By Steve Waters
Any property owner studying their local newspapers must be wringing their hands in anxious disgust. There seems to be an appetite for lousy headlines among the real estate pages of our capital-city outlets.
While I understand the angst, I’d like to set the record straight and explain why the ‘market downturn’ you’ve been hearing about actually presents an opportunity for strategic property owners to take advantage.
I’ve talked to media industry types about this phenomenon of jumping on negative market tales. There’s no doubt that the old school outlets are doing it tough in that industry, and their need for more eye-catching stories is an imperative.
However, endeavours to create sensational, and ultimately ‘clickable’, headlines can lead many consumers astray when it comes to the actual state of play.
You’ve heard the old newspaper saying – ‘If it bleeds, it leads’ so while I respect well-resourced journos supporting articles with facts, there’s no denying most headlines are designed to grab your attention.
‘The Australian market’
In short, there’s no such thing.
We as industry professionals are at pains to say if you start blanketing the nation’s entire real estate economy with what’s happening in Sydney and Melbourne, then you aren’t telling the whole story.
There’s millions of different markets across our country – and then there’s those markets within markets. When you say, ‘property market’, what sector of real estate are you talking about? Is it residential, commercial, industrial? Is it primary or secondary? Are we discussing blue-chip or affordability driven?
The options to purchase real estate are broad and varied. Be specific in your attentions and look for the opportunities that the generalist commentators are ignoring.
Why do I feel so confident we aren’t racing toward a real estate Armageddon?
Let’s just stretch our imaginations to snapping point and imagine for one minute that we will have this totally unrealistic and sensationalised 20% price crash that made headlines around the nation recently.
First up – I think those commentators are behind the eight ball. My research shows me that there are actually some markets in Sydney that have already fallen 20%, and it occurred well before this ground swell of negativity was swept over us.
The thing is, that a 20% drop is really what I like to call ‘giggle money’. It’s that last gasp of a peak price run.
That little premium represents a moment when the market was running so hot, the seller didn’t know what they could achieve. The agent was caught up in such a rapidly moving value rise, they couldn’t put a price on it. So, the agent and seller think – “Well… let’s just put a ridiculous price on it and see how we roll,” – and they get it.
That premium, however, was never sustainable in a sensible market and the percentage of those buyers who actually get caught out is fairly small across the entire number of transactions in a capital like Sydney.
The historic safety net
Again, let’s just assume that Sydney is, on average, going to see property prices come off 20%.
Who’s that going to effect? Only those people who decide to sell after buying at the very top of the price peak. The cure is to treat your purchase as a long-term investment. If you haven’t totally pillaged your equity position, and have been careful with cash flow, this value drop will not affect you in the slightest financially.
The danger is all psychological.
In order to inject some sanity into your disposition, let’s have a look at what the Sydney market has done over the last half decade.
We’ve seen approximately 75% value growth in the past five years. If prices came back 20%, that would mean we’ve had 55% gain in five years without even applying the compound effect.
In what world would an owner not be happy with over 10% per annum gains in the value of their asset?
People are massively overreacting to a regular stage of the historic property price cycle. This isn’t the first-time markets have softened and it won’t be the last. Anyone who’s operated professionally through multiple price cycles will have already seen the softening coming.
Another fact is, as a whole, Australians aren’t over securitised. The total value of residential real estate in the nation is $7.6 trillion, and the total of outstanding mortgage debt against this security is $1.8 trillion – that reflects an LVR of 23.6%. It’s hardly panic stations stuff.
What do you do?
My advice to keep calm and stick with the fundamentals of good investing. Never overleverage yourself and maintain a decent cash flow position.
If you’re in the position to draw on your recent equity gains and service your loans, then you might be onto some very good opportunities at the moment because the negative sentiment is keeping vendors realistic.
Finance is our biggest hurdle at present – so if you can get a loan, it’s your ‘unfair advantage’ at the moment.
If you can’t borrow right now, that’s fine. Sit back, relax and wait for the market to do its thing.
Sydney and Melbourne will be the place to buy one day – it’s just not today. For now, look across the border to Brisbane, Adelaide and Perth – there are green shoots of growth everywhere.
IF you’re really panicking, remember this – no one ever lost property due to a fall in equity, they lost it due to a lack of cash flow. Stay on top of your budget and you’ll be fine.
Block the noise out. It’s created by people who don’t know a front door from a back door.