Blogs - Lindeman Reports

Posted on June 11, 2021June 11, 2021 by John Lindeman

Will this boom become an investor bubble?

High price growth often motivates investors to buy properties in the expectation that the growth will continue or even escalate, so are investors about to jump on board and turn this boom into a price bubble?

Although the number of investors in the property market is growing, the percentage of investors buying property is around 30% of all buyers, still far lower than during 2014/15, when over 60% of all properties purchased in Sydney and Melbourne were bought by investors. There are several reasons why investors are not taking part in the current boom.

Firstly, investors tend to buy units rather houses. Around seventy percent of units and apartments are owned by investors, while the figure for houses is much lower at only twenty percent, as the graph shows.

Investors prefer units as investments, because they are cheaper to buy and traditionally offer higher rental yields than houses.

Despite Body Corporate fees, they also tend to have low maintenance and repair costs and are located in areas with the highest rental demand.

Inner urban unit rental demand has collapsed

The attractions of units for investment have been turned on their head due to international border closures, which have caused a collapse in rental demand from overseas migrants, tourists and students, especially in inner urban precincts where most units are located.

There are nearly three thousand unit rental vacancies in the Melbourne CBD alone, and asking rents have fallen by nearly twenty-eight percent in the last year. Sydney’s asking rents for units have dropped by more than eighteen per cent. So why have investors not turned to houses instead of units?

Investors have been attracted to other investment options

Secondly, although house prices have risen, they have not been matched by increased rents. Rental yields are at historical lows of just 2.7% gross rental yield in Sydney and only 2.9% gross rental yield in Melbourne. This makes any house purchase in these capital cities a heavily negatively geared proposition.

Investors have been drawn to other asset classes which may offer better returns than residential property, such as commercial property, commodities, gold and shares. Some investors seeking a faster-paced experience have turned to innovative opportunities such as the emerging cryptocurrency trading markets.

Could APRA pull down the shutters again?

Thirdly, investors are concerned that what took place during the last investor led boom could be repeated.

This boom occurred in Sydney and Melbourne from 2013 to 2015, when APRA, the statutory authority which regulates and supervises our major banks, was concerned that the market might overheat as most properties were being bought by investors.

APRA intervened decisively, restricting investor access to housing finance by cutting back the percentage of investor housing loans that the banks could provide. Although these tactics were broad based and blunt edged, they were effective in curtailing investor demand and housing prices in Sydney and Melbourne took a nose dive.

Property investors are now worried that APRA might intervene again, and that they will be in the firing line. APRA has already publicly stated that their trigger points are:

Two years of over double digit property price growth
The percentage of investors buying property exceeds 50% of all buyers

Given the state of the market at present, APRA intervention is highly unlikely, but if the percentage of investors does rise and we also experience two consecutive years of high price growth, APRA could step in again and apply brakes to borrowing.

This means that if investor interest in residential property starts to increase dramatically, APRA will take measures to slow it down again. But, if investors don’t rush into the market in the next year and cause prices to keep on escalating, then APRA won’t need to act. Either way, this makes a broad based investor led boom in our major property markets all but impossible.

Sources:

CoreLogic published hedonic home value index
Unit rental vacancies and asking rents, Realestate.com.au
Lending Indicators, Australian Bureau of Statistics
Australian Community Profiles, Australian Bureau of Statistics

Posted on May 31, 2021May 31, 2021 by John Lindeman

When the boom is over

We all know that all property booms eventually come to an end, so what will happen to property prices when the current boom is over?

Property booms don’t all finish in the same way. Booms where investors have been heavily involved can become superheated bubbles and then they bust, with prices crashing. In fact, as price growth comes to an end, we can expect the usual dire warnings of an imminent property market crash to make headlines in the media.

The current boom, however, has been caused by home buyers rather than investors, so does this mean that growth will eventually slow down when demand falls? Can we expect prices to stabilise rather than crash and then look forward to price booms in other locations?

The best way to forecast what might happen to property prices is to look back to past property market booms which were generated by home buyers rather than investors, and see what took place when they ended. These booms occurred after the end of World War One, the end of World War Two and before the GFC.

How the biggest property market booms of the past ended

When the First World War ended in 1919, large numbers of soldiers returned home to start families, followed by migrants and refugees fleeing war torn and ravaged Europe.

