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Property Investors Need To Think Differently

Property Investors Need To Think Differently
June 20, 2016 Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

More than any other person in the world, I would have loved to have spent a few hours one-on-one with Apple founder, the late Steve Jobs. I’ve read his book, I’ve seen You Tube clips of him presenting, and I’m forever grateful for the extra conveniences in my world because of Apple’s technology. I’m fascinated by how Jobs’ mind worked. Jobs refused to follow conventional wisdom; it was his nature to constantly challenge the status quo.

Without people like Jobs who constantly think differently the world would never evolve. We’d all keep doing the same things – because that’s what everyone else does – and never question why. That’s what property investors do, too. From the creature-of-habit investor whose imagination can’t extend beyond their home town to the person who is genuinely trying to broaden their horizon but still ends up bowing to whatever the ‘consensus of the masses’ is at the time, there’s not a lot of creative thinking involved.

I’ve spent a reasonable chunk of my working life studying property market history and it has taught me there’s a lot of value in challenging the status quo. Most of the commonly accepted property theories aren’t supported by historical evidence. Probably the best example is assuming that highest population growth equals highest price growth – wrong! The best performed property markets over the course of time were in locations that most investors wouldn’t ever consider – fact!

This graphic summarises the main factors which influence property markets.
The most valuable research project that I’ve ever been part of involved calculating the historical performance of the property markets of every single one of the 550 local government authorities (LGA) in Australia over the last fifteen years (effectively, two full property cycles). This massive project took Propertyology’s research team several weeks. After then ranking each of the 550 LGA’s from best to worst performed, I was amazed by the order. For example, Narrabri was ranked 50th out of 550 LGA’s while desirable (but expensive) Bondi was 362nd. And, Ararat (population growth of zero) was streets ahead of Wyndham (population growth 3 x the national average).

Stage 2 of our project involved identifying some common characteristics amongst the better performed markets and the not-so-well-performed markets since the turn of the century. Our findings from this project has shaped the way in which Propertyology selects locations for future investment; we are constantly scouring Australia looking for towns and cities which have these three (3) characteristics:

  • Affordability – median property values are below $550,000;
  • Future economic development – job creation, confidence, potential for salary growth;
  • Supply – A history of controlled housing supply and no suggestion of change.

On the basis of total return (average annual capital growth plus rental yield), an incredibly large majority of the best performed markets throughout Australia since the turn of the century were regional locations. Some may question this but we have analysed the evidence.

Personally, I invest in (both) capital cities and regions! But, I won’t shy away from the fact that I favour more regional markets right now than capital cities. Lots more!
Some will say there are regional locations which represent high risk. In some cases that is true. But, those who are prepared to challenge the status quo will understand that there are also dozens of regional locations which have comparable risk to most capital cities and better potential for return on investment. Australia’s big regional cities with profiles which resemble a smaller version of a capital city include Albury, Armidale, Ballarat, Bendigo, Bunbury, Burnie, Cairns, Coffs Harbour, Devonport, Dubbo, Geraldton, Geelong, Gladstone, Gold Coast, Gosford, Launceston, Mackay, Maitland, Newcastle, Orange, Rockhampton, Tamworth, Toowoomba, Townsville, and Wagga Wagga. Investors would also be wise to not underestimate the potential from dozens of other towns which are in close proximity to larger cities.

One of the most important considerations for property investors when evaluating the potential risk to a market is the cost of a typical property. The higher it is the further it can fall. Imagine the potential impact on a market where the typical property costs $800,000 to $1,000,000, the typical mortgage is seventy to eighty per cent of that, and interest rates rising by one to two per cent. What do you think the typical mortgage balance is in a location where a standard meat-and-potatoes property costs between $250,000 and $450,000?

For me, investing is about making informed decisions using real research (not perception) to try to take advantage of opportunities while mitigating and balancing risk. To get that right balance, my own investment strategy is not that dissimilar to an astute share investor. Rather than sink 100% of my investment capital in to one or two expensive assets which fewer people can afford to buy, I prefer to carve up my capital and spread it across more markets, in assets which more people can afford, and with more sources of rental income. I maintain balance within my portfolio by strategically selecting locations in different states and through towns and cities which each have different industries that drive their economy.

Whether aware of it or not, most property investors are lured in to making investment decisions under the influence of their own personal household preferences. The thing is, whether we personally would live in Kograh, Kingston or Katherine is as subjective as selecting T-bone, trout, or tofu from the restaurant menu; it’s not relevant. The facts are that thirty-five per cent (8.2 million people) of Australia’s total population reside in 3.1 million dwellings across regional Australia.

Much of regional Australia is in that ‘affordability’ box which our big research project determined to be a common denominator amongst the best performers over the longer term. Tick! Certain strategically-chosen regional locations will benefit significantly from economic development as a result of the role that they’ll play in the Asian Century. Tick tick!

As for controlled housing supply, history has taught us a lot there, too. Many of Australia’s big cities have larger proportions of their workforce in the construction industry. For a few years now, Propertyology has grown increasingly concerned about the record levels of new supply building up in housing supply pipelines. Official data confirms that 335,186 out of 412,667 new dwellings approved (81.2%) during 2014 and 2015 were in capital cities. Don’t expect spectacular growth; in fact, many will produce price falls!

Some people forget that the Sydney market flat-lined for six long years while many parts of Australia, especially regional Australia, sustained a long period of strong growth. Even as recently as 2011, the Sydney market declined (albeit small) and followed up with zero growth in 2012. Most properties in Brisbane declined by fifteen per cent between 2011 and 2012. Perth and Darwin are declining right now and Propertyology forecast that both have a bit further to fall. Melbourne and Adelaide both have economic head-winds to overcome with significant job losses to come from car manufacturing plant closures.

Unfortunately, a significant proportion of property investors, and those who commentate on property markets, can’t see past Australia’s three or four biggest cities – less than twenty per cent of all LGA’s in Australia. Good decisions start with reviewing 100% of our choices; that means the fundamentals of the 411 LGAs located in regional Australia as well as the 139 LGAs that make up our eight capital cities! Think differently; it worked for people like Steve Jobs!

API Magazine [July 2016 issue]