Too Many Property Investors in the Market?

When investing in property it’s not too dissimilar from investing in stocks. When looking at potential stocks to buy, you be interested in looking at their financials. This means you’d be looking at things like earnings, debt, price-to-earnings (P/E) ratios, among many others.

And it’s the same when it comes to property. But instead of financials, you might look at vacancy rates, distance to the CBD, and the surrounding amenities. However, there’s one huge difference that applies to property and not stocks market. And that’s the level of investors.

The more property investors you have in a market, the harder it is for property values to go up. This might seem strange at first. If there are more buyers and demand is higher, wouldn’t prices go up?

But if there are more property investors in the market what happens? The Australian Government starts by channelling more money to building more dwellings (mostly apartments). This not only increases the supply of property (causing prices to stagnate or decrease) but it also gives the construction industry more jobs.

So effectively it’s a win-win-lose scenario. First home buyers have the benefit of property price stagnating, so they can save up for a deposit. Construction workers get jobs. But property investors have to sit and wait longer for property prices to appreciate. And many times they sell out for a loss.

Therefore, you wouldn’t to buy when there are a lot of investors; prices would take years to appreciate.

How Stock Investing Compares to Property

Now let’s put this in contrast to stock investing.  When it comes to stock investing, the more investors the better. It creates liquidity and volume, which can help you get in and out of positions.

But, generally speaking, a large amount of investors in the property market aren’t desirable. Despite that, Australia’s largest landlord lender, Westpac Banking Corporation [ASX:WBC], recently lowered the deposit needed for investors.

Instead of providing a 20% deposit, Westpac and St. George have decreased this figure to 10%. This means investors can now obtain loan-to-valuation ratios (LVR) of 90%.

The reason why they’ve lowered the deposit requirements is obvious enough. They want to be more competitive. And maybe decreasing the amount for an investment deposit isn’t so bad after all.

Banks are now increasing their strict regulations on overseas investors. For example, if a foreign buyer wishes to buy Australian property, they can only buy off the plan or new. And in addition, their deposits have been raised to 30% in some cases.

This means their LVR is 70%, which could put off many investors by the sheer amount of cash needed. Hence decreasing the amount of overall investors.

Yet I want to make it clear that I’m not suggesting that the Aussie property market is overvalued. There are pockets within the Melbourne and Sydney markets that are in need of a correction. However, on the whole there are plenty of opportunities out there to get great properties at par or below market value.

All you have to do is research, just like when you invest in stocks. You wouldn’t simply buy a blue chip stock just because you believe it’ll go up. Look what has happened to BHP Billiton [ASX:BHP]. If you bought five years ago, you’d be down 58% on your investment.

So why do the same thing when you buy property? Study the area, do your research, and in the long term you’ll be rewarded.

Härje Ronngard,
Junior Analyst, Money Morning

PS: Most people think great deals in Aussie property are already all gone. This is the worst attitude to have. Why would you take financial advice from a friend or something a self-proclaimed guru told you?

Instead why not do your own research and take control of your financial future. But where do you start?

If you’re interesting in property then check out Money Morning’s property expert, Callum Newman’s report ‘Australian Real Estate Game Plan’. In Callum’s report he’ll tell you the eight letter word that really drive property values. It’s the ultimate guide to help you start your future property plan, and it’s free!

To get your copy of Callum’s report, click here.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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