Don’t invest in the US property – it’s only going to get worse!

I know investing in US property is the flavour of the month at present.

But if you are considering investing there, no matter how cheap a house may seem, please take heed of a warning made by Rupert Murdoch, one of the smartest business people around. He is concerned that the US economy will be at a standstill for almost a decade. “There’s humongous unemployment. At least 30 million are either looking, given up looking or have half the job they had before. And it will get worse,” said Murdoch.

And if you’re still thinking, “Surely the prospect of being only paying $20,000 to $40,000 for a property and getting high rental yields is something Australian investors should consider” heed the words of Ben Bernanke, Chairman of the US Federal Reserve. He recently reported that more than 20% of US borrowers owed more than their homes were worth at present and an additional 33% had equity cushions of 10% or less, putting them at risk should US house prices decline much further.

But it gets worse…

The latest figures out of the US show that new home sales tumbled 8.1% in October while the median home price dropped to the lowest point in seven years.

It was the fourth time the sales rate has dropped in the past six months with high unemployment, tighter bank lending standards and uncertainty about home prices keeping locals from buying homes. Plus there is the flow on effect that helps the US economy spiral downwards. Weak housing sales mean fewer jobs in the construction industry, a sector that normally powers economic recoveries.

Established home sales are also very weak with buyers worried that home prices could fall further. Some can’t sell their current home to upgrade to a larger home, either because they have lost equity or they can’t find prospective buyers who can qualify for loans under tighter bank lending standards. The market is declining even with mortgage rates near their lowest levels in decades.

Sure property values have dropped considerably in the US but for a good reason and it doesn’t mean they are good value yet. Those cheap properties on sale were probably never worth the exorbitant prices they fetched a few years ago and they may not be worth the asking price now.

If you look at the facts there are some places in America where you can’t give a home away at any price! Doesn’t that make you suspicious? Something just doesn’t seem right, does it?

Let’s look a few other reasons not to invest in the US:

1. An unhealthy economy: Let’s not beat around the bush – the US economy is one of the worst performing in the world. Currently the US government debt levels are at a staggering 80% of GDP. In contrast, in Australia this figure is 6%. And don’t count on new government stimulus to pull the economy out of its recession – this hasn’t worked so far and some economists suggest the economy could dip again.

2. Massive unemployment: with an official unemployment level of 10%, but a more realistic figure close to 20%, and you’ll find unemployment is even higher figure in the back waters where you can buy these cheap properties. Sure unemployment means more tenants than home buyers – but how are they going to pay your rent?

3. Huge oversupply: there are current millions of properties sitting vacant in certain parts of the US and up to 20% of current home owners have negative equity in their homes.

4. More foreclosures forecast: A further four to five million US properties could go into foreclosure in the next few years.

Over the years I’ve spoken with many people who have invested (well I’d call it speculated) in the US and I haven’t seen one Australian property investor who has made money out of it. The only people I’ve seen profiting from the US property market are the spruikers who promote these schemes.

Sure, a $40,000 property sounds cheap but what many Australians don’t realise is that often the promoter has already added up to a 100% to the purchase price. This means the promoter finds a property for $20,000, and sells it to an unsuspecting Australian, and particularly the New Zealanders who seem to love US properties, investor for $40,000.

Then there are the tax issues and property management issues. Do you realise that in many areas of the US the property manager goes around collecting the rent personally and rents are paid in cash?

On the other hand in Australia we have constant demand for properties from a growing population and in some areas we have an undersupply of properties. This contrasting supply and demand ratio is what has underpinned our property markets during the GFC and has seen values increase over the past couple of years.

In my opinion, you should always invest for long-term capital growth, not the immediate gratification of a much smaller rental return that comes with positive cashflow real estate.

You will never get rich from rental income (on which you pay tax), but you can create substantial wealth from property that generates strong, long-term capital growth.
Investing sensibly will make you money, speculating will not.

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.