Is it time to worry about our property markets?

The financial markets around the world are currently taking a beating and for the first time in a long time property prices are falling in many parts of Australia.

According to RP Data-Rismark’s Home Value Index the seasonally-adjusted, capital city median house price in Australia dropped by 0.2% for August, with an overall decline of 1.2% since the market peak in May.

Even though national house prices increased by 8% during the 12 months to August, current signs clearly indicate a cooling market as we wrap up 2010 and many commentators are predicting that, at best, prices will remain flat for some time to come. Of course, there are always the doomsayers who see home prices falling significantly.

So is it time to worry about our property markets?

I don’t think so. Sure we are moving on to the next phase of the property cycle, 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% growth in some suburbs; the markets are simply getting back to their averages.

The RP Data figures for the last quarter show Hobart and Canberra were the top performing capitals, with median house prices increasing over the three months to August by 1.4% and 1.2% respectively, while Sydney was the only other city to experience a price rise, albeit a negligible 0.2%.

Declines in median prices for the same period were seen in Melbourne, with a fall of 1.5% and Brisbane where prices dropped by 2.6%, while Perth took the biggest hit with a substantial decrease of 4.8% over the last three months.

Overall the national median house price was recorded at $410,000 for August, down from $415,000 in July.

So what is a property investor to do?

One of the biggest mistakes that many property investors make is they forget history.

When a market turns, they 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 success 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 over the next few months – possibly well into next year. But I also see some great opportunities.

With an improving local economy, strongly rising population growth, rising rents and the ability to buy a bargain from some 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 some investors will set themselves up for success in this current stage of the property cycle.

My personal strategy is to continue what I have been talking about and doing personally for years:

1. Buy the right type of property – one that has some element of scarcity, which will always make it appealing to owner occupiers (who push up the prices) as well as tenants.

2. Buy in an area that has always outperformed the market.

3. Buy at the right price –this should be below its intrinsic value – the type of price that even if values do drop 5 or 10 % (and I don’t think they will in most areas) you will be covered.

4. Only buy a property to which you can add value – during this time of flat growth, manufacture some capital growth yourself through renovations or redevelopment.

What about falling property values?

The property markets across Australia have generally held up pretty well, but are obviously adjusting to the rising interest rates and general market nervousness.

Sure, the value of some properties has dropped. This has particularly occurred in the upper end of the market – but these were never investment grade properties. The same will happen in many holiday locations over the summer months – prices will fall as fewer buyers bid for the many properties on the market. And property values are falling in the lower end suburbs, new housing estates and regional Australia – all areas that will be more sensitive to rising interest rates. And prices will fall further in these areas.

But I see medium density middle priced properties – particularly inner and middle ring suburbs in Melbourne, Sydney and Brisbane holding their values pretty well.

You know how they say statistics lie? Well, currently the reported median price changes are not a good measure of what is really happening in the market.

Let me explain…

While the general property market has been pretty flat there are still some suburbs that have had very strong capital growth, while at the same time many suburbs have had their median prices fall.

It’s like me putting one hand in a bucket of ice water and the other hand in a bucket of boiling water and saying “on average the temperature is fine!”

Some parts of our capital city property markets are hot and others are not.

We’re moving into the next phase of the property cycle – one of increased risk for many investors (because they won’t be carried by rising markets) yet one of great opportunity for those who know how to play the game.

So what am I doing now? I’m going to continue investing the same way I’ve always done.

I’m going to continue looking for opportunities, be financially responsible and take advantage of the buyers market.

What does the future hold for you? Will it be one of prosperity or one of dependence? That’s the most powerful question you can ask yourself. What are you doing today to protect your future?