Why Property? Why now?

The latest residential price indicators showing strong increases across the nation could not have come at a better time. With many investors considering a diversification of assets away from the ASX, the sight of some markets – Melbourne, for example – rising by 20% is clearly compelling.

However, judging by a recent rash of questions to me, some investors seem to be considering a quick foray into property to capitalise on predictions that some sectors of some markets will continue to show similar price increases throughout 2008.

What many have latched on to is the annual median house and unit prices released by Australian Property Monitors last week. These national, composite figures came during a continued stockmarket dive and showed Melbourne, Brisbane and Adelaide recording spectacular price growth above 20% while Sydney lagged, registering a rise of just 5%.

Headline writers made much of the fact that Melbourne, if it continued at this pace in 2008, would catch up to and even overtake Sydney as the least affordable city in Australia. They didn’t emphasise the “if”. Melbourne surpassing Sydney is highly unlikely, but it’s the sort of speculation that makes investors refocus on property.

Many of the letters I receive show a lack of knowledge about the residential property market, suggesting they are from first-time property investors and/or investors who have been out of the market for some time while they concentrated on quicker returns from shares during a stellar and extended period of growth. The recurring theme in their questions is: “Quick, tell me what to buy now and exactly where it should be.”

The first question the “swinging investor” seriously needs to ask is: “Why do I want to invest in property and why now?” A simple question? You bet! And the answer is crucial.

If it’s because the investor is exiting the stockmarket and wants to park some funds in property in the short term with a view to making a big profit based on expectations raised by short-term data, then my answer is equally simple: “Put the money in the bank.”

If, on the other hand, the investor has made a firm commitment to using property to create wealth over the long term, then it’s a case of studying the ground rules before plunging in – particularly in relation to careful and correct asset selection and taking a sanguine, educated view of property and how it works as a long-term strategy.

With property, the bottom line is ensuring the asset will perform consistently over time and through a variety of economic conditions and influences. I urge all investors to pay attention to the preservation and protection of existing wealth-creating assets. If an existing property investor is secure in the level of capital growth, long-term potential for ongoing growth and in their ability to financially service the investment, then some strategic and diversifying planning needs to be applied to any additional purchases.

I have predicted that price growth will continue to diverge across the major cities. Sydney will remain subdued; Perth and Adelaide are expected to cool after hitting peaks last year; and Melbourne (the standout in 2007) will see rises in the most sought-after investment property sectors in the order of 5–8%. We may, repeat may, see some increases of around 10% in the early part of the year when the market opens off the back of pent-up demand left over from last year’s strong close. But that will apply to very specific assets in specific locations.

Once investors have taken a careful and educated approach to correct asset selection in what may initially be an unfamiliar asset class, the most consistent, long-term growth properties will always outperform the second-rate ones this year, next year and the year after.

But, anybody who thinks there are quick “windfalls” to be had over the next six months to a year in the residential property market months is not only barking up the wrong tree, they’re just plain barking!

This story first appeared in the Eureka Report.