Property values never drop!
Or do they?
I’d like to discuss an issue that regularly rears its head, especially in hot markets.
It’s the unhelpful mindset that property never goes down in value.
Now…property investment, done well, should be relatively boring, which might sound a little strange.
But the point is that sophisticated investors develop a sound strategy and stick to it – year in and year out – regardless of market conditions.
They also pay scant notice to any short-term vagaries of the market because they’re always focused on the long-term.
The thing about values
Property values can be fluid because property markets can and do change.
That’s why it’s called the property cycle.
Unfortunately, over the years, there has been a belief created that ALL property doubles in value in seven or 10 years.
This is simply not true
While well-located, investment grade properties will likely experience strong price growth over a seven to ten year period, often doubling in value, the same results won’t necessarily occur for inferior properties.
The problem with many uneducated property buyers believing that property doubles over a set period of time is that they think they can buy any old property and sit back and watch the capital growth roll on in.
This is especially the case in hot markets, when buyers are scrambling to get into the market – and usually pay too much for bad properties – because they fear missing out on the good times.
In every cycle, however, prices will rise, they’ll stagnate, and they’ll soften, so depending on what part of the cycle you buy in, you could be faced with reduced values soon after you’ve purchased.
What and when to buy
Recent research by Corelogic shows that one in 12 properties are actually resold at a loss across Australia.
The unfortunate owners are usually people who’ve bought an inferior property at the peak of the market, or perhaps over-stretched themselves financially, and found they couldn’t hold for the long-term because their cash flow wouldn’t allow it.
One of the keys to successful investment, of course, is to buy and hold for the long-term, but this requires having either the cash flow or financial buffers to do so successfully .
Sophisticated investors understand this so they only buying properties which they know are going to outperform the averages in terms of capital growth.
Serious investors also do not necessarily shy away at the peak of the cycle, but either diversify into another market not at the top of its cycle or buy properties to which they can add value and “manufacture” capital growth.
Serious investors also understand that not all land is created equally so they only buy properties that are investment grade.
Plus, to ensure the maximum chance of capital growth, they also only buy properties which:
- Appeal to a wide range of affluent owner occupiers
- Are in the right location, such as being a short walking distance to lifestyle amenities such as cafes, shops, restaurants and parks. And they’re close to public transport – a factor that will become more important in the future as our population grows, our roads become more congested and people will want to reduce commuting time.
- Have street appeal as well as a favourable aspect or good views.
- Offer security – by being located in the right suburbs as well as having security features such as gates, intercoms and alarms.
- Offer secure off street car parking.
- Have the potential to add value through renovations.
- Have a high land to asset ratio – this is different to a large amount of land.
So, as I’ve outlined, property values do fluctuate over the property cycle.
Sometimes they’ll grow strongly, while other times they’ll won’t do much at all.
But believing that property will always increase in value is a furphy that can result in unnecessary pain for the uneducated buyer.
That’s why to increase their chances of capital growth, and not loss, sophisticated investors always buy the very best properties they can afford.
This article is general information only and is intended as educational material. Metropole Wealth Advisory nor its associated or related entitles, directors, officers or employees intend this material to be advice either actual or implied. You should not act on any of the above without first seeking specific advice taking into account your circumstances and objectives.