Opportunities When the Property Market Tops Out

The property market is one of Australia’s most valuable ‘commodities’. Sure, we export minerals, agricultural products and health foods. But property is one of our national treasures.

It’s not just the locals who are in love with Australian real estate. Overseas investors value Australian land over all others.

According to poll of 150 China-based real estate agencies, 149 believe Chinese spending on foreign property would jump beyond 2015 figures this year.

Notably, Australia was at the top when it came to destination preferences. Our property market was favoured by 60% of surveyed agencies. We even beat out other popular countries like the UK and Canada.

You might be wondering why Chinese buyers are so addicted to Aussie real estate. But the answer is simple. Sure, they yearn for the lifestyle and opportunities Australia provides. But they also want to protect their cash. As the Chinese yuan devalues against the US dollar, holding cash is almost like throwing it away.

Chinese Yuan devaluing against the US Dollar

Source: XE.com

The graph above shows how the US dollar-yuan exchange rate has changed over the years. As you can see, since early 2014, it’s now costing more and more yuan to buy just one US dollar.

So instead of waiting for their cash to lose even more value, Chinese investors are buying appreciating commodities. And where better to look but Australia, right?

Growth slows down

There’s been a lot of talk about the slowdown of Australia’s property market. Economists at ANZ Banking Group [ASX:ANZ] have recently predicted the housing sector will soon reach its peak.

It’s not hard to see why ANZ would expect the market to run out of puff. There has been a crackdown on investor borrowing. It is now harder for foreign buyers to get their hands on Aussie land. And a glut of apartments will soon to come onto the market, likely reducing overall median prices.

The graph below shows the overwhelming increase in multistorey apartments in Australian capital cities.

Increase in multistorey apartments compared to houses

Source: Australian Financial Review

The number of multistorey apartments being built is almost triple that in 2010. Why is this a problem?

The simple law of supply and demand states that, once supply surpasses demand, prices start to drop. However, what’s scary is the overwhelming price climb of apartment developments (shown below).


Source: Australian Financial Review

It may mean that all this money has been thrown at assets ready to fall. I don’t personally share this view; however, it’s still something you should take into account when thinking about purchasing property.

But regardless of whether the market goes up, down or sideways, there are always opportunities to be had.

One market made up of many

Within any market, there will be booms and busts. Take the share market for instance. Right now the ASX 200 isn’t faring too well. It remains pretty much flat for the year, and growth prospects aren’t great.

Yet this hasn’t stopped investors from putting their money into the market. And why should it? It could be said that bear markets present far more opportunities than bull markets.

In a bear market, investors choose to buy beaten down blue chip or small-cap stocks for their growth opportunities.

This same principle applies to property.

A common mistake is to think the property market moves as one. There are markets within markets when it comes to real estate. If there weren’t, you could just close your eyes and point to a house.

Of course, no serious property or equity investors do this.

If the overall property growth is sluggish, why not look for particular suburbs that are gentrifying (when a particular area or suburb is experiencing a change in occupants)?

The area or suburb might consist of low income earning residents now. But in a few years’ time, the same location could be filled by young professionals with growing incomes. Their presence will bring accompanying infrastructure and development. Before you know it, the area becomes a hotbed for young professionals who want to live there. And the demand is reflected in market-beating returns.

Of course, it isn’t as easy to just say, ‘I’m going to buy in a gentrifying area’. As with all investing, you need to do your research and know the figures. You have the chance to grow your wealth, whatever the market is doing.

Opportunities do not always present themselves; more often than not, you need to make the opportunities for yourself. You can do so by increasing your financial knowledge and having the courage to try.

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 some self-proclaimed guru? Instead, why not do your own research and take control of your financial future.

But where do you start?

If you’re interested in investing in property, check out Money Morning’s property expert Callum Newman’s report ‘Australian Real Estate Game Plan’. In the report, Callum reveals the eight letter word that really drives 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.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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