The demand for housing resulted in severe shortages and house prices rose by over fifty per cent in a few years, as the graph shows.

The same situation developed again after the Second World War ended in 1945, and for the same reasons, as soldiers returned home and huge numbers of migrants and refugees arrived, resulting in housing shortages.

This was our biggest boom ever, with house prices almost trebling in just five years.

The third home buyer boom took place after the Federal Government’s introduction of the First Home Owner Grant in 2000, and continued until the Global Financial Crisis in 2009.

During this boom, house prices doubled in less than seven years.

Apart from the massive increases in prices that took place, each of these graphs also shows us that when the housing market booms ended, prices did actually fall.

The price falls, however, were quite small, only decreasing by around five percent at the end of each boom and more significantly, the market then recovered after each correction had occurred and moderate price growth returned.

Why do all home buyer booms end?

Big home buyer booms finish for a number of reasons. Price growth can stop when new property development eventually catches up to buyer demand, and the newly released stock results in temporary oversupplies.

Sometimes house prices have risen so much that potential buyers simply can’t afford them anymore, and some booms end because the number of potential buyers has been exhausted and there’s no more buyer demand.

Why do prices fall when home buyer booms end?

Just before booms end, potential buyers are frantically competing to snap up the few properties for sale on the market. These are often bought at prices well above market value, which would be fine if buyer demand continued, but as the boom ends, the value of these homes can fall below what the new owners have paid.

This wouldn’t matter if the last purchasers in a boom could hang on to their homes until growth returned, but sometimes that isn’t possible.

Many new owners decide to renovate or make other home improvements and most first home buyers need to splash out on whitegoods, floor covering and furniture. This additional expenditure increases their debt levels and may impact the capacity of some new owners to service the loan.

Others may be forced to sell because of work relocation, unemployment, or relationship and family issues.

This leads to an increase in unexpected or even forced home sales at the end of a boom just when the number of buyers has decreased and causes prices to fall. Such crisis induced sales only last for a number of months, as most new home owners are reluctant to sell and try to hang on to their homes until their situation improves.

As the above graphs show, the net result has always been a small correction in house prices of around five percent over the twelve months that follow the end of a boom. There is no reason to believe that this boom will end differently.

Why does price growth usually return?

Once these small corrections have occurred and our big city post-boom markets have stabilised, they usually enter a period of subdued but constant growth which can last for years. This is because the demand for housing in our major urban centres has always outpaced the supply, being driven by the constant arrival of new households from overseas, with each household requiring their own home to live in.

With our border firmly shut, population growth now comes only from new babies, who don’t increase the demand for housing as much as for more bedrooms.

This means that until overseas migrants are able to resettle here again, our property markets may enter an extended period of little to no growth.

This is of course, apart from areas where people are likely to relocate in a different part of their State, or from one State to another, because this creates more housing demand in the process. It is those locations which will have potential to outperform the overall market over the next few years.

Sources:

CoreLogic published housing data
Australian National Library Trove facility and Mitchell Library archives
House Price Indexes: Eight Capital Cities, 6416.0 Australian Bureau of Statistics
Housing Market Prediction Solution, Property Power Partners
Mastering the Australian Housing Market, John Lindeman, Wileys
Stapledon’s Index: Long Term Housing Prices in Australia, Nigel Stapledon, University of NSW

Posted on May 10, 2021May 10, 2021 by John Lindeman

The importance of size in property markets

When property investors talk about size, they are referring to population. Some won’t even consider a potential investment location unless there are at least 5,000, or 10,000 or even 20,000 people living there, but is there any logic to using size as a benchmark?

Size is one of those accepted truths about the property market. It’s based on the fact that people create economic and demographic diversity, so the bigger the local population, the more robust and stable its housing market is likely to be. This is why many property investment courses and books tell you to limit your search for possible investment properties to towns or even cities with a certain minimum population.

Population size can be misleading

I would argue that it’s not the size that matters so much as whether the population is growing or declining, because population falls cause lower demand for housing, leading to falling prices, longer rental vacancy rates and lower rents, regardless of how big a city might be. On the other hand, population growth, even in a small town will generate more demand for housing.

It’s also critical to know what types of households are moving into an area, and what types are departing. For example, a recently completed highway expansion or new railway project could result in many of the construction workers who rented in town leaving, but also motivate home buyers to move in, because the area is now quicker, easier and safer to access.

