Look beyond the headlines to invest wisely in property

By Catherine Cashmore

Tuesday, 07 February 2012

It seems that just a couple of months ago we were reading headlines outlining the possibilities of a US-style crash in Australian real estate.  It was the most common question I got asked throughout the course of last year – “should I wait to buy – is the market going to drop further?” I never have to field such questions during the boom phase of a property cycle.  During these periods, despite cautioning the opposite, buyers are too busy following the herd mentality to take a step back and read the signs.  Now, less than two months after the barrage of media gloom, we’re under a new influx of subtle conditioning with headlines such as ‘Don’t bet on a property crash’ , ‘Property crash just a myth’ and ‘Sydney streaks ahead of national market’ working their magic.

It’s totally understandable why moguls such as Gina Rinehart would see investment in Fairfax – even at a marginal level – as a valuable and strategic move. It doesn’t take Einstein’s mentality to work out we’re all – to some extent – puppets of the media.  As the author Nicholas Johnson once said about television (and equally relevant to other forms of publishing), “All television is educational television.  The question is:  what is it teaching?”  It’s a loaded query and one of which we should take note, because for most people, the only education they get on market movements is via mainstream broadcasts.  Furthermore, the stories are staged involve us emotionally, using personal examples and photos to illustrate the bias of the editor’s slant – stories that affect us on a very human level.

I have contact with a wide range of people involved in the real estate industry and often get asked to provide case studies for media stories.  Throughout 2011 the requests were for individuals undergoing rental stress or those experiencing negative equity.  So far this year, the demands have been specifically for those who have made considerable money from property investment – usually over a short period of time. I guess “normal” stories of success through long-term investment simply don’t sell in profitable numbers to warrant report.  It will be interesting to see how the year progresses in this regard, and I’m sure many investors will be left with little concept of who or what to believe.

Even more confusing – the stats used in each feature are based on methods that differ considerably depending on the index provider used.  Due to space requirements, these methods generally remain unexplained in the main body of text. As an example, the REIA uses the simplest method of correlation – picking out the middle number of all recorded sales results published on a quarterly basis.  Under this system, unit sales include townhouses, apartments, villa units, and so forth – with no specification of the differences between each property type. Any in-depth analysis of our market should not be based on this information alone considering how broad-based the results are.  For example, variability of sales volumes and the physical nature of stock available are two of many components that can skew the data.

Others attempt to employ more accurate assessments by breaking results down to reflect individual property attributes (two-bedroom, three-bedroom and so forth.)  This system is known as a “hedonic index”, and RPdata-Rismark is at the forefront of the research.  Then there’s the “repeat sale” methodology, which limits samples to properties previously sold.

Others only use detached dwellings thereby ignoring anything “attached”, and the preliminary “real-time data” each provider releases is only as good as the number and accuracy of results recorded from individual sales agents.  More confusing still, certain index providers assess capital city medians based on grouped suburb data – taking the 50% percentile from the correlated information to produce numbers that can differ quite remarkably in the short term to other research databases. To go into a detailed explanation of how each set of figures is collected would be an essay in itself.

Regardless, whichever is employed, it’s somewhat dangerous for investors to base their knowledge on one set of figures alone without a full understanding of the various instruments involved.  Having said this, to get a feel for overall “trends” in the market, median movements can be useful (hence why the RBA take close stock of the information).  When affordability is constrained during a downward phase of the property cycle, a higher volume of lower end sales will be reflected in the data and this can even be referenced when employing negotiation tactics.  However, they’re certainly not an accurate indication of an individual properties value.  For example, it’s possible for the overall median to drop while the price of an individual property rises.  A well-educated buyer will understand the fundamentals attributing to this quandary and override the waves of confusion – however, many will be left with more question marks than answers.

Every buyer likes to feel he or she knows the market, and opinions on the prediction of long-term price movements often take a political air.  For those entering the market for the first time, or wondering whether to diversify their funds into property, this conflicting information produces a thought bubble of question marks – especially considering it’s foolish and all but impossible to make blanket assumptions on the Australian real estate market without a thorough understanding of the fragmented elements affecting each state and suburb.

Furthermore, Australia’s median movements are generally so marginal, they don’t deserve the sensationalist headlines they create.  However, I don’t underestimate the importance of the data in scrutiny of overall economic health, especially when other indicators weigh in to show the trend could be reflective of more serious concerns.

Now we’ve moved passed Australia Day, market activity is about to begin once again. Weekend clearance rates will be published, poured over, and analysed, and investment advice will be spruiked from every corner.  Affordability has certainly eased, with last year’s interest rate drops being passed on by the banks, but caution still holds strong in the investment sector.  Those states benefitting from the two-speed economy have already turned the wheel on our downward trend, with Perth and areas of Sydney showing tightening vacancy rates and a marked reduction in stock.  For both states the bottom of the property cycle may have already passed, however in others – Victoria, for example – opportunity is still ripe (for the time being).

Melbourne is undergoing some challenges. The recent blows to the manufacturing industry with the downgrade of Toyota’s Altona-based factory and the challenges they’ll face when the carbon tax is implemented – including potential rises in the state’s unemployment, are all factors that will affect Victoria’s economy and general affordability and put a stop to any bullish ideas of a boom recovery.  As a consequence, any upturns in the market are likely to be perceptible later in year – and depending on a number of possibilities, may even push into 2013.  However, having said this, reported numbers attending open for inspections and buyer enquiry has certainly increased state wide – and with stock dropping and the population still rising, it’s inevitable that disparity between supply and demand in some suburbs will place upward pressure on prices.

The global picture doesn’t need comment at this stage – only to say it increases insecurity and will bear significant influence on the RBA’s decisions to further reduce interest rates – maybe more so than domestic matters.  Therefore, even though nationally we’ve seen a rise in the number of home loans, we’ve yet to see how many will be drawn down.

Indicators across all capitals show real estate around and below the state median is likely to be the strongest performer, with top-end sales still struggling.  This has been reflected throughout 2011 with a greater population push towards the more affordable outer-suburban markets and unit sales topping detached dwellings in the overall median data.

However, for vendors who have weathered through a complete seven- to 10-year property cycle, profitability in all states cannot be disputed – they’ve come out winning regardless of our current conditions. Even in Brisbane – which has taken the largest hit in its median value over 2011 (tumbling some 7%) –  when analysed over a 10-year property cycle, compound capital growth still shows rises in excess of 7% per annum.  The news won’t make headlines, but once again the long-term stability of wise property investment is demonstrated.

Back to current the current malaise and over all confusion, and it’s in an atmosphere like this that the greatest care should be taken when purchasing.  Only quality real estate is going perform well as we progress through 2012, and without plenty of due diligence, purchasers could find themselves making expensive errors.  However, if buyers can pull themselves away from the headlines and seek out more qualified opinions based on their own individual circumstance, opportunities to win in a gloomy atmosphere are in abundance.