An article by Ian Lloyd

The financial markets around the world are currently taking a beating and the property markets in some parts of Australia are showing signs of prices falling for the first time in a long time.
 
But this is normal after a period of high capital growth. All markets go through cycles and after a few years of close to 20% pa growth in some suburbs; the markets are simply getting back to their averages. A cycle by it’s very name and nature is something that occurs over and over. You would not have the comparison from high to low if you didn’t have one or the other.
 
One of the biggest mistakes that many property investors make is they forget history. Many comparisons at the moment are for six monthly movements so if you looked at the last six monthly reports on housing prices in your area, you may find you have a drop in average value that could be alarming. However, if you had a look at the previous six monthly figures for that same area you might find that you had a growth in the first six months equivalent or greater than the drop in the latter six months. (eg 28% growth in the first six months and a drop of 25% in the latter six months giving an overall growth rate of 3% for the full year.)When a market turns, property investors forget that the same thing happened years ago and the market will once again improve and start rising.
 
As human beings, when things are good we think that they'll be good forever, when things are bad we think they'll be bad forever.
 
The truth is that all property markets are cyclical - they grow, they plateau, they may even drop in value for a short time, then they grow again.
 
It is just the nature of economics. Certain factors in an economy have to catch up with each other.
 
If you're a long term property investor you should be excited about the opportunities our current markets present.
 
Of course you can't just go out and buy any property or pay any price, like some investors thought they could do in the past.
 
In this very different financial era, to be a successful property investor you will need to develop new strategies or adapt your existing ones to meet the new factors posed by a cycling market.
 
I foresee generally flat property prices and growth over the next 18 – 24 months with employment uncertainty a big contributing factor. But I also see some great opportunities.
On the up side, with rising rents, falling interest rates and the ability to buy a bargain from some very motivated vendors - the type of bargain that we couldn't find in the last few years when there was strong competition from other investors - I know many investors who are enjoying the types of yields that haven't been experienced in a long time. Many properties are now cash flow positive on day one meaning that if you lost your job you could still pay for the property, with the caveat you have a consistent tenant.

 
They are no longer negatively geared, something that hasn't been possible for a while if you bought good properties.

One aspect that may also help to keep a “floor” under house prices and values or even drive growth somewhat is the First Home Owners Boost. When combined with the normal First Home Owners Grant (FOHG) it appears to have had a good effect on land values. The demand for land to build new houses to maximize the benefit paid from Federal and State Governments combined has taken up much of the available land forcing prices upwards. Builders have taken options over available land making it difficult to secure land to build on even if you are eligible for the grants. This is causing another demand and supply imbalance which should be good for holding valuations higher.

One other aspect of the FOHG and Boost program from my observation is it has the propensity and appears to already be doing so of dragging forward future orders. People who were not considering buying a house now are doing so which may affect future market growth whilst we wait for the balance in the market to return.

Affordability is at a long time high with interest rates so low, which also means some in the market place, will be looking to purchase their own homes rather than renting. In about 74 suburbs across the country it is now more affordable to buy the average home than rent it. I don’t believe this to be an issue for investors. We already have the high demand from record population growth that has already occurred. I believe many potential purchasers will still hesitate with employment uncertainties and the pure disruption of moving house. It is the same blockage that prevents many investors entering the market. Good old mindset!

While many property investors are tempted to sit back and wait till the market bottoms out, picking it is the tricky part. The numbers of investors are starting to expand and there will likely be a rising demand for properties.
The cumulative effect of the 4 per cent drop in rates, rising rents and more first home buyers should propel a significant number of new investors into the market now or before the end of 2009
Some property experts say the time to buy is now. Much like shares the purchasing can be done on both sides of the absolute bottom. The danger on the down slope is you may have to ride a relative ‘loss’ for a period until it hits absolute bottom and then rises past your purchase price on the other side. Alternatively you can wait until it starts to rise and purchase on the increasing market. The danger I see with the latter strategy is that you usually have more competing forces wanting to purchase once you know it’s a rising market. I would much rather position myself now and wait.
This means that as property investors you have an amazing opportunity to lock in historically low fixed interest rates so you can ‘comfortably’ wait for the growth. For example, if you could lock in an interest rate fixed for 3 – 5 years at 5% and achieve a gross rent yield of 6%, then you are in a very comfortable position with rental increases looking like they will continue at a reasonable rate of growth over that period thereby widening the net cash yield to the investor over that fixed period. Growth on properties with sound investing fundamentals should be gathering speed by year 3 in my opinion or at least by year 5 if you choose the longer fixed term.

Property is a long-term journey, so investors taking full advantage of revised constricting finance options at very good rates combined with rising rents to borrow conservatively for top-notch investments with all the right fundamentals makes very good sense.