Is property crashing? Two big claims on property forecasting.

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The media loves property. There’s always so much speculation about what’s going to happen to property prices in Australia in 2016 – and if you only read as far as the headline, you would be forgiven for concluding that property prices are in immense danger.

But fear not – there’s plenty to be optimistic about.

Most market analysts are predicting Melbourne and Brisbane to take the mantle from Sydney over the next few years from a perspective of capital growth. For example, SQM Research (using their base case scenario) is predicting Melbourne will perform the strongest with capital growth rates of between 8-13% whilst Sydney will see 4-9% growth, Brisbane 5-8% and Perth will continue to decline by another 4 -7%. In contrast NAB Economics and Corelogic have released forecasted growth rates for detached housing of just 3% in 2016 for Melbourne, 4.5% for Brisbane and only 1.2% for Sydney.

And there is dissent amongst the biggest lenders about the future of Australian property prices with Macquarie Group, Credit Suisse and Bank of America Merrill Lynch all bearish on short term growth. In fact, Macquarie has called for a 7.5% drop in Australian property prices recently.

In contrast, NAB CEO Andrew Thorburn and Westpac CEO Brian Hartzer are both optimistic about price growth, albeit moderating from recent highs.

The man steering NAB was recently quoted as saying “You will see in Sydney and Melbourne, high single-digit rates of growth as being quite plausible given the fundamental drivers of what are pushing those prices up,” and Westpac’s head honcho says that conditions in the housing markets were “still pretty reasonable”.

Today, I want to take a slightly different view on the whole issue of property forecasting, make a few big claims, and also let you in on an insider secret.

 

BIG 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 three years (BIS Shrapnel) for example 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 (1 in 3 chance according to Goldman Sachs) 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 (A.B.S October figures show a drop to 5.9%), US interest rates are likely go up a whole 0.25% soon putting increasing pressure on debt laden corporations and governments around the world; geopolitical events could escalate in places like the Middle East or Ukraine. The list goes on.

 

BIG CLAIM #2: How you buy is even more important than 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 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.

Why are we so intent on letting the market determine 100% of our 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 enchilada?

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 that is the wrong question to ask, or at least the wrong order to ask the question in.

I will usually return fire with a few questions of my own like:

  • “Why are you investing in the first place?”
  • “Are you investing for small results or big results?”
  • “Do you want to use your skill to make money, or are you happy to let the market dictate 100% of your results?”

For example we recently purchased a site with an independent bank valuation of $8.5M for $6.35M.

We have bought at an intrinsic discount to market of 25%. Now this is a development site and I expect to make a further 20%+ on project costs in development profits.
Adding the two together I expect to make significant profits independent of anything that the market may or may not decide to do.

In this case what is more important? Where the property is located or how we were able to structure the deal? Exactly.

 

INSIDER SECRET #1: The best deals are not found on realestate.com.au
Carrying on from the comments above, do you think that deal I mentioned where I bought $2.15M under market value was advertised on realestate.com.au or any other website? Absolutely not!

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.

If you want bigger results and be the first to find out about exclusive, off-market property opportunities – give us a call.