Investing in Property Does Add Up
Earlier this week, Michael Pascoe, BusinessDay contributing editor for Fairfax Media, published Why Investing in Property Doesn’t Add Up, looking at the property market forecast in the next few years.
The article cast a negative outlook on the property market in the next few years, and claimed investors should expect to lose money in that time.
The reality is that property should almost never be viewed as a short term investment. Regardless of what the market does in the near future, property is a long term investment to make real gains.
According to Pascoe, “the average investor buying housing today is going to lose money over the next few years. That’s not because of any Doomsday Brigade price crash. It’s enough for prices to go flat for investors to lose money.”
“Investors get carried away with optimism in every boom in an asset class but once the froth is blown off the top of the market, the herd generally understands the easy money has left the building” he said. “The average property bought today and sold in three years wouldn’t quite break even on a nominal basis and would be down maybe 6 per cent in real terms” after transaction costs.
The sentiment behind this is that property is over hyped and is not a worthwhile investment in the next few years. Which is wrong.
There has been a substantial jump in prices over the last few years as everyone knows. That looks to be correcting over the immediate future, creating a more balanced market and accommodating better conditions for buyers. But a climb in values doesn’t mean that property is still not a worthwhile investment; it is potentially the most worthwhile.
One of the biggest dangers in property investment is to expect a quick profit turn around.
The capital gain over time will depend on the quality of the property, but short term investment often register a loss for the vendor. In the latest CoreLogic RP Data Pain and Gain Report, it was revealed that “homes that resold at a loss had an average length of ownership of 6.7 years.”
“Sales recording a gross profit [had an] average length of ownership at 10.1 years, while homes which sold for more than double their previous price were owned for an average of 17.7 years.”
“Property bought and then sold within a short time, 2 – 3 years for example, would definitely run a higher risk of losing money” says NPB Buyer’s Advocate, Brenton Potter.
“There can be exceptions to the rule if a suburb goes through a period of accelerated growth, but that’s more a rarity than a regularity. A few years is not really long enough for a property to accumulate value.”
The danger in this type of commentary is that it supposes that property investment is a quick turnaround, and is only worth investing in if there is a strong vendor market. Which is not true. Property is often one of the best ways to invest regardless of market conditions because property continuously raises in value. The caveat on this is of course the quality of the property – some properties perform better than others for a variety of reasons.
“Buyers need to take a longer term view when investing in property” said NPB advocate, Rob Di Vita.
“Historical data shows that property will increase in value over time – say 10 to 15 years – but the quality of property will depend on how much. Off the plan, high density apartments will often take much longer to appreciate in value, and may even go through a period of depreciation before they grow in value, whereas low density established property may appreciate much faster.”
The other danger in this ‘forecast’ is that it takes a general look at growth prospects in the near future. The overall property market is anticipated to have steady growth in the next few years, but that doesn’t mean some properties will do better than others. It all depends on the quality of the property – investing in a quality property will yield the best possibility for buyers to achieve good capital growth.
Investing in a good property and holding it for the long term actually does add up.