
However, many didn’t take into account that the Brisbane market works on a different cycle, with it historically being a shallower cycle, without the big price peaks or troughs.
The price trajectory is generally always up, but it takes seven to 10 years to record substantial capital growth.
What has happened over recent years, then, is that some of these investors have been caught out by expensive repairs, for example, which has resulted in their cash flow going from positive to neutral or even negative.
Plus, because they were expecting fast capital growth like they were used to in Sydney, they have decided to sell far too soon.
The truth of the matter
The on-the-ground truth of the matter is that anyone who bought in Brisbane around 2014 or 2015 is in a solid position, because interest rates have reduced significantly since then, even though weekly rents may have softened somewhat.
The investors who decide to sell up have also often been caught out when their interest-only loans have converted to principal and interest repayments, however, the situation can be remedied by refinancing.
Yet, most don’t bother to do this because it’s “too hard” or they’re too fixated on cash flow.
Savvy investors, on the other hand, will do what is necessary to improve their cash flow, plus they understand that the Queensland economy is poised for growth, partly courtesy of a mega major infrastructure program, and the drive to create more employment.
So, the investors who pull up stumps are offloading just before dawn in my opinion, because they were always expecting a Sydney or Melbourne type of growth, which never happens anyway.
The Brisbane market has always been a balance of cash flow and sustainable but slower capital growth.
The argument from some novice investors is often that they could have “made more money” in Sydney or Melbourne, but their holding costs would have been far higher as well, which would likely have wiped out their cash flow rapidly.
Of course, a balanced portfolio should include a mix of properties from our main capital cities for cash flow and capital growth reasons.
However, timing is of utmost importance in Brisbane in particular because of its longer market cycles.
That’s why the property investment victors will always be the ones who ignored the hype and the hyperbole – and simply and quietly played the long game.
Median hold period of resales at a loss/gain, houses vs. units,
March 2019 quarter