The Pitfalls of Buying Property

We have recently conducted a national survey of our client base and it has revealed some interesting data. About 70% of our client’s wealth, outside their principal place of residence, lies in the property market! This is an astonishing figure, and raises the question – “What happened to the Share Market?”

This is a good question and it seems as though it is the volatility of the stock market that has frightened off so many of our clients from investing in shares. It is interesting to note, that over a long period of time, both the stock market with share dividends and capital growth and the property market with rent and capital growth, come out to have about the same returns. Over the short term however, the property market is not quite so volatile.

During a survey we conducted, we asked our multi-million dollar property owners, “When do you think is a good time to buy property?” Their replies were, “Now”.

We then asked them, “When is the best time to sell property?” They replied, “Never”.

So if we adhere to that philosophy, it is critical that the type of property we purchase should be what we call a ‘Never Sell’ type property.

Bongiorno’s philosophy on buying property – 101

Never buy off the plan. This is something we have strongly communicated to our clients over the past 20 years. Our experience clearly shows that;

1. Off the plan properties are usually on very large blocks and tend to be overpriced. Furthermore, developers have to build in a bit of a profit margin above the norm, to cope with price increases.

2. This over-pricing of property is often coupled with what we would call “genuine speculation”, rather than a “genuine investment”. This speculation is often fuelled by people receiving government grants or an influx of overseas buyers. We can, and have seen, changes in these rules and regulations and what they do is dramatically affect the demand for these types of properties.

In our experience, it is almost always the second or even third buyer of the unit in such a development who makes money off the purchase. This is because this second or third buyer usually purchases the unit at a significantly lower price than the original buyer.

Buying a unit. We prefer our clients to buy in smaller blocks of less than six units. There are two important factors that can influence a falling unit price;

1. Multiple forced sales due to people that have lost jobs, become divorced, or mortgagee sales.

2. Outrageously high body corporate fees and unmanageable body corporates. Essentially, many people buy in large developments and don’t realise how expensive the body corporate costs are. In addition to this, you will have little or no say in the maintenance of the apartment in large developments because of the unruly body corporate structures and rules.

From a capital growth and valuation point of view, it’s the forced sales that can cause the biggest issues in big blocks.

Of course, there is one other issue, and that is that high rise developments are going up everywhere. History clearly shows us that these apartments are easy to replicate and that they never show the same percentage capital gain over time compared to houses.

 

 

House purchases. Remember it’s always the land that increases in value, whereas the actual building decreases over time. Typically, the closer you are to the CBD of a capital city in a top category suburb; the more likely you are to experience a strong capital gain over time. These well selected houses should, on average, double in price every 11 years.

Of course there is no exact trend as to when, and if, the price will increase every year, but the expectation is about 6% - 7% compounded growth per annum over a long period of time. You could also expect a net rental return averaging about 3% - 3.5% per annum. If you add the two together you’re looking at a total return of somewhere between 9% and 10% per annum, which is pretty fantastic.

How do you select the right property? What we have are sectors that are much stronger than others and there is no doubt that well located residential housing, in the long term, is the safest bet.

You, as my client, have access to RP Data through us. Don’t forget to make use of this facility when looking to purchase a property. Detailed and helpful reports can be generated on the exact property that you are looking at or on a whole suburb of interest. Suburb reports are fabulous as they not only show all the statistical information about capital growth over time, but also show demographical information on the suburb.

We recently came up with some interesting data on top performing suburbs. For example, Kew in Melbourne is far less likely to experience any mortgage stress than any other suburb. The reason for it is that in Kew, Tony found that 40% of the houses have no mortgages. This indicates that there probably won’t be a large number of ‘For Sale’ signs on houses compared to a suburb where perhaps only 20% of the houses have no mortgage.

If you would like to book a meeting with Julie or simply access some RP Data reports, please contact Julie on (03) 9863 3306 or email her at juliebongiorno@bongiorno.com.au.

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