What to learn from boom and bust reports

28th Sep 2016By: Margaret Lomas

The news is full of speculation about what might, or might not happen to the ‘property market’. These days, media reports of crashes or booms seem to be taken as gospel and have an impact on buyer behavior. If the media says it’s true, it is, isn’t it?

The issue I have is mainly about what constitutes a ‘property’ market. While it’s rarely defined in media articles, most of them refer to the Sydney and Melbourne market and use the activity in those markets as a barometer for all property, everywhere. And because of this, we see buyer behavior emulating what these reports say, in an almost self-fulfilling prophecy.

In truth, property behaves significantly differently in different parts of the country. Take the recent ‘Sydney’ boom for example. While journalists were shouting from the rooftops about how fabulously the property market was performing, those in Perth and, to a lesser degree, Adelaide, were looking at their own holdings and struggling to see much cheer.

Take it back 10 years, and everyone in Sydney was bemoaning their dreadful returns and blaming everything, including the state government, while Perth owners were jumping for joy at the speed at which their own market was doubling in value!

Now, Sydney-centric reporters seem to have short memories, with many of them claiming it’s always an amazing market, to the point where buyers are still jumping in and often buying property with abysmal rental yields and limited growth prospects in the coming five years or so.

Markets within markets

The reason for such a disparity in the values of property in one country, and reportedly one economy, is that the overall economic situation of Australia is often not reflected within smaller markets.

Take it down to a state level, and then, more importantly, a micro level, where individual local government areas are concerned, and it can be seen that areas can perform well even when a state, or the country as a whole, is not looking as robust. The reverse is also true.

Let’s look at Brisbane as an example. Within the inner ring, 5km from the CBD, property is subdued and buyers are few. Not that long ago, prices were increasing as the trend toward urban living became more and more attractive. Properties were snapped up, improving values, and new projects were developed to meet what appeared to be a creeping demand.

Now, we see a potential oversupply of apartments, and a peak for prices of freestanding houses (in what are considered to be blue chip areas), precluding many buyers as the mortgage required to purchase such property begins to pass what the average income of a Brisbane resident can afford.

But go south to the suburbs where affordable housing with high relative yields exist, where the population is growing at a cracking pace, and where there’s diversified employment opportunities, and we see a burgeoning property market which shows no sign of abating.

These are economically strong areas which have many reasons for the property to be growing, including an improvement in the overall relative wealth of the area. That doesn’t mean an area has to be ‘wealthy’ for it to provide exceptional yield and growth over time. It means that the community as a whole is becoming more affluent, often off a lower base. This is likely due to improving employment opportunity as businesses move into an area, increased local government employment incentives and commercial investments. All of these factors create a vibrancy which draws people in and keeps them there for the medium- to long-term – placing pressure on the price of housing.

The lesson

If faced with a choice between buying one property in a ‘blue chip’ area with high buy-in prices (and positive media sentiment) and buying four properties in lower socioeconomic areas where relative yields are strong and the micro economy shows signs of growth both intrinsically (through lowering unemployment rates) and extrinsically (through external commercial investment), I know what I would prefer.

Buying four allows me to buy into a number of economically vibrant areas, get a better overall yield and have diversification and a more robust portfolio which, if need be, can be liquidated slightly at a time.

The lesson here is, don’t pay any attention to media reports which exclaim or decry booms or busts. There is not ‘one’ property market, and believing there is a right time and a wrong time to buy property may lead to missed opportunity. Examining micro markets and looking for those smaller local economies which are in the midst of creating their own mini property boom will not only make you a better property investor, but a far more financially successful one too.