The Secret to Surviving the Property Boom and Bust Cycle

Today’s Money Morning is sounding an alarm to all Victorians. Prepare for an invasion from the north!

Domain reported on the weekend that it now costs more to buy a block of land in an outer Sydney suburb than an actual house in other state capitals across Australia.

How long before New South Welshmen start flooding out of the place?

Today’s Money Morning takes a peek into things to find out…

What’s driving Sydney real estate?

You only have to take a look at the top 10 suburbs for land sales in the six months to December 2015 to see some of the prodigious price rises.

See for yourself…

Source: Domain

Click to enlarge

Of course, the dominant factor driving these prices in the first place is net migration into New South Wales.

I asked buyers’ advocate Catherine Cashmore for her take. Catherine is the smartest person I know when it comes to Australian real estate.

Catherine told me 70% of overseas migrants now settle in NSW or Victoria, predominantly in the major cities. That’s up from about 50% in 2012. It’s why Sydney and Melbourne have led the country for this property cycle.

But it’s Victoria that is currently attracting more migrants from interstate than anywhere else in Australia. That’s a stark contrast to the 1990s when Victoria was losing 30,000 people each year.

From memory, Queensland was the desired destination back then for Victorians looking for jobs — and more sunshine.

Not anymore. Migration to Queensland is currently falling. But the worst state is, of course, Western Australia. The commodity price crash has seen the rate of migration plummet.

That means you should be looking at Melbourne if you’re interested in buying…

Buy and hold for this asset

I know. I know. An American hedge fund manager has come out and said Australian housing is in a massive bubble, and that Melbourne and Sydney property prices might fall 50%.

OK. Everyone’s entitled to their opinion.

But do you remember when US fund manager Jeremy Grantham said Australian housing was in a bubble way back in 2010?

Or the head of ASIC saying the property market had all the hallmarks of a bubble early last year?

Why is it any different today?

Or will this latest bit of doom mongering go in the file with all the other ones?

It seems like every second week someone claims we’re in a bubble, pronouncing an imminent collapse.

Truth be told, I’ll be more worried when there ISN’T anyone saying we’re in a bubble.

Don’t get me wrong. I’m no spruiker for the real estate industry. But it’s the timing I’m interested in.

That’s what we study over at Cycles, Trends and Forecasts. We’re not ready yet to tell subscribers to stay out of the market.

Perhaps a better approach than listening to opinions is to manage your risk appropriately. One way of doing that is committing to playing the long game. You can ride the booms and busts out if you don’t plan on selling anytime soon.

Take the Parasol family, for instance. According to Business Day, they bought into the Melbourne suburb of Richmond in 1988. They paid $1.1 million for a two storey building.

They can now expect $7.5 million for it today. There have been plenty of property market fluctuations in 28 years — including a major bust.

But, as we say over at Cycles, Trends and Forecasts, the land market takes the gains in the end. Land value captures everything around it.

The sale of the Gatwick Hotel is an even better example…

What this infamous building reveals

The Gatwick is a notorious boarding house on Fitzroy Street in St Kilda.

It’s been the scene for murders, drug raids and stabbings. A lot of the guests that stay there have drug, alcohol and mental health issues.

I know it reasonably well because the Port Phillip Publishing offices used to be down the road from the place.

In July last year, the clientele of the Gatwick took major blame for the decline of Fitzroy Street in general. To be blunt, it is the kind of place you cross the street to avoid.

Even so, the selling price for the building is expected to be $11 million. It dates back to 1938.

Now consider what a Labor MP said last year when the Party considered spending $600,000 in improving facilities at the Gatwick Hotel: ‘The value of the Gatwick isn’t in its land, it’s in its people.

Yeah right. In fact, the surrounding properties will probably double once the Gatwick is gone, if they haven’t already. They take the gain from any future improvements.

Land, of course, is getting harder to come by, especially in Sydney and Melbourne. That’s why the next issue of Cycles, Trends and Forecasts will show how this reveals where to look for capital growth in the suburbs. Find out why here.

Best wishes,

Callum Newman

Callum is a feature editor for Money Morning. He covers areas of interest arising from world markets and the global economy that could mean new investment opportunities for Aussie investors.

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