It would seem never has so much been lost by so many in times of headline prosperity.
What does that mean? We’re continually surprised about the inbuilt marketing characteristics of property as an investment strategy, even to people who have lost money on it. We repeatedly have people walk in our door who want to improve their financial future, but are also intent on steering the conversation towards residential property as their solution.
We assume this stems from the country’s ongoing obsession with property. It’s on TV, it’s on the radio, it’s in the newspapers and online. It seems everyone is buying it, making money from it or renovating it. The data providers have been pushing down the timing on their blackbox price indices from monthly to weekly to daily updates. It’s doubtful anyone will feel or care about a daily 0.01% change either way in the value of a house, but the industry wants to acquire the head space in the average person where thinking about the daily value of a house is important.
Despite the booming market of the last few years we’ve regularly seen investors with properties in far flung locations that were meant to be hot due to some region-specific event. When that cooled off the one-horse town didn’t look so hot anymore. The capital growth disappeared, and the rental income became shakier. What do they do?
Then there’s those with capital city apartments, we’ve seen plenty of these too. Can’t lose in the hot cities where the growth has been, surely? Given the oversupply and unhelpful people who sometimes facilitate the purchase with their own hefty fees, it’s another area where property has been a loser. What do they do?
Normally with a dud investment you’d want to cut it loose after learning the expensive lesson. Walk with the equity and find something more suitable. The fact that there’s no equity, it’s in the negative, makes it harder to cut the ties.
Why is there no equity? In most cases little equity was put down to begin with. This was all about speculating with debt on capital growth without a buffer because collective wisdom says property only goes up. The rent doesn’t cover the outgoings because in time the increasing value was meant to make that little problem go away.
Getting rid of one of these duds now means writing a cheque to the bank for the difference. Understandable that while someone’s bleeding they don’t want to rip the band aid off, but these properties will be a millstone around the neck for some time.
Why does this happen? Despite the omnipresent thought of property as an investment, there is no identifiable investment process or investment philosophy that can be applied across the board to property. Every house or apartment is an individual entity, bolted to its location. And the ‘where to buy’ is like stock picking. Some think they know how to pick the right house in the right area, but it’s a single entity, undiversified and subject to all manner of vagaries.
Will lending finance stay the same? Are there another four apartment towers or a new subdivision coming? How long will metal prices remain elevated for that booming mine the area has hitched its wagon to? Will or won’t the government enforce their regulations on foreign buyers? Similar vagaries fade into the background when an investment portfolio is comprised of thousands of equities and bonds from around the globe.
Sure, there are people out there making a career from forecasting the latest property boom locations. It’s a lucrative business being a paid expert, but it’s more about their career and ego than anyone’s investment. These people can sell their reports to real estate companies who use them to spruik, speak at conferences, make media appearances and write columns. Some will even sell their insights to the average investor. They identify a place in Central Queensland, then three years later it’s time to get out. This isn’t an investment philosophy, it’s a fee heavy speculative endeavour.
Any investment philosophy is based on a belief in markets. For hundreds of years they’ve rewarded investors for their capital, that hasn’t happened consistently in a remote mining town. That capital has to be invested with an understanding of the risk factors that have historically provided a reward, that’s not an apartment in Western Sydney. That capital has to be diversified to minimise risk, tough to do in a single location. Even with multiple properties the diversification is in theory at best and still restricted to one asset class. That capital shouldn’t rely on forecasting or timing the right moment in and out of a location. And finally, that capital should be invested with an eye on fees and taxes.
Homes are great to live in, but as investments they’re always speculations. If we could get a circuit breaker for the one-track mindset people have towards property it would be a welcome change. Even more welcome for some investors’ finances.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.