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Why past performance is no guide to the future

Why past performance is no guide to the future

by John Lindeman

A racing horse’s “form”, or past performance is often used as a guide to predict its future performance. When it comes to the property market, many experts assure us that it’s the same. But if we actually look at how they use past performance to make their forecasts, we immediately come across a huge contradiction.

Only buy in areas that have stood the test of time

One group of experts claim that we should only buy properties in suburbs that have “stood the test of time”.

They say that their high performance in the past offers us not only the greatest level of security, but the best prospects of continued price growth into the future. This is based purely on the expectation that high past performance predicts future performance. 

Seems logical, except that there are many suburbs and towns where housing markets have boomed for years, only to crash without warning. In fact, every boom has ended at some time, even if prices haven’t crashed. The expectation that growth will continue in the future in some suburbs purely because it has in the past ignores the continual changes in population, purchasing power and affordability that occur in our all housing markets. High past performance is a good result for property owners in such areas, but is no guide to their future performance.    

Only buy in areas that are overdue for growth 

The other group of “past performance” experts use past performance in the opposite way. They rely on the absence of past performance to pinpoint areas that are “overdue for growth”. They identify suburbs, towns and even cities where prices have not risen for years and then claim that such markets are due for a catch up to those locations where high growth has occurred.

This ignores the fact that demand may have dropped in such areas, or that there have been huge housing developments causing oversupplies and that either or both situations keep prices subdued. We have seen such experts predicting the imminent boom of Brisbane’s housing market every year from 2013 onwards, based purely on the fact that growth hasn’t occurred.   

The issue for us is that while both experts use past performance to justify their predictions, one group looks for areas with high past performance to find potential boom markets, while the other searches for areas with little or no past performance to do exactly the same.

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How spruikers use stats that suit them

How spruikers misuse past performance stats

It’s human nature for us to exaggerate when talking up our achievements. We tend to embroider facts about our relationships, families, work and homes, placing them in the best possible light while we push any uncomfortable truths which don’t fit our picture of perfection into the background.

Sales people do exactly the same, but we often don’t realise what they are doing because we want to believe the best about something we are about to buy. This is why project marketers, sellers’ agents and property spruikers will dress up their potential property investments to look their absolute best and why they get away with it.

This suburb has enjoyed Impressive past performance

When talking up an area’s past price performance, they will look for the stats that suit and ignore those that don’t. As this table shows, a spruiker selling property in Moranbah would tell you that house prices there have boomed by nearly 20% in the last year, not that they are still nearly 40% lower than they were five years ago.

A sellers’ agent trying to push property in Springvale South, however would show you that house prices have shot up by 50% in the last five years and ignore the fact that they have fallen by over 10% in the last year.

The area’s population is about to increase dramatically

Another commonly misused stat is projected population growth, trotted out to show you that an area is about to experience a substantial rise in population and therefore in housing demand. The stats used may relate to an entire region, such as South-East Queensland, and may have no effect on demand in already established suburbs.

It is also critical that any population projection indicates what types of households will be arriving, the types of housing they will prefer and their expected length of stay.  For example, the predicted rise in population may be for retirees, which would have no effect on first home buyer locations, or construction workers whose need for housing will be short term rentals.

These stats can be twisted to tell almost any story and mislead prospective investors. Even more important is the fact that while more households create more demand for housing, this will only lead to price growth if the supply of new houses falls behind the demand for them.

This infrastructure project will cause a massive rise in housing demand

Perhaps the sneakiest claim of all is the use of “infrastructure” in the spruiker’s bag of tricks to predict a housing market boom for areas where they are selling property. The project could be a new hospital, university, shopping centre, railway line, highway, airport or mine, and is often used to support their claims that housing demand will shoot up as a result.

The facts are that most infrastructure projects do not increase housing demand at all – they create demand which is directly related to their purpose – hospitals for sick people, universities for students, shopping centres for shoppers. Even railway line expansions, highway duplications and new mines may employ fly-in-fly-out construction workers on family friendly rosters, which means that any rise in housing demand will be where the construction worker families live and nowhere near where the project is located. Even more importantly, many infrastructure projects are altered, cut back, delayed or even abandoned altogether before they even start.

Check everything that they say – and then look for what they left out

Always be wary of any stats boasting impressive past price performance results, high population growth projections or claims that a rise in housing demand will be driven by new infrastructure projects. One good method to evaluate any spruiker’s claims about a potential property investment area is to check the origins of their stats – is this information sourced from reliable, independent and recognised data providers? Then check what they have left out and why: 

  • Will new households really be moving into the area?
  • What types of housing  will they prefer?
  • Will the new housing developments in the area lead to an oversupply?