Market activity is more important than size

Much more important than an area’s size is the amount of property market activity that’s taking place there. You can easily check this by looking up the property sales, rental vacancies, listings and time on market in any suburb or locality.

Even a small town might be buzzing with new buyers or renters and you might miss an obvious investment opportunity if you rely purely on the town’s size.

Size does not guarantee economic stability

Even some large Australian cities rely heavily on one or two main industries to provide employment and economic growth such as tourism, manufacturing, horticulture or mining. If these key industries decline there’s a knock on effect to other local industries such as retail, entertainment, educations, and administration and so the property market suffers.

The important thing to look for is not diversity, but whether the main industry in a small town has growth potential, because this will also have a knock on effect to other industries in the town and lead to more housing demand.

For example, the arrival of over 1,000 construction workers in remote Weipa (total population of 4,000) led to a massive and sustained rise in both rents and prices.

When doing your research for potential investment areas, don’t just rely on size, but also look at expected growth in population, increasing property market activity and new or expanded economic projects.

Posted on March 22, 2021March 22, 2021 by John Lindeman

The property market stripped bare

John Lindeman strips the market bare to find out why housing prices are shooting up almost everywhere and reveals what will happen next.

There are many explanations for the current housing market boom, such as lower interest rates, relaxed borrowing rules, buyer grants, building incentives, stamp duty waivers and tax cuts. But while these have all contributed in some way to the rise in buyer demand, they don’t explain the dramatic increase in the number of potential buyers, or the huge rise in their buying power.

When we strip the market down to the basics, we are left with just two facts that explain why housing prices are booming and tell us what’s around the corner. That’s because property purchases consist of two amounts – your deposit, and what the banks will lend you.

The banks require you to make a significant deposit on the purchase price of your property, because this protects them from risk if its value falls.

They also need to protect themselves from risk if interest rates rise, so they apply a floor rate which is two or three percent higher than the standard variable rate to your loan application. This serviceability test shows whether you can keep up repayments if interest rates go up and it controls the amount of housing finance that they will lend you.

These solutions have always made it difficult for first home buyers to obtain housing loans, but now everything has changed, and it’s largely because of the pandemic.

There are more potential home buyers than ever before

The need to have a big deposit has always been the first big stumbling block for potential home buyers. But last year, we had to endure lock downs, social distancing and border closures while many people worked from home. We stopped spending on travel, clothing, recreation, entertainment and holidays and saved the money instead.

As a result, many aspiring home buyers have managed to save enough for a deposit and so the number of potential first home buyers has increased dramatically, with a fifty percent rise in first home buyers entering the market over the last year.

Banks are willing to lend more to each potential home buyer

But it’s not only the number of first home buyers that has increased – the amount that banks are willing to lend has also gone up. This is because the banks have significantly lowered the floor rates against which they test home loan serviceability.

During the pandemic, lenders lifted their floor rates to seven percent and more, because they were worried that a severe economic recession was heading our way.

Now, however they have dramatically cut their floor rates because the economy is back in growth and the RBA has given an assurance that interest rates won’t rise for some years. The result is that potential home buyers have received a massive uplift in their assessed loan serviceability and higher loan amounts are being approved.

For those who like stats, this table shows the greater home buying capacity that the lower floor assessment rates have given potential buyers, when this is based on their household income. On average, the reduction has given home buyers the capacity to lift sale prices by up to twenty-five percent or more above pre-pandemic levels.

The three growth governors will soon kick in

Now you can see why there are not only more potential home buyers in the market almost everywhere, but that they can offer higher prices as they compete with each other. So what happens next? Watch for these three growth governors:

The number of home buyers entering the market will start to fall.
Loan size limits set by the banks’ lower floor rates will be reached.
More current home owners will be motivated to “cash in” and try to sell.

As these growth governors take effect, there will be fewer buyers in first home buyer suburbs with more potential sellers and price growth will slow down.

We are already seeing evidence of this trend in many of the lowest priced suburbs of the Outer Sydney Rim (such as Penrith, the Lower Blue Mountains and Campbelltown), where the number of properties listed for sale has risen in recent months. This gives us a clear indication that the peak of the market is already close to being reached in these first home buyer locations.

