• 19 September 2014

Property is not a get rich quick scheme

Today we are going to be looking at two graphs from RP Data. What happened between 2003 and 2005? There were price rises but these were restricted to Melbourne and Sydney. It was merely Sydney and Melbourne playing catch up after some years in the doldrums. Yes Property investment is not a get rich quick scheme. There are many years in doldrums but there have been and will be many years of growth. This was Sydney and Melbourne’s growth spurt. No need for alarm but alarm there was, thanks to the media. The RBA forgot the first law of supply and demand set prices. Sydney and Melbourne were simply attracting a lot of rising prices but a lot of rising production by builders eager to make sales. A normal market equilibrium. However, the RBA panicked and immediately raised prices. Because of what they thought was happening in Sydney and Melbourne they hit hard every mortgage holder, every business person across Australia. Property club advised about this long ago in our magazines. We also wrote to members of parliament.

The question is would the Reserve Bank again be stampeded by sensation media headlines in raising rates right across Australia. Including the “Melbourne and Sydney boom”? Believe it or not my opinion on the RBA has turned. I don’t think they will rush to raise rates. I think they will see that rising construction is vital for the economy and it in good time will steady price growth.

Please see the below chart; A1 shows on the back of a low supply into the market prices were rising rapidly. When I started to come into the market towards the end of 2009 the one previously lodged development applications. But the RBA were busy rising rates again. You would recall that we alone picketed all the RBA offices around Australia month after month calling for a 2.5% interest rate (which they have eventually came back to!) We also called for stability with interest rates (which they have now come back and given us). Nearly 14 months of no RBA fears of a rate increase each month. Sensible sanity now businesses can plan ahead with some sanity.

B. Now we have prices rising again and again it is on the back of supply. However there is a lot of builders applications passing through the system that will result in supply.

What does this mean? And how can you benefit?

It means that some areas are currently under supplied and experiencing rapid price growth (which the club had predicted). They will soon have more supply coming in which will lead to a flat lining in capital growth. On the other hand there will be areas where we believe there is not enough stock coming through the pipe line but our rising population. This is opportunity time!

Chart 2; shows the rising investment as a share of the total housing market. You will see that it kills off quickly when there is a rate increase. We can see in 2005 that investment reached a peak. The RBA rate increase quickly killed this off. In other words, the RBA again have proof that their actions can kill supply and the buyer force up prices and rents! Next one we see this again in 2008 sanity was returning to the market. Rates had crashed right down and investors again returned to the market bringing in more supply. With these green shoots of summer coming through and confidence of the community what did the RBA do? They killed off the green shoots by raising rates early. You can see the result is investors deserted the market pulling down the supply and raising prices. Refer back to top chart; you can see that this is the return to the market bringing in more supply. If you look at the top chart this coincides with the rapidly rising prices on the back of the previous low supply caused by the previous RBA rate hike.

So what about the future?

Has the RBA learn from its past mistakes? I think they have. I don’t believe the next move by the RBA will be up. What a great time to be investing in solid bricks and water. See your property mentor to learn about the properties not to buy. For example lightweight construction – maintenance issues. Those properties that are in regional towns, cities or worse mining areas. Would you then like to know what other traps are lurking that you can avoid? Contact your property mentor we have a book of 100+ tips and traps in property for you. I know this will create even more jealousy and envy with our opposition out there when we say yes again this is all free. Again, no we do not charge $6,000-$10,000 like they do. No we are not spruikers we are not representing real estate agents out there who have to get the highest price off you.

Regards, Kevin Young

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