It’s only natural for project marketers to talk up the benefits of investing in their new property developments, so it’s essential that you do your due diligence in establishing the accuracy of their claims.

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Beware of the modern day property prophets

Beware of the modern day property prophets

Thousands of years ago, we relied on wise men called druids or shamans to interpret the meaning of signs and predict the future. For example, when our forebears saw a solar eclipse, they thought that the sun was being devoured by some huge invisible monster as they stared upwards in horror.

They were unable to comprehend why this was happening, but the wise men knew all about eclipses and could even predict when they would occur.

Rather than impart this reassuring knowledge to the people, they told them something quite different.

‘Yes,’ they said, “a huge heavenly monster is eating the sun and only we, your protectors can save you – but this will be for a price.’ When the people had paid up, the druids assured them that they were scaring the monster away, and that the sun would soon return to its former glory, which of course, it soon did.

We still rely on modern day druids and shamans

Home owners, investors and potential buyers all want to know what’s in store; whether to buy, where to buy, what to buy, whether to hold or sell, and because most of us don’t know how to interpret the meaning of all those figures, stats, indicators and dynamics out there, you may have to rely on modern day druids or shamans to do this for you.

Whether they’re called property theorists, strategists, advocates, agents, advisors, educators or mentors these days, most of them will still only reveal the future if you pay them, just like the shamans of old.  

This is where it really gets complicated, because each of your advisors or educators may give you a different spin, depending on their own perspective and even personal interest. Who should you listen to and who should you avoid?

One expert is urging you to invest in Brisbane, another says buy in Perth, still another warns you that Brisbane’s housing market is about to crash, yet another urges you that Darwin is about to go gang busters. Who is right?

How to check their motivation, credibility and past accuracy

Well, there’s an easy way to test them. The internet makes this easy. You can check the motivation of any so-called expert by checking their website – do they claim to have “acquisition experts” on their team, or do they have access to “unlisted” or “off market” properties?

This code language means that they are probably seller’s agents or project marketers who will be getting paid a commission, finder’s fee or kick back for pushing a property on to you. In other words, the property you purchase will certainly be in their best interests, but may not be in yours. 

You can also check to see what others are saying about these experts. Google the person’s name, together with words such as “housing market” or “property expert” and see what pops up. You might be surprised!

You can also easily test their past accuracy. Using Google, go back in time and compare what they said some years ago about the property market to what actually happened.

Of course, not everyone can be right all the time, but at least by testing the accuracy of the those who claim to be experts, you’ll be better informed than our forebears were when they thought that the sun was being eaten.

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Tips and traps of buying overseas

Tips and traps of buying overseas

At some stage in our lives, many of us dream of owning a cottage in the south of France or a hacienda on the Spanish Riviera, maybe even a log cabin up in the Swiss mountains. Others may be tempted to buy an overseas investment property, particularly when our own housing market is stagnant and there’s no growth potential.

Buy a property in Spain and receive an honorary residency permit

Some countries enthusiastically welcome overseas property buyers, with Spain and Portugal even offering residency permit enticements to foreigners who buy a property worth over €500,000.

This is because housing demand in many European and Asian countries is flat as their populations decline. Not only are fewer babies being born, young people are emigrating.

While the demand for aged care accommodation is growing, the declining populations in many countries is creating a growing surplus of family homes. Hence the Spanish government offers incentives for families to move there and buy a home.

You can’t buy a property in Switzerland unless you are a resident

The opposite applies in Switzerland, where the government is charged with discouraging foreign immigration and restricts property ownership to those people who already have residency permits. But before you jump into foreign home ownership, it is also important for you to know the tax and legal systems that apply, as they could be very different from ours.

Beware of wealth, property, value added and inheritance taxes

For example, if you rent out the property during your absence, both the local country and Australia may tax your income from rent, unless Australia has an arrangement with the other country which takes the tax you have paid overseas on rental income into account. 

Most countries have a capital gains tax, plus an ongoing property tax similar to our state-based land taxes, but some also have property related taxes that do not exist in Australia.

These include value added tax, which is applied to improvements made by the owner, wealth tax applied to properties worth more than certain amounts and inheritance tax which kicks in when the property passes to beneficiaries.

In some countries, inheritance tax is low or non-existent when properties are left to spouses or children, but become onerous when estates are left to others, or if immediate family are bypassed in a will.

