What to Look for When Buying Property in a Heated Market

How do you amass a fortune?

If you asked Marcus Crassus, a Roman general and politician born in 115 BC, he’d probably tell you to buy property. It’s hardly ground-breaking advice. But Crassus didn’t buy property the traditional way.

Instead he bought extremely hot property, literally. Crassus made a fortune from buying Roman homes that were on fire at the time of purchase.

Talk about buying a fixer upper.

Once Crassus knew a house in the area had gone up in flames, he quickly rushed to the site. Standing outside the burning house, he’d watch the owners cry in despair. There was no official Roman fire brigade at the time.

If they couldn’t put the fire out with a bucket of water, it was pretty much a lost cause. As you can imagine, Crassus’ offer was a fraction of the property’s value.

How can you blame him? After all, the property was on fire. Every minute meant the house would cost more to repair.

An overwhelming majority of homeowners accepted Crassus’ offer. They would rather get something for their burning homes than be left with a pile of ash.

But how can you amass a fortune from buying burning homes? At some point or another Crassus would have had to sell for a profit.

As soon as Crassus and the homeowners came to an agreement, he’d tell his 500-strong private fire brigade to put the fire out. That’s right; Crassus had the only fire brigade in Rome. He also had a team of slaves who worked on restoring the homes to their pre-burnt condition.

By buying problems and selling solutions, Crassus amassed a fortune. It sounds a lot like the strategy property investors use today. But one does wonder how all these fires got started in the first place…

Temperatures keep rising

How many times have you heard that property prices are near the top? Many commentators and forecasters have tried to predict the top. However, the property cycle hasn’t started its decline just yet.

According to Corelogic, ‘over the past 12 months [starting October 2015], combined capital city home values have increased 7.1% which is up from a recent low of 6.1% at the end of July.

It’s not an easy thing to predict the top of a cycle. The general idea is that the market tops out when rental yields are low and confidence is at all-time highs.

But many of the naysayers who believed prices could climb in future have been proven wrong. Morgan Stanley called the peak in September last year.

In September 2015, we called for a peak in housing market conditions, and flagged the risks from a looming oversupply and macro-prudential tightening,’ the equity research team said.

According to news.com.au ‘…some economist and analysts are saying Australia’s housing price boom has hit its peak – and some are even hinting at an impending recession.’ And this was in October last year.

It would be extremely difficult to employ Crassus’ questionable property strategy in today’s market. However, there is one similarity. Potential homeowners are entering a hot market.

Gentrification

Most of us want to live in locations that are convenient. We want stress free morning work commutes, and places which meet our lifestyle criteria. That’s why a lot of us are drawn to homes close to the city. They offer various employment opportunities. And there’s never a shortage of restaurants, schools or public events.

This is why housing close to the CBD is so expensive. More people want to live there, and it’s reflected in the prices.

But if you’re a first time homeowner, it can be tough saving enough for a hefty deposit. While it might be nice to buy your first home in Toorak, Brighton or on the Sydney Harbour, it’s not realistic. There are many more buyers in the market with more money willing to pay far higher for the luxuries on offer.

This is why you might want to look at places which aren’t bombarded with demand. Try looking at suburbs which are gentrifying. Gentrification is a term used to describe the renovation and revival of deteriorated urban neighbourhoods.

It’s basically a suburb or area which is experiencing a transition. And this transition takes the form of low income earners moving out and high income earners coming in. Higher incomes will not only boost property prices, it also attracts new infrastructure. New shopping malls, transport options and other life style amenities will only drive property prices higher.

But how do you know if an area is gentrifying? Not every suburb that looks rundown is going to suddenly be the next hottest suburb.

However, looking through data such as household income, demographics and building activity within the area can be a good start.

If you look at these figures over an extended period of time — say, 10 years — you could get a good idea if a suburb is gentrifying or not. The best part is that all this information can be found for free on the Australian Bureau of Statistics website.

Sure, it takes times to go through the data and make sense of it all, but if you can buy in the right area at the right time, all your hard work will be rewarded. Just like Crassus, you’ll be able to build a property fortune, even in a hot market.

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.


Money Morning Australia