Invest smart and don’t buy into buyer frenzy

12th Nov 2014By: Margaret Lomas

One of the things which always annoys me, is the way that the property news these days seems to always be dominated by quarterly price growth results from the capital cities. Property writers everywhere seem hungry for information, which proves that there is either a property bubble, or an extreme downturn, and somewhere in this sensational reporting, property investors have to try to make sense of what their own next steps should be.

In my own investing lifetime, I’ve lived through at least three ‘booms’ in each of our major capital cities. These booms have not occurred at the same time, but in each one the resulting news has always been the same – it is reported that prices are too hot, that the bubble is about to burst, and that housing is so unaffordable that first homebuyers will never enter the market again.

This kind of reporting fails to deliver a clear and accurate picture to property investors of what will really happen to their portfolio if they decide to invest. It also fails to recognise that there are two distinctly different classes of property investors.

Property personalities

The first class is the property speculator. Such an investor will buy for short-term profits, timing the market on the way in and on the way out, to ensure that the profits they do make create a sufficient return to cover buying costs, and the capital gains tax which will become payable. Some also renovate along the way, but all speculators have a specific outcome in mind – to make profits from each buy in the short term, and to roll those profits into creating even more profits on the next purchase. It’s a strategy that carries a high degree of risk and the market timing becomes the most crucial aspect – where you buy matters less, as long as the area chosen has a period of price growth just after the purchase is made.

The second class is the buy-to-hold property investor. The aim of such an investor is to acquire a property and then build on the growing equity in order to create a base of assets that will later provide a retirement income. The gains made on each property are not reduced by costs, as these gains are not realised in the short term – they are simply used as leverage. The idea is to create a wider asset base and a greater exposure to growth, so that each time the market moves, the investor has more skin in the game, and more assets which get the growth exposure.

When I ask property investors which one they want to be, the vast majority want to build for the future, and set and forget for now. Yet, these very same investors’ behaviour at the time of buying is often that of the speculator – trying to chase rising markets wherever they are, jumping into the fray in the midst of extreme heat, where they fall prey to overpriced properties in an effort to get in before it’s too late. Then, the set and forget behaviour kicks in and they leave that property to sit in their portfolios, often through protracted periods of stability. The bottom line is that they have often bought at a high – coming in behind the initial batch of buyers as they rush to ensure they don’t miss out, and then they take years to recover as the market tries to catch up with the premium value they paid for the property.

In it for the long haul

I’ve always believed, from experience in my own portfolio, that over time, most property in most areas will deliver similar growth results, as long as the property was purchased with the critical growth divers in mind. Put more simply, suburbs with the same characteristics in terms of local economies, population and infrastructure planning, situated in different states, will more than likely deliver the same, or similar, growth rate when measured over a 10-year period.

To test this (completely unscientific) theory, I did a quick (equally unscientific) review of five suburbs in our five major capital cities, and worked out their 10-year growth rate. This 10 years takes into account the crazy Perth boom around eight years ago, the recent Sydney hysteria, the Melbourne post GFC madness and the more stable, regular markets of Brisbane and Adelaide. I chose suburbs with similar characteristics, around 10 km from the CBD – Hurlstone Park NSW, Cannington WA, Edwardstown SA, Maidstone Vic and Woollongabba in QLD.

As expected, while individual (yet different) years showed periods of great growth in each of these suburbs, in all suburbs the total overall growth rate, when averaged over 10 years, was between 8.5% and 10%! I haven’t done the calculations, but slide the date range to any 10 year period and, while the rate of growth won’t always be 8.5% – 10% (as I don’t believe property always doubles every 10 years), the rate of growth across all similar type suburbs in all states is most likely going to be similar – be it 5% or 15%.

This illustrates a very important point – there is little to gain, and in fact a fair bit to lose, by getting caught in the buying frenzy that sensational media articles help to create. If you indeed want to be a buy-and-hold investor, it’s far more prudent to look for areas with those important growth drivers which are not part of an oft -reported and clearly hot market, and, as long as you hold for 10 years, what you buy will probably have pretty much the same performance as what you did not buy! While I am definitely not saying that all areas in all parts of Australia will perform well, as long as the growth drivers exist, the property will deliver petty much consistent growth results over the 10-year period.