Reading between the lines


11/08/2012

Reading between the lines

Was it the Greek tragedian Sophocles who said “no enemy is worst than bad advice?” If he’d lived in the 21st century, he’d no doubt be aiming his words at media reports from the property or finance industries. He may have followed his words with “no bad advice, is worst than ‘expensive’ bad advice.” Because in both these industries, the consequence of bad advice costs exactly that - a good deal of expense.

It has the power to make or break an individual - the latter it will do quickly, the former it will do slowly – but undoubtedly, a bad mistake made on bad financial or property advice alone is not easily, or painlessly, undone.

Both industries are hard to control and even if the current level of regulation increased, it would be difficult to restrict what can and can’t be published in the media altogether. The best option seems to be by way of education – teaching readers to ‘source that which is hidden’ - or as commonly phrased, ‘read between the lines.’

It starts with a broader understanding of the base motivation lying behind the authorship – although in the age of digital media, ideally it should start in school.  This aside – the reader should question everything, because currently the landscape of ‘hype’ is littered with mis-information.

Like other professionals in the industry, I’m contacted weekly regarding submissions to various property magazines and websites.  Sometimes I’m given the freedom to write on a subject of choice, other times I’m asked to comment on current newsworthy items.  However, I made a personal commitment some time ago to remove the ‘party line’ from my articles and write from an independent viewpoint – a viewpoint not always shared, or welcomed, by those I work with.

This past week, a request came from what many would ‘assume’ to be a respected property investment magazine wanting to ‘beef up’ the content on their website. As with many property outlets, they sent out a mass e-mail requesting material from ‘area specialists’ in return for some free promotion.  Obviously the idea is not just to attract readers but more importantly advertisers - the greater the content, the greater the number of ‘hits’.

In this instance, they wanted information on ‘hotspots’ – where the market’s heading and which areas would outperform and so forth. Obviously if you ask any selling agent to identify a hotspot for the sake of free promotion, they’re going to spruik the suburb they specialise in. The advice is not independent or unbiased, and the word ‘expert’ should come with a large disclaimer attached. If they sell in Doreen, Victoria for example, they’re hardly going to advise a purchase in East St Kilda! However, it’s fair to suggest a broad spectrum of readers will be influenced by the data.

The information carried in local and national newspapers holds the potential to portray a more balanced viewpoint.  However, unless the reader has foundation of understanding about the subject matter at play – mis-conceptions can easily occur.

This, leads me to a brief mention of a report a few days ago in the Herald Sun claiming ‘house prices’ had risen some 125 per cent in Melbourne over the past ten years. Before vendors dance around in glee, it’s important to draw a distinction between the term ‘house prices’ and ‘median values’.

The term ‘house prices,’ suggests every property and every vendor has experienced the windfall, however we know this isn’t the case.  Common sense alone dictates that areas close to city centres and major transport hubs, where the available residential land has been utilised and the population continues to increase, has inevitably underpinned established property prices over the last decade. Therefore, the vendors who purchased carefully a decade ago, would no doubt have attracted healthy growth – growth that could be in excess of 125 per cent in some cases!

However, there are plenty of vendors who wouldn’t have benefitted from a 125 per cent windfall. They may have purchased the first rollout of apartments in Melbourne’s Docklands for example, or ‘on the fringe.’ They may not have taken due care with the type of property, price paid, or buyer demographic in the near vicinity when choosing.  Consequently, it’s important not to buy into the hype that all property – no matter what or where – has experienced post inflationary growth.  It’s simply untrue – property prices rise and fall as they do with any other asset.

Another report - “Property experts blame the GFC for dud forecasts” - demonstrates the foolhardy nature of trusting respected analysts without a good deal of due diligence or risk management.  In this instance, the article points out how previous rather ‘bullish’ forecasts, regarding the outlook for Perth’s growing prospects pre GFC, were a little more than ‘off the mark.’

It’s true, few could have predicted the ‘x factor’ event – but it also highlights how a complex the arena has become and importantly, how wary any investor should be prior to accepting predictive reports – (especially considering eruptions from the international landscape, play an increasing role in consumer sentiment.)

