Astute property investors are not creatures of habit and will buy to maximise their returns
Eight years ago, if we lived in Brisbane, were tempted to buy an investment property, and were a creature of habit, the chances are that the property we purchased also would have been in Brisbane.
The typical Brisbane house in 2003 cost $226,000 and would today be worth around $425,000. That’s pretty good growth on our capital, even with three years of this eight-year period being the GFC-gloom times!
If we lived in Perth and were that same creature of habit our investment capital would have performed slightly better ($202,000 to $469,000). In Sydney, where affordability constraints have acted as a deterrent for people buying homes, the typical house increased in value from $500,000 to $641,000.
What if we were that same person looking to invest in property eight years ago only this time we were not a creature of habit? What if we understood that property investment was not an act of “buying” but an act of reading the science of property markets and making the most money we could within a level of risk which we were comfortable with?
If we were this person, our research back then might have taught us that there was going to be an enormous demand for housing in West Australia’s Pilbara region, a demand that could not be matched by supply. We might have purchased a home in Karratha, where thousands of new jobs would be created to support a relatively new industry called liquefied natural gas. Or we might have purchased a similar home in Port Hedland, where new infrastructure would be built to support the most lucrative reserves of iron ore in the world.
If we purchased that home in Karratha or Port Hedland we would have paid $185,000 and $210,000 respectively – a similar price to what we could have paid for a home in most of the capital cities. The same home today would be worth an incredible $755,000 in Karratha and $1.1 million in Port Hedland.
With a current population of 19,000 in Karratha and 15,000 in Port Hedland, housing is now so expensive that many people elect to rent instead of buy. If you are one of those landlords you would today be receiving rent of $1,500 per week in Karratha or $2,650 per week in Port Hedland.
Of course, the key words used throughout this story are “if” and “might”.
The reality is that, of all of those Australians who could afford to invest only a small percentage of them actually do it. They either don’t understand how acute the consequences will be later in life or they allow the rat-race of life to take precedence over their own finances. Many others can afford to invest although they’ve never sought out a skilled advisor to assist them to (safely) maximise their investment returns – they are the creatures of habit.
The moral of this story is not to encourage property investors to buy property in Karratha or Port Hedland today. While rental yields there continue to be among the best in the country our research suggests that housing supply will catch up soon so rates of growth will normalise – and might even go backwards. In addition, home prices are such there now that we wouldn’t consider it wise to tie up so much capital in a single property.
Moreover, the moral of this story lies in the importance of investing as soon as you can afford to. And don't be a creature of habit! An astute share investor acknowledges that the share market will always contain a plethora of opportunities. Similarly, an astute property investor will look at the credentials of property markets across the country and not restrict their search to a handful of suburbs in their home town.
While Karrathas and Port Hedlands don’t pop up for property investors very often there will always been several locations throughout the country that have exceptional investment credentials; you are not going to find them being a creature of habit!
Simon Pressley is managing director of Propertyology, a full-time property market analyst, accredited property investment adviser, and 2012 REIA / REIQ Buyers' Agent of the Year.
The Mark at Sydney's Central Park
Now, all signs point south for this market. A year ago vacancies were near zero but today they’re approaching 5%. Price growth has stopped and, according to Australian Property Monitors’ price graph, has started to dip below the red line.
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