And on the subject of inheritance, it is worth noting that some countries oblige you to leave your property to your next of kin in accordance with the established practice of the country.

This means that your lover or mistress, if you have one in France, is entitled to a share of your French estate when you pass away. Could be quite a shock to the family back home!

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A Chinese ghost city

A Chinese ghost city

We tend to think of ghost towns as places where all the residents have long since packed up and gone, but in China some huge cities have recently been completed – built entirely on the opposite premise, that people will arrive.

One such new ghost city is Kangbashi, located on the barren steppes of Inner Mongolia, the home of summer sandstorms and freezing winters.

While it may be fairly typical of modern cities in most respects, Kangbashi stands out because of its remote location, its huge size, its impressive monumental architecture – and an almost total lack of residents.

A city built for over one million residents remains largely empty

Kangbashi was intended to house over a million residents and the city was virtually completed by 2009. Every possible need of the future residents was catered for, with sporting centres and stadiums, cultural galleries and museums, showcase architecture, monumental gardens and massive shopping centres.

The only thing missing was residents, as only a few thousand moved in when the building work was completed. The few westerners stumbling across Kangbashi at that time could not make any sense of what they saw – a huge city without people; it was a ghost city. 

Why was such a huge empty city built?

This prompted questions about the purpose of Kangbashi. Some cynics say that the city’s remote location indicate that it was designed to house people displaced from other parts of China in the event of a nuclear war, or other major catastrophe. It was designed to be a sort of refuge of last resort. However, given the scale of the city’s monumental artworks, impressive architecture and attempts to encourage tourism, this seems extremely unlikely.

Others claim that the city was built to help diversify the economy of the area, to encourage the impoverished rural communities in the region to relocate to Kangbashi, assisted by generous compensation packages. If this is true, then the city’s isolated location and harsh climate would not matter to people already used to such conditions.

Property investing is a form of life insurance to some

Another cause of the lack of residents is that many Chinese see property investment as a form of insurance, and buy new apartments not to rent out, but to keep brand new and unoccupied, as security for the future, like someone might hoard gold under the bed. Therefore, while many apartments in Kangbashi were purchased by Chinese investors, only a few have been bought for their owners to occupy.

Maybe the city just needs time. The population keeps growing steadily with nearly 200,000 residents at last count and nearly 5,000 local businesses operating successfully. Tourism is also growing steadily, and likely to rise even more as the city slowly springs to life.

If we build it, will they come?

The concept of a whole city being built on the premise that residents will follow is something we are not comfortable with in the west. The proof, if we need any, lies in the massively overdeveloped high rise, high density unit blocks in our inner urban areas whose owners are suffering from high vacancy rates and falling prices.

The issue is that these have been built by developers on the basis that past buyer demand reflects future buyer demand. Rental demand is not the concern of a developer, although it soon becomes one for the investor who buys a property.

In centrally managed and controlled countries such as China, prebuilding a whole city is quite feasible and residents can be created by encouraging or even forcing people to relocate.

It remains to be seen whether the vision will be realised and Kangbashi becomes a model for other such bold enterprises, but at this stage the ghost city is definitely slowly coming to life.

 

Acknowledgement: Image by Popolon – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=44947017

 

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Why our governments are building useful things

Why our governments are building useful things

In its July Statement, the RBA has stated why it has cut the official cash rate twice in just two months: “Easing of monetary policy will support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.’

If you turn this “bank speak” into plain English, it means that the RBA thinks that unless we spend more, we are in for rising unemployment and may well slide into recession.

One of the main reasons for this unhappy situation is that, according to the latest HILDA survey, average Australian incomes have not risen in real terms (after being adjusted for inflation) since 2009. And so, the RBA is doing all it can to increase the amount of spending money we get each week. 

The value of safe haven assets keeps rising

We are not responding to this stimulus by buying more, so the Federal Government has chimed in with tax cut incentives, including a big once off income tax refund. But rather than planning huge spending sprees, most consumers are apprehensive.

They sense that the economic mood is changing and rather than spending more, they are spending even less, putting their spare cash into safe havens such as bank shares and gold (the graph shows the rise gold’s spot price in US$ since August 2018.)

The RBA can do little to prevent this decline in spending and in its July statement urged our governments to spend more money by building useful things to stimulate jobs and growth.

Build freeways, railways, tunnels and airports

The government knows that spending more, while foregoing revenue with its cut cuts will delay the long-awaited return to a balanced budget, but the alternative is far worse – being the first government to lead us into recession in thirty years.

