Tips to minimising your risk in a turbulent market

By Catherine Cashmore

Tuesday, 09 August 2011

The financial fallout in America is not going to do anything positive for investor confidence, however the agents this weekend were taking full advantage of the news to spruik the safety of investing in “bricks and mortar”.   Without exception, in each auction preamble, there were comments to the effect that “the share market is crashing, and therefore there’s no better time to turn to real estate”.

Of course it’s in the best interests of real estate agents to spruik this message – but then, why not? Amidst all the conflicting headlines, the property market is happily singing its own tune. The clearance rate has been firmly in the 50s (the new “norm”) for some months now. We’ve had a flat market all year with minimal movement – interest rates are on hold, our economy looks secure – and if anyone was perturbed following the downgrade of America’s AAA rating, it wasn’t evident in property land this weekend. Numbers walking through opens and standing outside auctions gave the impression we’re in anything but doom and gloom. Of course, the crux is when will the window shoppers turn into buyers?

While investors have flexibility to step in and out of the market as confidence dictates, there are increasing numbers of homes buyers who – having sold earlier this year during which stock levels were at a peak – are now looking to purchase. Data released this week shows evidence of this, with a marked increase in approvals for owner occupiers (and slightly less so for investors). Rate City reports the biggest increase in June, rising by 0.93 % or $9.60 billion since May.

However, the physical evidence is also clear – during the torrential rain at Saturday’s auctions in Melbourne, there were large crowds of brolly-less buyers (not neighbours) standing outside home sales monitoring results –and getting very wet in the process! It’s inevitable those with pre-approvals will take action sooner or later, and when they do this will result in upward pressure over some sectors of our market.

The amount of stock on market is another contentious issue. Good properties with motivated vendors priced to sell in the current market are not in abundance, however agents are reporting large numbers of off-market – (and on-market) – stock where vendor expectation is set firmly at prices that far exceed even the best times of 2010. These are the discretionary vendors who don’t need to sell, however, they will do so only if a buyer can be found who’ll pay their “wish” price! This is dictating where our market stands at the moment – it’s not going down – but neither is it going up at any great pace.

How much prices move over the remainder of the year is debateable and will no doubt be moderated by affordability. However while we still have a supply/demand imbalance of both useable and available housing along with increasing GDP, labour shortages, a strong mining sector, low unemployment and an economy that is faring better than most other developing countries, we will continue to suffer the inflationary consequences.

There may be a good proportion of our population who are financially feeling the strain, and this has certainly been evident in some sectors of the housing market. However an equally large proportion of our population is reaping the rewards of investment in a booming economy. As the old saying goes: the rich get richer while the poor get poorer.

Of course, not a week goes by without numerous reports hitting the headlines suggesting we’re heading for a housing market crash. Despite plain facts, a minority always seem to find a public platform to beat the drum of impending disaster. It seems pointless to reiterate the arguments for and against; they have been repeated many times from all corners of the spectrum, and like politics - sides have already been staked out.

The truth is no market or investment is risk-free and ultimately the future prospect of any one market is largely out of our control. As individuals we have little say over the weightier matters dictating the economy, but we do have the ability to minimise risk through a carefully strategised plan before making any financial decisions. Short of putting money under the mattress or taking an oath to live the remainder of our lives on the rental ladder for fear of the next looming financial disaster, risk minimisation is something we can control when deciding to purchase property. With this in mind, it’s important buyers take care to buffer any rollercoaster effects by minimising their risk profile and employing strong negotiation skills whilst purchasing well within their borrowing capacity.

It’s just as possible to lose money through unwise investment in the real estate market as it is with any other financial acquisition. However the difference with property is it’s essential to our daily needs. Next in line to air, food, and water comes shelter. Unlike America and the UK, most people in Australia live in capital city locations – in Melbourne alone we have between 1500 - 1800 people entering the city each week. For each person that enters the country our total GDP increases – as our population grows, so does our GDP. The majority of immigrants actually bring wealth and income into the country – they are not all coming in poverty stricken on boats even if it is the popular perception.

All of these people (including our growing generic population) need a place to call home. Whether they purchase or rent is immaterial, because we have a shortage of quality residential real estate, in the places where they need and ‘want’ to live (the city!). With increasing demand it’s inevitable – over a period of time - property prices will increase, and with this in mind, it seems fair to suggest the ‘right’ property presents a relatively low risk investment.

So what are the boxes you need to tick to minimise risk? Well if before you step in; get some good independent advice,

•  Don’t exceed the budget.

• Buy in an established residential location close to transport, shops, and jobs.

• Buy a property that accommodates essential living needs with good space, light, secure off street parking, and at least the potential for quality of ‘lifestyle’.

• And finally, buy a property that has long term ‘owner occupier’ appeal. Remember - it’s home buyers that essentially fuel the market, so to ensure the house or apartment will rent and hold value during any potential market downturn, purchase a ‘home’ – not just roof space!

Catherine Cashmore