While buyer demand is now rippling to higher priced areas as existing home owners decide to upgrade, the same growth governors will eventually limit the size and duration of price rises.

Some areas could be in for a wild ride though, if their house prices grow by more than twenty-five percent over pre-pandemic levels. Remember that the higher the price rises, the more likely it is that these areas will suffer price corrections as the market cools down.

Posted on February 25, 2021February 25, 2021 by John Lindeman

The compounding growth myth unmasked

Ever heard of the power of compounding growth? You’ll often see it promoted as the reason that property investment can provide such great results. But does it really work? John Lindeman investigates.

Many experts assure you that property investment is a long term game because prices always rise over time. Future growth builds on past growth, delivering the snowballing result called compounding growth.

Because of the power of compounding growth, some strategists even insist that timing the market is futile. By this they don’t mean that its future performance is unpredictable, but that it is simply unnecessary to try and predict the future – all we need do is buy and hold.

They point to the long-term performance of property and show you how its regular and consistent price growth exponentially increases your equity over time, as demonstrated in this commonly used illustration of the power of compounding growth.

Compounding growth seems to offer you a secure pathway to wealth, because as your equity grows, you keep buying more properties until you reach your final goal.

Most investors only ever get to own one or two properties

If only this were true! Yet the facts are that very few property investors own more than two properties. According to the ATO¹, ninety per dent of property investors only own one or two investment properties and are seemingly unable to make the power of compounding growth work for them. But that’s because the theory doesn’t work in practice, for two very critical reasons.

Firstly, unless your properties generate positive cash flow, you will quickly hit a borrowing ceiling, because banks won’t lend you any more money. Most properties are negatively geared, which means they cost more to hold than the income they generate, so you are actually losing money, and your borrowing power is quickly exhausted.

Secondly, although property prices do go up over time, price growth can dramatically vary from one location to another, even at the same time. Some areas may not experience price growth for a decade or longer, while others experience short but sharp bursts of growth which are then followed by years of price stagnation.

Theory and practice are different

Einstein once said, “In theory, theory and practice are the same, but in practice, they are different.”

The chances of hitting a property jackpot are slim indeed if we buy and hold without achieving both consistent positive cash flow and high price growth.

This is why most investors never get past owning one or two investment properties.

Their experience shows us that relying on the power of compounding growth alone is totally flawed.

Those few investors who have managed to increase both their equity and portfolio over time and achieved their wealth creation goals have a secret – they always purchase the right properties in locations with high positive cash flow as well as the potential to generate high price growth.

Source:
¹How many properties do investors own? Michael Yardney, YIP Mag blog 12 Dec 2018.

Posted on February 25, 2021February 25, 2021 by John Lindeman

How to profit from a growth market

Warren Buffet has just two rules that investors must follow to ensure success. His first rule is Never lose money and the second is Never forget the first rule. So how can investors use this wisdom to profit in the current market?

It would seem that getting into a growth market is the best way to avoid losing money, and in fact many investors do just that, by holding off buying properties until they are sure that prices are rising.

There’s an issue with buying in growth markets

The issue is that property market performance in a city, region or even a suburb moves in a recurring pattern of growth and decline, as the picture shows.

When we are in a growth phase such as the current one, it’s critical to know just how long prices are likely to keep rising. Are we still at the beginning, with more good growth to come, or are we already near the end? This is because sooner or later, prices will become unaffordable, or current buyer demand will be met and growth will end.

When growth ends, markets go into decline and eventually bottom out, sometimes for years, before demand grows again. It’s those investors who enter a market when prices are about to increase who make the most money.

On the other hand, the last buyers to enter a market before prices peak stand to lose, because they have purchased just before the declines set in.

So how do you know that the market where you intend to purchase an investment property has plenty of growth potential left in the tank? The answer to this is not measured by the length of time that price growth has been occurring, nor is it indicated by the amount of growth that has taken place. The answer is revealed by the types of buyers creating the demand.

Different types of buyers create different types of demand

Property buyers come in different groups, such as first home buyers, upgraders, downsizers and investors. Each of these has different motives and limits when it comes to buying property, so if we know which group is doing most of the buying, we can estimate when the growth is likely to end. And if we correctly forecast which group is likely to be next, we can buy just before the growth really kicks in.

