why property investing is for mugs

Why Property Investing is for Mugs

We?ll stick with the property theme for today. Tomorrow we?ll have something different? probably.

Have you ever wondered why property investors just can?t bear to admit that house prices could fall?

I mean, ask any other investor and they?ll admit it?s possible for their favourite asset class to drop.

It doesn?t matter whether they?re share, gold, bond or art investors, every last man jack of them will say, ?Prices can fall as well as rise.?

But not property investors.

Property prices always go up is their mantra. Even in the face of evidence to the contrary, they still deny it.

Well, there?s a simple reason for their denial, which I?ll get to in a moment. First, as we did a bit of channel hopping on Foxtel last night, we stumbled on Your Money, Your Call on Sky Business Channel.

Maybe, if we?re kind, we can see a few cracks in the property-always-goes-up-mantra. Even so, it?s like drawing blood from a stone to get property experts to concede house prices may actually fall.

Even so, the wording is so cryptic that one of the experts admits there has been a price correction but not that prices have fallen. Only in the world of property does a price correction involve prices going up!

The following is a transcript of the host, two property experts and Adam from Willoughby ? a caller to the show:

Adam: ?How much further do you think the property market could come off? We have recently sold our property in Willoughby and we?ve taken over a 10% hit on our property? we had it valued last February and we recently sold it, in fact it?s over, a greater than 10% hit, and in some of the surrounding suburbs people are seeing in excess of 20-30% devaluations on their properties. That probably hasn?t escaped to the press yet but it is significant, and in talking to a lot of? the real estate agents, they?ve only really got one buyer on most of these properties. So I?m just wondering whether you have any view in terms of how far it could fall??

Before we go on, we like Adam?s reference to reports of price falls not having ?escaped to the press yet.? Of course he should have said it ?hasn?t escaped from the press yet.?

The press is just as keen as the property spruikers to keep price falls under wraps. Even when they do run a prices-falling story, it?s soon followed by a prices-to-the-moon story ? just to even things up. But anyway, back to the show?

Host: ?I don?t see any evidence of significant falls in the lower north shore of Sydney, what are your thoughts??

Expert 1: ?No, I do a lot of work in the lower north shore, a lot of work. And in fact I had business in Willoughby and I was auctioning a couple of properties in Willoughby on? Saturday, and we didn?t sell one of them I grant you, but I have not personally seen a drop in the lower north shore. We have experienced I believe a drop in the northern beaches area, but that?s probably been the case for the last three to four years. What has happened, there has definitely been a slight correction, whilst I don?t think there has been a drop I think that the rapidity of the growth has certainly come off the boil a little, but the thing about Willoughby and those lower north shore areas ? in my humble opinion ? is that they are the most convenient spots in Sydney to get around. They offer great lifestyles and really when you look at Willoughby for the size of the blocks that you get, the size of the homes you get, you compare them to the inner west or the inner east and they?re still very good value in Willoughby so I can see that the lower north shore will continue to go along OK, that?s my absolute thought on that one.?

Host: ?Lisa Montgomery would you agree? This goes back to the great variability you see in Sydney, particularly near the harbour.?

Expert 2: ?Yeah, look I do agree. And I think it?s interesting. This is your family property you?ve just sold? if you?re going to be selling and buying, yes you might have lost a little bit in that correction but if you?re buying in the same market you may be able to pick up a little bit with that next purchase as well. So, you know buying and selling in the same market is OK, it?s when you sell and you hold for some time that that correction could cause you some difficulty.?

Expert 1: ?And Adam, you did use the word valuation and that?s not an exact science? I really have to say to my great friends out there who are valuers, you know it?s a very difficult job particularly in a market that is decreasing a little, we?re looking at valuations which are six to twelve weeks behind and is often trying to catch the tail up so, really I think valuations and particularly if they?re only estimates from agents, you?ve got to be very careful, you really do.?

For a start, buying and selling in the same market isn?t OK if you?ve made a loss.

A loss is a loss. It doesn?t matter if the new property you?ve bought is cheaper, you?ve still made a loss on the property you?ve sold. If you buy something for $1 and sell it for 50 cents, you?ve made a 50 cent loss? even if you buy something else for 50 cents.

And secondly, it?s a bit rich for a real estate guy to have a pop at valuers for getting house values wrong.

But anyway, as you know, financial advice and property spruikers don?t always go hand-in-hand. As the following example shows.

Clear evidence of why property spruikers need prices to go up was in the ?top tip? from property guru Chris Gray on his Sky Business Channel show last Friday:

?Before you buy an investment property you?ve got to work out your numbers beforehand. So let?s just say you bought a typical $500,000 investment. That should rent out at about $450 a week. And that equates to about $22,500.

?Now let?s just assume you borrowed 100% of the funds at say 7% interest, that equates to $35,000 in mortgage repayments. Now strata fees and other expenses are going to be about 1% of the property value, so that?s going to be about $5,000 a year.

?So if you add all those numbers up, a property of about $500,000 will cost you $15,000-$20,000 in cash flow.

?So why would you ever buy an investment that costs you money? Well, if that property rises on average by five or ten per cent a year it?s going to rise by $25,000-$50,000 which means that your net return is anywhere from $10,000 to $40,000. So the real key to making money from real estate is to cash flow it in the short-term and then you?ll make money in the long-term.?

There you have it. Exactly as we?ve told you all along. Property investors buy housing for one reason ? capital growth. The income to them is irrelevant apart from the fact that it helps reduce their annual expenses.

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