Australian Property Update - 12th April 2011
This week we take a look at some of the strategic considerations for your property investment.
- Is Your Home a Quality Investment?
- High Priced Residential Property? Pure Speculation
- Brisbane Property Market Post Flood Damage
- Palmerston - a Top Spot at the Top End - FEATURE REPORT
A key and erroneous assumption made by many Australian property purchasers is that their home is a quality investment. This is rarely so, as to have the option to give up working, you need a pool of investments that produce income. Your home is not one of these. Consider for a moment the definition proposed by Robert Kiyosaki, author of ‘Rich Dad, Poor Dad’ that an asset puts cash in your pocket and a liability takes it out. On this basis your own home is a liability. The same property could become an asset by housing tenants and producing income.
A compounding factor in this equation can be the aspirational home purchase. Let’s be clear, this is a lifestyle choice, and in terms of portfolio style is often a speculative trade, NOT an investment. We’ll come back to this point in a moment.
To define terms here, an investor will take a long term view on what they believe to be a quality long term asset. This means that they are prepared to ride out short term movements in price to achieve a more predictable and therefore safer and probably lesser long term return. A trader will look to find underpriced or overpriced commodities of whatever sort and buy or sell them against what they believe to be the real value, usually for a relatively quick profit.
Even a quick calculation demonstrates that you can hold over two and a half times the exposure to property by renting the same standard you would have bought and installing tenants in the purchased property. All costs are deductible for income producing property but all costs of maintaining your home – a lifestyle purchase – come direct from your back pocket. Even after Capital Gains Tax considerations, you are twice as well off.
Whilst we’re looking at investment strategy in the cold light of day, let’s consider...
If you observe one of Warren Buffett’s highest principles, you will look to trade against the flow of the market on the basis that the herd mentality is usually wrong or at best poorly timed. Markets often move for reasons that defy logic.
There is little doubt that the most volatile pricing in Australian residential property is top end Sydney and Melbourne. These markets tend to move in line with financial markets where the purchasers make their money, and as such do not offer diversity (if that’s what you want). The way to profit from these speculative trades is to maintain cash whilst the market is down and sell when it rises. You need to step outside the band to profit or be prepared to downsize when you need your cash. If all you do is buy and sell in this market, you spend in line with that bracket of the market and never really profit because your next home purchase consumes the profit that you have just made
This is in addition to the obvious point that it is far cheaper to fund residential investment properties and rent the same standard of dwelling even at the top end of the market. More efficient still may be to rent a high priced and low yielding house and purchase lower priced and better yielding stock that offers more predictable and consistent capital growth.
In essence, luxury property, let’s say over $1 million, is a discretionary lifestyle spend. If you are looking to profit from it, understand that it is speculation, not investment.
The mining boom in Queensland has a trickle down effect which benefits Brisbane as the state capital. For investment stock it is probably the best state capital in which to invest in 2011.
Some of the short term dips in value that investors need to be prepared to tolerate are on display in Brisbane right now. A general dip in the market due to several factors including depressed consumer confidence created a weaker market over 2010 and flood damage was widely expected to compound the negatives.
The upside of a flat or negative period in a strong overall market is that this creates buying opportunities for the astute property investor.
Concerns about values falling again after last year’s dip (RP Data quote a 3.7% fall in median pricing last year) appear to have been ill founded. BRW magazine ran an article on April 7th quoting Colliers International‘s view that weaker values and rising rents were “way off mark” in addition to anecdotal evidence of unchanged pricing in top end riverfront properties, which, as we have discussed above, are the most exposed to value swings. This demonstrates resistance to further downward pressure in what was always expected to be a flat year for Brisbane property values.
Confidence in Brisbane after the flooding is strong and in equity terms, the market seems to have found a natural support level. If you are considering investment in the Brisbane residential property market, get in during this year before it starts to run again.
The Darwin property market has had one of the strongest gains in capital growth of any destination in Australia. Certainly it has outperformed any centre of equivalent population until around 12 months ago and has started to resemble the experience of the Perth market which is also chiefly driven by resources industries and has taken a significant hit after years of crazy growth.
But as we discuss in the full report, Darwin has different characteristics than other capital cities, including its satellite towns. We have a look at a new city in Palmerston and the drivers for that market. The big picture is enticing but are there pitfalls given that Darwin prices have taken a hit in recent times?
For the full report, click here
If you have any questions about the above information please click here to send us your details or contact our office on (02) 9917 8600
Missed out on last weeks report? Click below to view the April 5th edition of