Investors for example, are motivated only by profit. They enter markets when prices are rising and the more that prices rise, the more investors want to buy.

On the other hand, owner-occupiers are motivated by affordability. They enter markets when borrowing conditions are easy and finance costs are low. The more that prices rise, the fewer of them can afford to buy. Then, when the new affordability ceilings have been reached, owner-occupier demand slows and price growth stops.

In the current market, most buyer demand is being generated by owner-occupiers, not investors. Although that means there’s a limit to the growth that can occur, it also means that investors can take advantage by buying property in areas that have not yet experienced growth, but have the potential to.

Where to wait and where to jump in

As new affordability ceilings are reached, growth in first home buyer suburbs will slow down and then ripple to more affluent areas as upgraders take advantage of their increased equity and favourable borrowing conditions. This means that suburbs in well-established, desirable locations are highly likely to be next to rise in price as upgraders move and improve, indicated in these examples for Sydney and Melbourne.

Not only will many potential upgraders living in outer first home buyer suburbs move to better homes, but they will also relocate to more suitable suburbs. Investors who buy well-appointed, low maintenance properties in locations with excellent transport, recreational and retail services will be following Warren Buffet’s first rule – Never lose money, as they sit back and watch the price surge occur.

Posted on February 15, 2021February 15, 2021 by John Lindeman

Bubble, boom or bust – what lies ahead?

Bubble, boom or bust - what lies ahead?

Some experts are claiming that our property markets are heading for a boom, while others are warning that we could soon be in a price bubble about to bust. John Lindeman gives us his take on what lies ahead.

There’s a huge difference between property booms and price bubbles. Bubbles invariably bust and when they do, housing prices end up much lower than where they started. Property booms, on the other hand eventually run out of steam with an occasional small price correction followed by a prolonged period of little to no growth.

The issue is that they both look the same at the start, as this graph shows.

So what’s the difference between a boom and bubble? It’s the type of buyers causing the growth. Buying demand from investors grows when prices rise and the more that they increase, the more that investors want to buy properties. Owner-occupier booms take place despite price growth and the more that prices rise, the more that demand slows down and then stops as prices become unaffordable.

Only investor led booms can become bubbles

Investor led booms can become bubbles because investors don’t buy properties to live in, like owner-occupiers do. Profit is their only consideration, and fear of loss their only concern.

This means that when price growth slows down or stops, investors start to put their properties on the market and try to sell. When the number of properties for sale exceeds buyer demand, prices start to fall. Panic starts to set in as more and more investors try to sell and because no one wants to buy, the bubble busts.

Owner-occupier booms merely slow down and when they end prices don’t crash, because the purchased properties are now people’s homes. When buyer demand comes to an end, there’s no motivation to sell. Only those home owners who really need to move for personal, family or business reasons will do so.

Property booms can occur anytime and anywhere that the demand for housing outpaces the supply, but only investor led booms can turn into bubbles.

So what type of property boom are we in right now?

There’s a simple benchmark that tells us the type of boom taking place right now, and therefore what is likely to occur when the boom has ended.

The benchmark is called tenure, a technical term that refers to the conditions by which homes are held or occupied.

The pie chart shows the percentage of homes privately rented, those rented from government agencies and those which are owner-occupied.

You can see that just over one quarter of homes in Australia are rented from private investors, so if the percentage of homes being bought by investors is lower than this, then owner-occupiers are driving buyer demand, but if the percentage climbs higher, then we are heading for an investor led boom and a possible bubble that could bust.

This next graph shows the percentage of homes being purchased by investors and reveals that they have been lower than the 26% benchmark since 2019, and also that the percentage of investors buying homes is declining.

Investor interest in residential property has waned in recent years because rental demand is falling and the yield from rent is too low. Investor interest has turned instead to high yielding investments such as shares, commodities and even commercial property. Owner-occupiers are not deterred by low rental yields, because they buy properties to live in, not to rent out.

The current mix of low interest rates, easy finance, reduced repayment buffers plus government incentives and waivers is causing the current surge in owner-occupier demand and when the new affordability ceilings are reached, growth will slow down and then end, but it won’t bust like a bubble.

Posted on January 25, 2021January 25, 2021 by John Lindeman

The three little pigs

The story of the three little pigs and their experience with property provides investors with valuable insights into how property booms occur and why they end.