That’s why the Federal Government, in concert with most State Governments are committed to an infrastructure-based approach to economic growth, building freeways, railways, tunnels and airports, all of which will help to reduce unemployment and put pressure on real wages to rise at last.

Real income growth will increase both housing affordability and buyer incentives, something which our exhausted housing markets are desperately calling for, but it’s going to be a very slow process. Investors would be wise not to seize on any slight rise in housing prices over the next few months as proof of a recovery, especially as potential sellers are likely to flood markets hoping to get higher prices, only to find their hopes dashed as buyer demand remains sluggish.

The “two-tiered housing market will soon return

This is why we are likely to see a “two-tiered” housing market dynamic occur once again over the next few years. The losers will be those capital city housing markets which experienced the highest price growth in recent years and also have large supply overhangs. The winners will be those areas which are likely to benefit from current or fully funded government infrastructure projects creating more housing demand. This is where rents and prices could rise dramatically.

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The armchair dream of set and forget property investing

The armchair dream of set and forget property investing

With housing prices continuing to slide in most major capital cities, many investors feel exposed and threatened, because they have gone heavily into debt to purchase their properties.

This is when we get reassurance from some armchair experts who insist that the property market is merely subdued, that it’s marking time and growth will return soon. To support such “set and forget” buy and hold strategies, these theorists point to the long-term performance of property and state that growth is about to return, because it always has in the past. But how has the market really performed in the past? And what does this actually tell us about the future?

The theorists show us graphs such as the one below, proving that regular and consistent price growth exponentially increases your equity over time.  

They then assure as that this is how the Australian housing market works, with prices doubling every eight to ten years. Because the market has behaved this way for so long, they argue it will continue to do

But has the market actually performed so reliably in the past? The graph below shows the rate of price growth that has taken place in every capital city other than Sydney and Melbourne over the last fifteen years, according to ABS published data.

Quite clearly, the buy and hold reality is nothing like the buy and hold dream at all.

The differences between the dream and reality are more extreme when we compare the performance of different suburbs to each other, even in the same city, and different types of property in the same suburb.

“Buy and hold” can certainly be a workable investment strategy if you purchase the right type of property in the right area, at the right time and pay the right price, but the evidence shows that jumping in and buying anything, anywhere on the assumption that all housing markets and all types of properties will perform the same over time is totally flawed. Investors who follow such an armchair investing strategy are likely to find that their dream soon becomes a nightmare.

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The truth about good yield and bad yield

The truth about good yield and bad yield

Good_yield_bad_yield

Given the current lack of growth in our property markets, many experts, educators and advisers are pushing cash flow as a good investment option. The trouble is that most of the suburbs and towns they put forward are selected purely because of their high rental yields – but there’s good yield, and then there’s bad yield.

Bad yield is not going to deliver you positive cash flow, because rental yield is a function of both prices and rents. Rental yields can rise if prices have fallen, even if rents haven’t risen, or if rents have not fallen as much as prices. This is bad yield, and some of the highest rental yielding suburbs put forward in various glossy promotions are in locations where housing prices have crashed in the last five or so years.

These “high yield” lists feature towns such as Broken Hill in New South Wales, Blackwater, Collinsville and Dysart in Queensland, Newman and South Hedland in Western Australia and Rosebery, Zeehan and Queenstown in Tasmania. Investors seeking positive cash flow might be tempted to buy in these towns because they have high rental yields and extremely low house prices. If you are amongst them, remember that the high yield in these markets has nothing to do with rental demand and everything to do with falling prices.

Good yield is driven by rent demand not by price falls, so if you seek positive cash flow from your properties, look for high rental yielding areas with high rental demand, such as tourist destinations, infrastructure construction zones and locations favoured by overseas arrivals.

All of these households create genuine rent demand. Some of the highest good yields can be found in coastal suburbs where prices have risen in recent years, but these are seasonal holiday locations, and the high yield is only obtained during the peak summer season. Watch out for such seasonal variation traps.

Permanent and semi-permanent rental areas such as ex-Housing Commission estates or the older affordable outer suburbs of our major cities provide consistently high yields with solid rental demand. These areas might seem unattractive to some, but they have strong rental appeal to others.

Remember, that although some of these locations may not appeal to you, what matters is that they do appeal to someone else. For example, Risdon Vale is an outer suburb of Hobart with a constantly high good rental yield and it’s also where Tasmania’s maximum security male prison is located.

