Where To Find The Best Property Based Opportunities in 2017?
OK, there is much speculation in the media, and amongst property analysts, about what is going to happen to property prices in Australia over the years ahead.
So with 2016 pretty much done, now is probably a great time to get out the crystal ball and look ahead to what we are likely to experience in 2017!
Looking back at the big changes over 2016, it would be best described as both a year of volatility and one where we have learnt to perhaps expect the unexpected.
We started the year with the worst two-week stretch to start a year…ever… which saw the broad-based S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite down 8%, 8.3%, and 10.4%, respectively.
Of course towards the end of this year the U.S voted in an unlikely president in the form of Donald Trump and markets saw the US stock market soar to new heights. Go figure right?
In the first quarter of 2016, oil prices hit 12-year lows with West Texas Intermediate hitting $27 per barrel, and natural gas hitting 17-year lows of $1.60s per million BTUs. In contrast, in the last quarter of 2016, coking coal has risen by over 300% through the year.
The Bank of Japan stunned the world by selling 10-year government bonds with a negative interest rate for the first time ever. And in the UK, the leave camp where victorious resulting in a Brexit some never saw coming
Closer to home, the RBA has cut interest rates to historic lows, and property prices in Sydney & Melbourne have continued to surge ahead with auction clearance rates of nearly 80% as we write this.
In April, 2016 the NAB forecast that house prices would rise by 1.5 per cent in Sydney, and 2.3 per cent in Melbourne during 2016.
However, they underestimated the demand for quality Australian residential property, forcing them to revise their forecast upwards in July, 2016 to a predicted house price growth of 8.6 per cent for Sydney and 6.1 per cent in Melbourne.
Then in November 2016, the NAB have again come out and called for very weak growth in 2017 with house prices nationally expected to rise by just at 0.4 per cent, and unit prices dropping by 1.6 per cent in 2017.
NAB Chief Economist Mr. Alan Oster was reported as saying “that despite those soft figures property prices were unlikely to experience a severe “correction’’.”
In the same week, researcher Luis Christopher, released his annual property outlook report for 2017 which predicts price growth over 2017 of between 11 and 16 per cent in Sydney and 10 to15 per cent in Melbourne. “What we have noticed in very recent weeks is an acceleration, particularly in the Sydney housing market. Our view is that this acceleration will continue, it will go well into 2017.” Mr Christopher said. However, Mr. Christopher also believes that this level of growth is unsustainable and could lead to a hard landing in 2018 if the Reserve Bank of Australia does not lift interest rates &/or if the Australian Prudential Regulation Authority (APRA) does not clamp down harder on home lending.
In the QBE published “Australian Housing Outlook 2016 – 2019” the forecast is for most cities house price growth to be below the rate of inflation, and for the price growth of all capital city dwellings (houses and units) to be negative with the exceptions of Canberra & Hobart for the period to end of financial year 2018/19.
And of course perennial doomsday prophet, economist Professor Steve Keen, has again claimed that there will be an Australian Recession in 2017 and real estate prices will decline by 40% to 70%.
Today, however, I want to take a slightly different view on the whole issue of property forecasting, make a few bold claims, and also let you in on an insider secret.
BOLD CLAIM # 1: They can’t all be right!
One of the problems with forecasting is that very few people get it right consistently. Especially, those trying to forecast over 3 years (e.g. QBE, BIS Shrapnel) because the economic landscape can change so quickly these days. Just think about the type of economic headwinds that could blow through the Australian economy over the next few years. China has a hard landing or stimulates their economy further, Interest rates could go up or down, Australia could go into a recession ( there is a 50% chance according to BT Investment Management’s Vimal Gor) or return to long term trend growth over the next few years (R.B.A & I.M.F forecasts), unemployment could go up or down (the latest A.B.S figures shows unemployment steady at 5.6%), US interest rates are likely go up putting increasing pressure on debt laden corporations and governments around the world, geopolitical events could escalate in places like the Middle East, or the South China Sea.
BOLD CLAIM # 2: There is no such thing as one Australian Residential Property Market!
The problem with property predictions, especially at a national or state level, is that each property in Australia is unique and that the market is not one homogenous market.
In fact, the Australian Residential Property market consists of 6 states, 2 territories, 565 Local Government areas, over 15,000 individual suburbs, and over 9.6M individual homes, each with something unique about it.
And even if one of the forecasters above nails it at a state level, does that mean that every property in that state is going to perform the same way. Of course not!
Understanding how to use property data, and the available research tools, can become a full-time profession if you want to do it at the highest levels.
BOLD CLAIM # 3: How You Buy Is Even More Important Then Where You Buy!
Let’s just start by saying that if we can find capital growth out of careful property selection, and subsequently the markets go up and we make money, then obviously that is a good thing.
However, the problem with our apparent national obsession with trying to find the next “hotspot” misses the whole point of investing.
See the difference between an investor and a speculator for mine, is that an investor has a high degree of certainty around the level of their reward, their risk, and their timeframes upfront.
That is before we invest, we have a high degree of certainty of at least part, if not all, of our investment outcomes.
Why are so many property investors intent on letting the market determine 100% of their results?
Doesn’t it make more sense that we should at least equally focus on making money on the way into the deal, and treat any additional growth we get from market forces as a bonus, not the whole enchalada.
For example, whenever anyone finds out that I am a professional property investor the most common question I get is “where should I be investing”.
As far as I am concerned it is not that the questions is a bad one, but probably one better asked down the track a bit.
I will usually return fire with a few questions of my own like:
- “Why are you investing in the first place?
- “Do you want to use your skill to make money, or are you happy to let the market dictate 100% of your results?”
- Do you have an investment plan? or
- “Are you investing for a small result or a big result?”
For example we recently purchased a site with an independent bank valuation of $8.5M for $6.35M.
We bought at an intrinsic discount to market of 25%. Subsequently we had an offer to purchase it from us for $9.5M so we could have taken a quick profit of $3.15M but given that is a development site and that we expect to make a further 20%+ on project costs in development profits we have decided to see this project through to completion.
So even if the market does not go up, by combining the intrinsic discount achieved through buying well with the development profits we expect to make, it is possible to lock in profits that are both reasonably well known, and that will occur within a reasonably known time frame, with a reasonably known risk. The point I am trying to make here is that independent of anything that the market may, or may not, do in the future from a capital growth perspective, we should be able to generate serious profits using our skill, experience and financial resources to lock in our profits.
In this case what is more important?
- Where the property is located? Or
- How we were able to structure the deal to achieve these types of outcomes?
Insider Secret # 1: Often The Very Best Deals Are Not Found on www.realestate.com.au!
Carrying on from the comments above, do you think that deal I mentioned where we bought $2.15M under market value was advertised on www.realestate.com.au, any other online website or print media? Absolutely not!
See the way the property industry really works is that the very best deals get offered to the biggest players in property first, or those with close connections to the people involved in sourcing the deal. That could be friends, relatives, or the best clients of real estate agents, banks or other lenders, lawyers or solicitors for example.
By the time it has been offered to these people, and if they all pass on it, only then is it passed down into traditional property sales channels where you can fight over the scraps with all the other retail investors.
So moving forward how do you really want to “do” property?