Each of the three little pigs chose a different strategy, one building a house from straw, another from sticks and the third from bricks, but in the end, only the brick house was able to withstand the big bad wolf’s huffing and puffing.

Their experience closely resembles the three types of housing market booms, which are those created by investors, opportunity led booms, or those driven by genuine demand for more housing.

Investor booms are like houses built of straw

Like houses built from straw, investor created booms grow quickly, because investors don’t live in the properties they buy or sell. Their only motive is profit, so price growth can be speedy and spectacular, but is also often speculative.

The boom continues as long as the number of investors wanting to buy is greater than those trying to sell.

When the number of investors deciding to take their profit and sell begins to outnumber those wanting to buy, the growth quickly ends. As disappointment turns to dismay the remaining owners may all try to sell at the same time and prices can often crash, just like houses made of straw.

Opportunity booms are like houses made from sticks

Opportunity led booms can occur whenever housing finance becomes cheaper or easier to obtain, giving potential buyers more borrowing capacity.

At such times, renters take the opportunity to buy their first home, and existing home owners decide to upgrade, with the rise in buyer demand causing prices to grow.

Such opportunity led booms continue until new affordability limits are reached and buyer demand slows down. But sometimes they can start to fall apart, like houses made from sticks. This occurs if unemployment grows, or interest rates rise because some recent buyers may decide to sell while others are forced to and prices come down again.

Population led booms are like houses built of bricks

The third type of property market boom occurs when the number of people wanting to live in a suburb or city suddenly rises and housing shortages occur. The cause could be high numbers of overseas or interstate migrants, or a local transport project such as a new or improved road or rail project which makes an area safer, quicker and easier to access and more attractive to live in.

This last type of property market boom takes time to build momentum, as migrants usually need to rent for several years before they can buy a home, while transport infrastructure projects also take years to finish. However, it is the only boom where demand is driven by something as solid as a brick house – more people.

What type of property market boom will occur next?

Population driven booms produce far more reliable results for investors than opportunity led or investor created booms, and there is every reason to believe that when our international borders are opened again, a population driven boom will start.

We will receive a huge influx of migrants seeking an escape from the pandemic ravaged cities of Europe, Asia, Africa and the Americas. To predict what this huge rise in population may do to our housing markets, we have only to look back to previous times after our international borders were reopened after years of closure.

This is not the first time our borders have been closed.

We have experienced international border closures before – during the First and Second World Wars, because overseas travel was dangerous and migration came to a standstill for several years. When our borders were thrown open in 1919 and again in 1946 we experienced our highest population growth ever, as thousands of immigrants and refugees fled war torn countries to make a new start in Australia.

As the graphs show, this huge rise in housing demand caused housing prices to boom in just a few years.

Housing prices doubled and even trebled in the years after our borders were opened, and the similarities to our current situation are striking. Our international borders are once again closed and huge numbers of potential immigrants are lining up, waiting to start a new life in a land that has weathered the COVID-19 storm much better than most.

How investors can secure the greatest benefits from the next boom

We can benefit from the forthcoming population driven boom by purchasing investment properties just before the borders reopen in areas where overseas arrivals are most likely to settle. These areas will experience high rental demand and as housing shortages develop and intensify, prices will rise as well.

In short, these areas will provide investors with the same security as the third little pig enjoyed when he built his house with solid and reliable bricks.

Sources:
Housing Australia, a Statistical Overview, ABS 1991, 1996, Australian Bureau of Statistics
Australian Demographic Statistics, 3101.0 Australian Bureau of Statistics.
Stapledon’s Index, Stapledon Nigel, Long Term Housing Prices in Australia

Posted on January 5, 2021January 5, 2021 by John Lindeman

How to avoid analysis paralysis

With so much data available to property market investors, it’s no wonder that the more we dive into the numbers, the greater our confusion can become. John Lindeman explains which stats can help you make informed decisions and which you can safely ignore.

We often see blogs, podcasts and free reports claiming to reveal the next hot spots or areas about to boom when all they do is offer a list of last year’s best performers.

Their authors assure you that suburbs with a long history of strong capital growth have the best potential because their consistent performance is likely to continue.

At the same time, others will tell you the exact opposite, insisting that buying in areas with long histories of little or no growth makes better sense, because they’re next in line and even overdue for good growth.

