Stick to the ‘fundamentals’

Stick to the ‘fundamentals’
November 15, 2018 Simon Pressley

There are plenty of cliché’s thrown around in the world of property.

From ‘Location, location, location’ to ‘worst house, best street’, there are any number of pithy catchphrases that seem to sum up investment philosophies in a neat package of worded wisdom. One of the best clichés, in my opinion, is a mantra that applies equally across most facets in life:

Stick to the fundamentals

While this seems like common sense of the highest order, few people bother to dig below the surface and sink into details about what the fundamentals mean for their property portfolio plans.

 

Unfounded panic

From time to time, the tone of the broader media my transition from generally positive to doom-and-gloom. There’s never a shortage of people who have a glass-half-empty outlook on life, a keyboard to express it, and many colleagues prepared to echo their negativity. In reality, there’s been very few genuine Armageddon’s!

The current negativity that dominates Australian property markets stems from two core sources.

One is the Sydney-Melbourne market downturn which was, frankly, inevitable.

Real estate markets run in cycles – it’s historically proven – and the boom price growth these two major capitals were enjoying couldn’t go on forever. The failing here is commentators and media are claiming the softening of these two cities means the “Australian property market” is in freefall, but that’s a gross error.

The second source of discontent is the APRA-enforced tightening of credit which does have an influence on property markets at a macro level but, is only one piece of a very big puzzle.

What are the fundamentals?

In reality, there’s a big bunch of factors that influence property markets. Some of these are macro factors (matters affecting the world, the nation, a state in a broad sense) while a majority of the factors are micro (local level issues).

While macro issues such as APRA, tax policies, and interest rates affect every market, it’s the micro-level issues that are most important. And that’s why, in every single year, there will always be plenty of locations across Australia with strong markets [refer here], some that losing ground, and many others than producing modest growth.

Each individual factor falls in to the category of either ‘demand’, ‘supply’ or ‘sentiment’. The important thing for EVERY property investor is to ignore the external noise and gross generalisations and to objectively analyse the fundamentals of each location on its merits.

  1. Demand

Demand for a location’s property stock is one of the foundations of price and rental growth.

A majority of people have a strong belief that population growth is the most important factor on the ‘demand’ side of the equation. While population growth certainly is a factor, Australian history is absolutely littered with evidence that confirms it is far from the most important factor. To help prove the point, please spend a few minutes reviewing the numbers in this graphic.

Affordability is a primary ingredient of demand. Remember, while we all need to live somewhere, we don’t have to buy it. But if we can’t afford to buy it there is no demand to us at all.

Accommodation that’s available at a price point that is easy for the average buyer to enter the market is a staple for Propertyology’s location selection criteria.

A lower cost of living also means that locals can enjoy more things for less money. The 20,000 people who are migrating away from Sydney each year is the best example of the influence that affordability has on a market.

Lifestyle factors are on the demand side of the equation, too. But investors would be wise to remember that what suits your personal lifestyle wont be the same for others. For example, 8 million Australians (and growing) have made a conscious decision to not live in a busy, expensive, capital city. And, while most people like beaches and lakes, very few people actually live near them.

Infrastructure will work in conjunction with other demand-driving fundamentals, too. The important infrastructure is the essential stuff like health and education, quality retail facilities, and efficient transport access.

In saying that, this doesn’t imply that investing in real estate is based on buying near a train station, hospital or university (refer here). If it were that easy, properties in those locations would boom every year. We know that they don’t!

Employment is a key driver of housing demand. As economic conditions change so too do property markets. For example, as the state of Tasmania transitioned from being in recession in 2013 to progressively become one of Australia’s best economies, their property markets accelerated. Vice versa in Western Australia from 2014 to now.

According to official ABS data, 200,300 additional jobs were created in locations outside of the 8 capital cities over the two years ending September 2018.

As one who analyses property markets across Australia every day, it’s a big bunch of economic stuff that I find to be the most important information.

  1. Supply

If there’s just one thing that the 2018-19 Sydney-Melbourne property market downturn should have taught everyone, it’s that absolutely no location is immune to the potential of becoming over-supplied!

An individual location may have the best compilation of demand indicators but if the local construction industry has become over stimulated an investor may soon discover property prices and rents heading in the opposite direction to what they want to see.

It’s too late once vacancy rates are sky high!

Conversely, vacancy rates for an individual location might be low at the time of investing but could quickly become high two years later.

Propertyology monitors supply as an interaction between several essential elements.

Some are legislative factors such as zoning changes that allow for increased density, new land releases, and government incentives to encourage new construction.

We have a number of metrics that we use to monitor the activity of the construction industry in each of Australia’s 550 city council jurisdictions.

  1. Sentiment

We believe there’s a third fundamental factor influencing property prices beyond the stalwarts of demand and supply.

Sentiment (or confidence) refers to how a local community is feeling (its mood).

Influencing factors include elements such as political stability, government policies, interest rates, major events and job security.

Buyers and sellers will view these facets through the prism of their own lives. For a decision as important as buying a property, one requires confidence. And, the human race is very easily influenced by what we read.

One of the primary funnels of sentiment is the media. Unfortunately, ill-informed reporting on the property market can have very real impacts on prices. Gross generalisations about the market or selective analysis of dramatic statistics can have some readers screaming in horror at the fate set to befall us all.

This was well evidence by a recent television report claiming the “Australian property market will drop by 40 per cent,” when, just the next day, the entire foundation of the story was quashed as extreme by the very sources who appeared in the program. These commentators claimed selective editing painted a very unbalanced picture… but then, a reasoned voice of moderation would hardly sell advertising space on the tele, would it?

What are the solutions?

Astute investment decisions come from blocking out the noise, understanding fundamentals, knowing where to get good quality information, being able to join the dots, and then having the courage to act.

Always remember, the mainstream property media predominantly focus on what’s happening in Sydney and Melbourne – just TWO cities. Australia has a population of 25 million people and its geography includes 110 individual towns and cities with populations of 20,000 or more people.

That’s lots of exciting options for an investor to properly analyse in order to take advantage of the best opportunity.

Right now, more than half of those locations have produced price growth over the last 12 months. Some have produced double-digit growth. You’re unlikely to learn that from mainstream media.

Pay little attention generalists and don’t be fooled by the naysayers. Australia is a BIG market with many opportunities. Stick to the fundamentals, and there’s no doubt you’ll be a long-term winner!

 

Propertyology is a Brisbane-based buyers agency and (national) property market research firm. We help everyday people to invest in strategically-chosen locations all over Australia. Through understanding and analysing market fundamentals, Propertyology was the only company in Australia to forecast Hobart’s remarkable resurgence and begin investing there in mid-2014, before the boom. Our multi-award-wining buyer’s agents are now actively investing in several other locations. Like to know more? Contact us here.

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