The secret to Risdon Vale’s high rental yield is the demand for rental accommodation there, coming from the girlfriends, partners and wives of the prison inmates. They want to live in Risdon Vale so that they can more easily make conjugal and family visits to the prison. You might not wish to live near a maximum security male prison, but the secret to Risdon Vale’s high rental yield is that many others do.

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Top tips for obtaining housing finance

Top Tips for obtaining housing finance

Newcastle mortgage broker, David Hoar shares his passion for property by giving us his top tips for obtaining housing finance

The best strategy for getting into the market now depends upon your particular circumstances, and your ultimate objective(s), but remember that in December 2018 around 40% of all home loan applications were rejected – so before you get too excited talk to your broker or bank about getting pre-approved to save yourself unnecessary cost, time and stress.

Leveraging equity

If you’ve been fortunate enough to own property that has gone up in value over the last 5 or so year’s then you can look at using equity in your current property to buy another one.   In this situation the bank re-values your property, to identify the equity you have available, and will generally allow you to borrow up to 80% of your current properties value.

Most lenders will structure the deal as follows:

  • 20% of the new property value plus costs (stamp duty, pest and build, conveyancing etc) secured against your current property
  • 80% of the new property value secured against your new property

By doing it this way you avoid Lenders Mortgage Insurance (LMI), which is normally charged by lenders if your loan on the new property is more than 80% of its value.

Buying on low or no deposit

There are some lenders that will allow you to borrow up to 95% (including LMI) to buy an investment property, however this can be expensive as LMI ramps up quite considerably when your loan/value ratio is over 90%.

If your parents or siblings own a property, then some lenders will allow you to use equity from their property to help support your purchase and avoid LMI.

Like where you live but can’t afford to buy there?

Then rentvesting might be a good strategy for you.  In this case you continue to rent and then buy an investment property somewhere else.

Many people choose to do this – as they enjoy the lifestyle or proximity to work and social and entertainment options of where they live – but can’t afford to buy there. 

So rather than miss good buying opportunities an investment is purchased in another location. Remember, that you don’t have to like where you buy an investment property, you just need a good supply of tenants that do!

About David Hoar

David Hoar of Home Loans Newcastle is a finance lending expert with clients from Brisbane to Hobart. David is a qualified Accountant, has a Graduate Diploma in Taxation, a Graduate Diploma in Marketing and Management, and a Certificate IV in Mortgage Broking – and he is passionate about ensuring property buyers have access to expert information and help.

For more information, visit: https://www.homeloansnewcastle.com.au/

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Top Tips for dealing with Real Estate Agents

Top tips for dealing with Real Estate Agents

Melbourne real estate agent, Bryce Houston shares his passion for property by giving us his top tips for dealing with real estate agents

Become a local expert

Try to inspect at least twenty properties of the type that meet your criteria in the town or locality you are looking at before making any purchase decision.

Don’t rush things

Make the effort to visit the area a few times. During the week, at weekends, in the day and during evenings. Talk to the locals to get a feel for the area and what it has to offer – and what it doesn’t.

Check recent sales

Look at the property sales (sold results) on realestate.com.au or domain for the last six to twelve months to ascertain the actual market value of sales. Don’t go only by the listed asking sale price – study what has sold and for how much.

Know your buy price limit and preferred type of property

Know how much you can borrow and the type of property you want before talking to agents. Then tell them that you are pre-approved and what you are looking for. This will make you a serious buyer in their eyes and they’ll try hard to find you a suitable property. Call them once a week to see if anything has turned up.

Set up alerts

Set watch alerts on your favourite real state app like realestate.com.au or domain to alert you of any new listings so you can get into action as soon as they come online.

Check the days on market

Ask the agent how many days on the market a property has been on for or simply search realestate.com.au from newest to oldest as this will show you the oldest. Older listed properties are often more negotiable and agents will be keen to sell.

Don’t be reluctant to make an offer

Real estate agents and Vendors love to get offers especially if the property has been on the market for a while. Even if it’s a low offer, it could be the one the vendor accepts.

Keep in front of the agent’s mind

Agents may not chase you, especially in hot markets, and good deals go quickly in any market. Let them know you are a serious buyer and stay in touch. You may be offered a property off-market, which can save the vendor thousands of dollars in advertising and staging costs, save the agent’s time and reduce your purchase price.

About Bryce Houston

Bryce has bought, subdivided, renovated and sold properties from Frankston to Byron Bay. He combined his thirty years of sales experience with his passion for property by becoming a real estate agent in 2016, and now gets to share his passion for property with other sellers and buyers.

For more information about Bryce: https://carrumdowns.harcourts.com.au/Profile/Bryce-Houston