Past performance does not predict future performance

It’s no wonder that investors get confused, when past performance stats are used by experts to give you two totally different predictions. Not only do they contradict each other, but they also don’t make sense. Just because a suburb has experienced high past price growth, doesn’t mean it will keep going. In fact, it is very likely that prices will soon be, or have already been pushed up to the point where buyers must start looking elsewhere and the growth is about to end.

But, neither does this mean that those suburbs with long histories of below average growth are lining up in the boom queue. They may have massive stock overhangs, depressed local economies or falling populations with further price declines ahead.

The housing market puzzle has two pieces

Past performance doesn’t help us to make accurate predictions because the housing market is a puzzle which has two pieces – supply and demand. Looking at the past only reveals part of the picture, and we need to look forward as well.

Housing supply is all about properties. We measure supply in any area by the number of houses, units, townhouses, duplexes and apartments that are on the market from new property developments plus those listed for sale or available to rent compared to past sales and rentals.

Housing demand, on the other hand, is all about people. It’s the number of renters, first home buyers, upgraders or downsizers about to move into an area compared to the number of renters, first home buyers, upgraders or downsizers who are planning to move out. From this you can see while supply looks backwards, demand looks forwards.

By comparing the current supply of properties in any area to the expected demand for them, we can obtain a clear and complete picture of the state of the property market in that area. We can then make accurate forecasts about potential price and rent changes.

Analysts who only rely on past performance data such as sales and prices to predict the future are trying to solve the puzzle with only a small piece of the total picture and that’s why their forecasts so often turn out to be wrong.

Property market predictions you can trust

Leading property market expert, John Lindeman invented Australia’s only patented Housing Market Prediction Solution, which is a database that ensures investors can avoid the perils of analysis paralysis and make the best possible buy, hold or sell decisions.

This massive data storehouse gathers real time housing market performance data for properties in every suburb.

The patented Housing Market Prediction Solution merges this supply data with highly accurate demand algorithms estimating population growth and movement trends plus forecast buying or renting intentions down to suburb level.

The solution then produces highly accurate property market predictions to identify suburbs with the best growth and cash flow potential, which we reveal in our predictive reports and share with the students of our educational programs.

Past performance you can rely on

Since they were developed by John Lindeman the algorithms employed in the patented Housing Market Prediction Solution have produced a consistent past predictive accuracy rate of over ninety per cent in terms of forecasting both the direction and intensity of price and rent changes for houses and units in Australia’s 15,000 suburbs and towns.

Posted on December 11, 2020December 11, 2020 by John Lindeman

Which is best – to buy or rentvest?

Which is better - to buy or rentvest?

With the cost of housing finance at record lows, banks willing to lend and our governments providing incentives, it’s no wonder that first time buyers are rushing into the property market. But which is better – buying your own home or starting out with an investment property?

The main issue with buying your first home is that it often becomes a balancing act between where you can afford to buy and where you want to live. You may wish to buy a home in a familiar area close to schools and good transport services, or near a shopping centre and recreation facilities, only to find that homes where you want to live are priced out of your reach.

Your first home purchase is usually a compromise between where you want to live and what you can afford. This is why so many first home buyers sell after a few years and then move to a more suitable home in a better location as soon as their situation improves.

How to have the best of both worlds

You can easily resolve this dilemma by renting where you want to live and buying an investment property where the market offers high rental yields and high price growth potential.

This strategy is called rentvesting, and it’s becoming increasingly popular because it gives you the flexibility to live where you want for lifestyle, while it also puts you in a much better financial position than if you bought a home.

There are several reasons for this:

You can claim all the rates, insurance, maintenance, repairs and even interest repayments of an investment property against your other income.
You receive tax benefits, depreciation and of course, rental income.
The property should be cash flow positive, making you money from day one.
The price growth potential should be much higher than if you had bought a home.

Knowing where you want to live is a “heart” decision – it’s based purely on your personal preferences, but knowing where to buy an investment property is a “head” decision. You won’t be living in it, so your preference doesn’t matter.

What does matter is that rental demand for your investment is high now, and that buyer demand will be high when it’s time to sell. This will give you strong, regular cash flow from day one and high price growth over time.

In principle, the choice is clear. It’s much better to rent where you want to live, and buy where you want to invest.