On the property merry-go-round

 

 

There’s a fine line between pleasure and pain”. I’m tipping there are a few people surveying Perth’s property market feeling that at the moment. The following relates specifically to Perth, but can be applicable elsewhere.

Is it in the bargain basement? Or the shitter?

There is nothing pretty, or promising, about property prices in Perth. But even as it now is, covered in zits … real estate is just so damn sexy an asset class that people will never switch off.

It’s like a train crash.

Why? Because we have all seen dreams come true via property. We’ve seen many of average means make motzas from property.

Given the pull-back, is now the time to buy? That will depend on what sort of buyer you are.

There are only two sorts of residential property buyers – home owners and investors.

They are opposites. They buy for opposite reasons. Their motivations are opposite. Their tax positions are opposite. They usually don’t even want to buy the same sort of property – though I would argue this is wrong and property developers are usually to blame.

Home buyers should buy for emotional reasons. They want property close to family, friends, a lifestyle, their work, the kids’ schools. They are buying somewhere to live to make them feel happy.

In reality, a home buyer doesn’t need property prices to rise. Though it would be nice if their home simply kept pace with the same relative value as similar properties.

However, you buy an investment property for one reason, and one reason only. To make money.

Not making money from an investment property is death. Property investors NEED property prices to rise over time. Because otherwise they would be better with their money in other asset classes.

So, is this now a market for first-home buyers, or investors?

Let me tell you what usually happens in a property market cycle. And what has certainly happened on the east coast during recent decades.

When prices were falling, earlier this decade, first-home buyers didn’t want to know about property. When the property market started its upswing, FHBs held back. The stats showed that the early property push in this cycle was driven by investors, while first-home buyers were staying away.

I don’t know why. I’m equally astounded at the stupidity every time it happens. But, during every property cycle, it’s the same fricking story.

Prices peak. Home buyers scream about being locked out of the market. Prices start falling. No-one wants to buy. Prices eventually bottom. Investors step in. First-home buyers stand back. Prices rise a bit. First-home buyers continue to sit on the sidelines. FHB’s eventually step in, as investors start to pull back. Prices scream ever forward. FHBs moan about unaffordability (while continuing to buy), then property prices peak …

And the cycle starts again.

Let’s keep it fairly simple.

If you are a first-home buyer and you’ve been watching the property market for a while now, here are some facts. Property prices are now about 7.5 cheaper than the top of the market in late 2013 (according to REIWA’s stats). If you add in the impact of inflation over 3.5 years, prices are more like 13-15 per cent lower than you would have been paying 3-4 years ago.

Yes. Really.

At a 15 per cent discount.

Have we hit a bottom?

Probably not. Vacancy rates for Perth are now above 6 per cent. That’s stupidly high and suggests considerable over-supply. Median rents are still falling like an eagle kicked too early out of its nest, which suggests the same thing.

Plenty will have their opinion. But mine, for what it’s worth, is … this aint over yet, baby.

If you’re a FHB who has felt trapped out of the market, understand this important principle: “Buy when you can afford to buy”. And given that prices are considerably, relatively, cheaper than they were 3-4 years ago, stop moaning and buy.

Capital gain should not be your primary motivation. In the future, you will buy and sell in the same market, when you trade up.

If you’re an investor … different story. This is about making money. If you believe there is more pain to come, wait. If you’re happy not to be paying the crazy prices of a few years ago, then perhaps now is your time.

Yes, for investors, I’m sitting on the fence. You make the call.

Bruce Brammall is the author of Mortgages Made Easy and managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au.