However, it’s not just ‘pre’ GFC reports that get it wrong - a post GFC “off the mark” example can be viewed here...BIS once again, who predicted in a report in 2009 that house prices in Melbourne, Sydney and Adelaide would increase up to 22 per cent over the following 3 years – or here - data providers in 2009 predicting 7.6 per cent growth per annum in Sydney over the next decade.

Granted, we still have a while to go before we can calculate the accuracy contained in some of the above information, however all are based on median house prices which as previously mentioned, have little relevance for individual property prices.

With overall sales turnover still lagging behind that of previous years, any rise in median value is only representative of the particular composition of ‘good’ properties selling.  Buy well, and you may sell well and get an average 7.5 per cent per growth per annum.  One the other hand, purchase into one of the high-rise blocks currently under construction and based on the level of supply alone, you’ll probably get the opposite.

This aside, reading reports on future hotspots is all well and good.  However, they tend to feed the concept that money can be made from property short term.  To do so, would need more than a crystal ball or an investment ‘property millionaire’ e-book. Therefore, it’s important to balance the message with an understanding of the motivation – good or bad - lurking behind the words. This aside – boom markets, (hotspots,) have a habit of ‘correcting’ rather sharply.  The risks are always greater if due diligence isn’t taken initially. Be warned!

I don’t expect anyone to think politicians can be trusted on the ‘face’ of the information they provide.  Even the most innocent of minds will be educated in this regard.  For those living in Geelong Victoria, who read in their local rag - “Home buyers in the Box Seat”  - citing RPData’s assessment that their region had remained ‘flat’ with minimal growth over the past 12 months. Will be none too surprised to hear - when it comes to council rates - property prices are soaring!

According to the latest rate assessments, values in Geelong have increased 10.2 per cent over a two year period.

“The property value increase, a jump of 10.2 per cent over two years, follows an 11.2 per cent increase in values during 2008-10.”

The article - (notably in the same newspaper that convinced readers it was a ‘buyers market’) - quotes a ‘spokesman’ for City Hall stating

“While most householders assume their rates will rise on the back of increases in their property's value, this is not always the case”

However, before readers get too comfortable, the article goes on to say;

“The average residential rate rise for the City of Greater Geelong this year will be 5.1 per cent.”

So in other words, ‘not always the case’ should more accurately be termed – ‘generally the case’.

In truth, no matter what percentage the increase, once the budget has been assessed and amount to be raised averaged out, if one suburb has experienced a greater perceptible rise in property values compared to a neighbouring suburb in the same municipality – owners may find themselves paying more than the ‘average’ 5.1 per cent rise per property.  The rate valuation is only used as a method to ‘guide’ how councils redistribute increases. Albeit, I think there’s enough independent data indicating flat market prices over the previous two years, to ensure they’ll be plenty of quibbles over the assessments when received.

I said at the beginning of this article ‘common sense’ plays a large part in predicting where values in property will increase or decrease - hence why careful purchases of established property in inner and middle ring suburbs facing consistent solid demand, have thus far been the safest bet for an investment portfolio.

The lessons gleaned from all of the above should ring clear – it’s only through careful researching and an element of self education that you can really buffer against a risky environment. Don’t blindly accept the advice of a ‘property expert’ or ‘journalist,’ any more than you’d trust that of a politician without investigating the reliability of the data they provide or motivation behind the sales pitch.

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Catherine Cashmore

Director

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Catherine Cashmore has been working in the Australian real estate market for over 14 years. As a buyer advocate, she has assisted hundreds of Australian home buyers and investors to secure quality real estate for the best possible price. Originally from the UK, and having lived in the US, Catherine is a seasoned traveller who has extensive experience across a range of international real estate markets for those interested in property investment overseas.. 

As President of Australia's oldest economics organisation, Prosper Australia, Catherine is a regular and highly respected media commentator and often called upon to give guest lectures to university students (including RMIT and Sydney University) on how tax policy affects real estate, the design of cities and the economy.

She is editor of Port Philip Publishing’s 'Cycles, Trends, & Forecasts' – a publication that teaches real estate investors about the land cycle and its effects on the economy. She is author of ‘Speculative Vacancies’, the only study in the world that analyses long term vacant housing based on water usage data (Melbourne focused). As such Catherine has an in depth knowledge of the Australian real estate market, few can rival.

You can contact Catherine directly on 0458 143 089 or at cc@cashmoreco.com.au

 

 

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