The “Property Bubble”

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Commentary by Motion Property CEO Jack Brukarz

I constantly come across the doomsday merchant’s spruiking their views about the future of the Australian property market. Fist, let me debunk the myth and emphasise there is no such beast. Australian property is as diverse as our crucible of multiculturalism. What possible similarity could there be between the property values in the mining towns of Western Australia and those in the beach side suburbs of Sydney or Melbourne? What weird and obscure impact will the construction of a gas pipeline in Darwin have on the apartment market in Melbourne’s CBD?

So why is the media regularly talking about “the bubble”? Well first of all it sells newspapers and creates viewing audiences. Second it generates advertising revenue. In addition, many of these articles are driven by government and central bank policies designed to keep the economy restrained and under control. With the Federal Government up for election every three years, how can we rely on its policies for future direction if each of the major parties has its own agenda?

The Coalition is being accused of favouring the rich and the capitalist society while they in turn blame the Left for irresponsible social and unsustainable initiatives. Policies whipsaw regularly. One day negative gearing is good and next it is bad. Next week foreign investment is on the nose and the following year it will, most likely be encouraged once again. What puzzles me is why the average investor makes decisions based on the content of the next published blog or news item.

I have concluded that it’s all about consumerism. Our behaviour has become conditioned by the on-going barrage of advertising that we endure on an hourly basis through billboards, television, press and social media. Many consider investment property as a luxury not a necessity. It is put in the same category as flat screen TV’s. It’s nice to have one but why buy now when it will be cheaper in six months. And anyway, my current circumstances are fine, so I’d rather take an overseas trip that allocate funds to an investment property. Let me enjoy life now and let the future look after my circumstances. “She’ll be right mate”.

Modern day consumers have the attention span of a 30-second TV ad and that’s how they view the property market, rather than project a decade ahead. Moreover, with the explosion of investors in equities, many have become accustomed to watching movements in these markets on a daily, hourly or even shorter time frame. Instant gratification is what it is all about. Win or lose in a matter of days or minutes. There are “gambling” opportunities all around. Betting on sporting events which end in a few hours or backing the direction of the Australian dollar over a few minutes. In these circumstances, a win will result in an appetite to gamble, while a loss will send people back into their shell. That’s what has happened to a large extent to perception of the property market.

What is really going on? First and foremost, unless one wins lotto, sells a start up to Google for a squillion, waits to inherit a fortune from soon to be deceased “baby boomer” parents or retires to a pacific island where the cost of living is covered by the aged pension, how does the average person expect to maintain lifestyle once he/she loses the ability to continue working for an income?  A 9.25% per annum compulsory superannuation contribution certainly won’t solve the problem. To have a comfortable retirement we are told, a couple needs an income of $55,000 per annum. This in turn requires an investment fund of about $1.2 million in addition to the family home. Many have not even considered this by the time they reach their 50’s as they have been ‘too busy’ living. There are of course those that don’t plan on having a long retirement and who don’t need to concern themselves with this challenge.

Back to the property issue. Whether residential, commercial, industrial, houses, apartments or units, the asset is not important if it meets your criteria and appetite for investment. What is important is to start and continue without the media influencing your decision. And you can’t stop with your first investment. You must maintain the momentum as long as one’s capacity permits.

As is often the case, I was asked, at a meeting of business colleagues this morning, what is the state of the apartments market. What they meant was, where are prices headed? Here’s my response.

The Melbourne apartment market, of which I have an extensive understanding after some 30 years in the industry, will have short term peaks and troughs. It is true that currently there are many apartments for sale and more to come in the next 12 months. It is also true that sales have slowed since the banks were forced to introduce revised lending criteria by APRA, foreign investors have been penalised by higher stamp duty and are subject now to greater scrutiny than ever before. However there are many drivers of this market and allow me to note a few:

 

  1. Our population is growing at a faster than expected rate. Almost 100,000 residents per annum from births, immigrants and interstate migration. That’s 274 daily. It’s the capacity of the MCG each year. Where will they find accommodation?
  2. The middle classes in Asia are expanding at an enormous pace. They want to diversify their investments and are continually looking for opportunities. Australia represents the perfect haven for their funds and as high density living is already part of their culture it is obvious for that apartments are attractive to them.
  3. Our political and legal systems are stable and protective of property ownership .
  4. Presently the AU dollar means our properties have become cheaper in US dollar terms over the past 18 months by some 25% to 30%. That means a $500,000 apartment in US dollar terms is only $375,000. It would be surprising to see our dollar rising again providing scope for additional capital growth for foreign investors.
  5. Our rental market is strong and although rents have increased only slowly over the past 12 months, there are always tenants prepared to occupy apartments depending on the rent.
  6. We are privileged to have some of the best tertiary educational institutions in the world right here in Melbourne. Some 175,000 foreign students live in Melbourne and surrounds. Many years ago, students would share “digs” with several others. With affordability improving many now live on their own or share with only one other. In many cases, parents are buying the units, rather than ask their student children to rent, as they take advantage of property ownership and potential growth.
  7. The family size is shrinking. In the fifties and sixties the average marriage age was low 20’s with families of five or six. Now couple are delaying marrying till their 30’s and the number of singles/couples in a home is growing annually.
  8. Tragically, almost one third of all marriages ends in divorce leading to an increased need for smaller accommodation.

 

This, therefore is my take on the media hype and its influence on overall crowd behaviour.  One would rarely jeopardise one’s health by acting on generic medical advice from a website or magazine. Then why do so in regards to property. The need to secure a comfortable retirement is undisputed. That most wait too long before acting is a known fact. Almost 74% of Australians still rely on some form of handout after retirement.

Get the right advice, look at your financial situation and be proactive before it is too late. Time waits for no one.

My advice is simple. If you can afford to invest, without creating angst or stress, then do so now. There is no time like the present to start or continue on your wealth creation journey. Why wait for the market to turn around again? And it will, you can bank on it. The best time take action, is in a buyer’s market. And it certainly is that right now.

Forget the “chit chat” and do something positive. Long term, there will be no regrets.

“There is nothing to fear but fear itself”.

 

Commentary by Motion Property CEO Jack Brukarz