There is one topic that is guaranteed to generate sensational headlines: real estate! One day we are told that real estate is booming, the next day people like Steve Keen and Harry Dent are predicting falls of up to 40 per cent. When a boom is on we are even subjected to articles telling us how much our home is increasing each day, often accompanied by comments that it’s a tax-free gain and worth more than we are earning.
Of course, it’s all nonsense – capital gain is not something that is happening, it is something that has happened. And the sad reality is that a big capital gain last year is a red flag that next year may be very different. The principal is called regression to the mean.
The problem is that most media commentary focuses on that elusive animal they call the “property market”. We might be told that Australian property is overheated, or that the property market has fallen by 5.6 per cent in the last year (in Sydney), or that Perth values have fallen by 12.6 per cent after peaking in 2014.
But the fact is there is no such a thing as a single property market – not for Australia, not even for a single capital city – there are myriad property markets all doing their own thing. How can you compare a townhouse in Cairns with a mansion in Point Piper? All over Australia some markets may be rising, other markets may be falling, and some may be flat.
Also, real estate figures are notoriously unreliable because they take no account of improvements by owners, although these can be significant.
Headlines about booms can lure inexperienced buyers into traps, and doom and gloom scenarios can scare people from making a good decision to buy. So, if you are serious about investing in property, stop reading the headlines and set yourself a specific plan. The first task is to find out exactly what you could afford, which means talking to a lender or mortgage broker, and laying all your cards on the table.
Then, having worked out your price bracket, you need to research areas where you can buy a property you like for the price you’re able to pay. Once you have established that you are in the running, take the time to research the market thoroughly so that you become an expert on the area. You do this by going to open houses, befriending local real estate agents, and reading everything you can about your preferred location. Then when you come across a genuine bargain you will know that you have struck a winner.
Always keep in mind that the secret of success in real estate is to buy well, and then add value. Buying well often means that the vendor has a strong need to sell. This could be for a variety of reasons, such as an interstate transfer, financial strife, marital break-up or simply because they have contracted for another home. This is why it is vital to find out the seller’s motivation before you think about how much to offer.
The best way to add value is by refurbishment, which is often referred to as buying the worst house in the best street. It’s almost impossible to do this with a unit. But remember that you can achieve a free value add by simply picking an area with strong growth potential. This should generate strong demand, which should push up the price of the property you bought.
I am not at all troubled by the usual negative comments about property that are circulating at the moment. Australia’s population is on track to reach 40 million within 35 years – this has to be positive for anybody who buys well-located, quality real estate today and hangs on to it for the long term.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. firstname.lastname@example.org.
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Occasionally I come across an interesting article to do with Home Loans. I thought I'd share some of these with you here.