Strategies in a flat property market

For the last few years making money from property has been relatively easy. Anyone, even those with little understanding of property investment, could buy almost any property in a reasonable location, and sit back as the value increased almost daily.

But of course, this could not last forever. First home buyers have been forced out of the market due to decreasing affordability and many established home buyers and investors have been spooked by general economic uncertainty and more recently by rising interest rates.

Others realised that 1.5% capital growth a month that some areas exhibited was not sustainable.

Although the long-term trend for property prices in Australia is upwards, growth is not constant. Concerns about inflation and our fast growing economy and a mining boom ahead prompted the Reserve Bank to unexpectedly raise interest rates this month and put some speed bumps along the way.

Before I get into the implications of a flat property market, let’s have a look at where we are around Australia in property.

Over the last few months Australia’s housing market continued to tread water, with the latest figures from RP Data www.rpdata.com and Rismark showing house prices increased just 0.1% in September, meaning house prices have basically not risen since May. The data shows the national median city house price is $406,500, which is $9,500 lower than at the end of the June quarter.

During the month to the end of September, the best-performing market was Sydney, where prices increased 0.9% during the month, compared to a rise of 0.5% in Melbourne and 0.7% in Brisbane.

Prices in the under-performing Perth market dropped 1.9% in September, while prices in Darwin were down 1.1%, down 0.8% in Adelaide, and down 0.3% in Canberra.

Capital city home prices are up 7.9% on a year ago while prices in regional Australia performed poorly with prices rising only 2.7%.

In annual terms the RP Data reported property prices are higher than a year ago across all capital cities except Perth (down 0.3%). Leading the way is Melbourne (12.7%), followed by Canberra (up 11.3%), Darwin (up 8.2%), Sydney (up 9.3%), Adelaide (up 6%) and Brisbane (up 2.1%).

What do these figures show?

Well what they don’t show is the segmented nature of the markets. While the market is less buoyant than earlier in the year, good properties are still selling quickly, however B and C class properties have been hit hard.

It is clear that the property sector is in the midst of a consolidation – something I have been predicting for a few months. I saw this coming because finance approvals were falling (there were fewer buyers applying for finance) at a time when there were more properties on the market. According to SQM Research Brisbane has 50% more properties listed for sale than this time last year, while listings were 20 to 30% higher than last year in other cities.

So with flat or stagnant housing markets around much of Australia for the next little while, obviously property investors will not be able to count on strong increases in capital value to produce profits.

However, it is said that successful property investors should be able to make money under any market conditions. Although capital values may not rise as they have done over the last few years, and in some areas might even fall, there are strategies and techniques available to property investors to beat the market.

Characteristics of a stagnant market

First, before we look at the strategies available to us, let’s look at the characteristics of a stagnant market.

In a stagnant or falling market, typically you will find that:

• There are less buyers.
• Properties take longer to sell.
• Property prices are only increasing slowly and they are falling in some areas
• More properties are sold at prices considerably below asking prices.
• More people rent, especially first time buyers who either cannot afford to buy, or who do not want to risk taking on a loan.
• Rents increase and vacancy periods reduce.

At first sight this might all seem like bad news. But actually these characteristics provide property investors with opportunities to profit.

Opportunities for investors

At this stage of the property cycle there are more opportunities for investors because:

• There are more flexible or motivated sellers, who will be prepared to agree to a better price or better terms, or both, and so there will be more well priced properties to be found.
• Property yields will increase as rents rise because we are at the stage of the property cycle where rising interest rates will keep more potential buyers out of the market and stop builders building. This means more tenants and fewer new properties for them to rent and of course this leads to higher rentals.

Don’t forget that so far, history has shown us that falling or stagnant markets are temporary. The good news for property investors is that in Australia, as our economy picks up, inflation will kick in, wages will increase and property prices will start increasing once more.

But it does mean that now, more than ever, you can’t just buy any property, rent it out and wait for capital growth to generate equity.

To be successful you need to buy a property below its intrinsic value, in an area that has always exhibited strong long-term capital growth and add value to your property.

This is not hard to do. You just have to have up-to-date information on values and do your research. Buying an established property “with a twist” below its intrinsic value is a great strategy in today’s market.

What do I mean “with a twist”?

One that you can add value to through renovation, or with a hidden opportunity that others have missed.

Then as the cycle moves on, as it always does, you will own a property that will benefit from the rising market.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.