MYTH 1: Property Investment is a shortcut to make millions instantly

Property investment is not a get-rich-quick Ponzi scheme, no matter how many people tell stories to the contrary.  While your friend’s second cousin’s boss might have indeed become a millionaire buying and quickly reselling properties , it was likely due to a combination of several factors including the buyer’s experience and knowledge, his or her ability to take risks, market conditions, timing, the state of the properties and luck.

You must remember that there are many people who have also lost millions in such transactions. We are not saying this to discourage you from investing in property, but to emphasize the difference between speculative property investment and regular, strategic property investment. 

Speculative property investors are those who buy undervalued properties with the sole intention of selling them quickly. Generally, they buy properties in emerging markets and offload them as soon as prices increase. They might renovate or improve the property to inflate its value before they make the sale. This type of investment requires immediate access to a large amount of capital and an ability to make extremely quick decisions. It also takes a lot of experience and specialized knowledge of the market to make good speculations. Though lucrative, this is a high-risk venture and not suited for people who are looking for conventional investments. There are no substantial gains from rental income in the short term and if your market predictions go wrong, you are likely to lose a lot of money. So in short, unless you have the time, skills, a large amount of operating capital and an appetite for huge risks, this type of investment is not for you.

Regular property investment, on the other hand, is based on a long-term growth strategy of maximizing capital gains and rental income while minimizing the risks due to market fluctuations. Over a period of time, the capital gains and rental incomes from existing properties can also be used wisely to finance additional properties, allowing the investor to build a property portfolio. Since this type of property investment focusses on long term growth, it is unlikely to be affected by short-term market downturns and hence the risk for investors is low. It also doesn’t need a huge capital injection or ready access to funds, making it easier for the “average” investor to enter the market. 

In a nutshell, while there might be a lucky few who made their millions very quickly buying and selling properties, they are the exception and not the norm. For the average investor, indulging in such speculative investments can be extremely risky. Instead, it is much better to focus on making slow and steady gains over a period of time using a responsible property investment strategy.

MYTH 2: Property Investment is a sure shot way to lose all your money

While you would be wise not to get carried away by the hype surrounding the money-spinning ability of property markets, you would also be well advised to be skeptical of doomsday prophecies predicting imminent property market crashes. Most of these have little substance and experts have time and again pointed out that property markets in Australia are in no immediate danger.

Yet, every day we hear loud, emphatic and panic-inducing opinions proclaiming that the price of properties in Australia is too high, the prices are unaffordable compared to the average salaries, it is all a “bubble”, the market is headed for a “correction” and a “bloodbath” is on its way. Do a quick search for “Australian property market is” on google, and it comes up with several “helpful” auto-complete suggestions including “is the Australian property market about to crash”, “is the Australian property market overvalued” and “is the Australian property market in a bubble”. No wonder the average investor is worried.

We cannot deny that property prices in some of the markets in Australia are indeed extremely high. According to the 12th Annual Demographia International Housing Affordability Survey , Sydney and Melbourne rank among the top ten “least affordable” cities in the world in terms of buying a home. We also acknowledge that it can be challenging for the ordinary investor in Australia to enter the property market.  These factors alone, however, are neither indicators of the sustainability of a market nor the imminency of its crash. In reality, a housing market crash typically happens due to an unlucky and extremely rare combination of several macroeconomic factors. Some of these factors include:

A severe slump in economy: While property markets are quite resilient in the long term, they do get affected by the overall economy. If there are consequent quarters of negative economic growth or in other words, “a recession”, property markets are bound to get negatively influenced.

Increased interest rates: Increased rates of interests can lead to a spike in the cost of mortgages. This in turn leads to an increase in the number of unsold and defaulted properties in the market. This may result in a reduction in property prices and an excess of supply compared to demand for houses.

Increased unemployment: Since most people who buy property dependent on their jobs to make mortgage payments, unemployment can upset the property market and lead to lower property prices.

Excessive supply: Oversupply of properties in the market will lead to a decrease in prices as vendors are forced to reduce prices to stay ahead of competition. This can happen when there are more houses than people who want to reside in them in a particular area owing to a decline in population, infrastructure changes that affect an area negatively or movement of temporary workers to their base locations.

While some of the above factors may be true to some extent for some of the property markets in Australia, they are in no way representative of the nation’s economy as a whole. To begin with, the economic fundamentals of Australia are extremely strong and backed by a well-regulated banking sector. As a matter of fact, Australia was one of the few countries that largely escaped the repercussions of the Global Financial Crisis even while most other Western countries went into recession because of it. Additionally, home loan interest rates in Australia are historically low, and while they are unlikely to fall further in the near future, they are nowhere near enough to cause borrowers to default. Employment as well as income rates in Australia are among the highest in the world. While a certain amount of the population does remain unemployed, the number is negligible and hardly a cause for any immediate alarm.

According to Reserve Bank of Australia’s data released in December 2015, half of Australian home owners are actually more than a year ahead in terms of paying off their home loans, which essentially means that 50% of borrowers could skip their loan payments for an entire year and still be ahead of the required balance. Above all, the demand for housing continues to increase steadily in most Australian cities given the steady growth in population driven by immigration, shortage of properties in several areas and the desire among youth to own their own homes . So overall, the macroeconomic conditions in Australia as a whole are far above the danger line for them to influence the property markets negatively or cause a catastrophic crash.

If you are still not convinced, consider this: In early 2012, there were several reports predicting a 60% fall in property prices in Australia in 2013. But what actually happened was that many individual property markets in Australia saw a strong recovery in 2013, and the year ended with an overall growth rate of 9.8% in the property sector. The trend has since continued, with house prices defying all warnings, and increasing by the year. The Australian Bureau of Statistics (ABS) reported that house prices increased by around 11.4% in eight major Australian cities in 2015.

Despite the overall positive picture, we must warn you against making generalized assumptions about individual property markets. While the overall picture of the Australian economy does not point towards any cause for great concern, there may be specific areas that are not following the general trends.  This is because the property prices typically depend not only on the macroeconomic factors as a whole but also on the merits and constraints of individual areas. So if you are planning to invest in a certain area, it makes sense to research the overall economy as well as the specific market that you are planning to invest in before you commit yourself. That said, common sense, historical data and an understanding of economic principles suggests that most of the property markets in Australia are not at any significant risks or danger of imminent crash than property markets elsewhere, and may in fact be in a better position compared to many other markets.

 

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