Is Now A Good Time to Invest in Property?

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Buyers were back bidding at auctions over the weekend.

Melbourne’s clearance rate hit its highest level in almost two years, with over 70% of homes selling under the hammer.

In Sydney it was the same. Around 78% of auctions resulted in a sale.

It’s clear to all…

Property is back, baby!

At least, that’s what the headlines will tell you…

Of course, these oft-quoted figures don’t include one crucial detail — unreported results.

An interesting omission, don’t you think?

My best bet is those unreported figures hide a rather large number of unsuccessful auctions. Rather than the other way around.

The figure would be closer to 53% in Melbourne if you included the unreported as non-sales.

And 53% hardly sounds like a frenzy of buying now does it?

But as Mark Twain, once quipped, ‘Never let the truth get in the way of a good story?

So, the 70%-plus figure is what you’ll read about everywhere today, as the property spruikers do their level best to pump up the market.

(And who cares about the clearance rates in Brisbane — 33%, Canberra — 47% or Adelaide — 35%. Don’t even ask me about Perth…)

It’s not just the usual suspects from the property industry talking it up, either.

I’ve seen some crazy thought bubbles on the auction uptick coming from supposedly respectable economists, as well.

These people — who should know better — are scrutinising six weeks’ worth of property data like some caffeine addled micro-cap day trader does the five-minute candlestick patterns.

As if you can read anything at all into these results yet!

Then there was the unedifying sight last week of government minister Michael Sukkar acting as property spruiker-in-chief…

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Will you regret it if you buy now?

Sukkar told The Australian:

If you’ve got an opportunity to get a foot in the market before then you should take it, given I think the market is starting to improve. Peopl­e who buy now I don’t think will regret it at all.

This statement is simply amazing. The minister for housing dishing out financial advice.

Where do I send the cheque for this great advice Mr Sukkar? And pray tell us, what do you think of bitcoin…?

The message is clear enough, I suppose.

When it comes to property, the government has your back. It really always has, though.

In fact, I don’t think there’s been such a government supported asset in history as Australian property.

It’s exempt from most Centrelink calculations. For example, you could live in a $3 million house and pick up the full aged pension.

The tax system is kind to property, too.

You can sell it tax free if you’re an owner occupier. Investors can offset their income through negative gearing.

And now first home buyers are also going to get some government largesse thrown their way soon, too.

The new scheme will allow first home buyers to get ‘into the market’ with only a 5% deposit, rather than the usual 20%, with the government (i.e. me and you as taxpayers) guaranteeing the rest.

With interest rates falling as well, you can see why some are banking on the property ride to ramp up once more.

But there are some serious questions you should ask yourself before you jump aboard…

Good times, bad times, risky times

The biggest question a prospective property buyer has to ask themselves now is this: Is the price of a property worth it given the risks at hand?

Because there are big risks to Australian property as an investment. No matter which way the economy goes.

Think about it…

Interest rates are almost as low as they can go. So, whatever rate you sign up to now is likely to be close to the lowest you’ll pay.

This is a paradigm shift from property investors in the 1990s and 2000s, who usually benefitted from the reverse process.

As interest rates fell, property prices went higher. That natural effect won’t happen for buyers now. At least not by any substantial amount.

And then there’s the risk that interest rates increase at some point in your loan term. Which, remember, is measured in decades, not months.

Although no one is talking about that possibility now. Which to my mind makes it the kind of Black Swan event that you need to think about carefully.

And that’s more likely to happen if the economy actually starts to, well, see wages grow and inflation increase.

Of course, there’re even bigger risks if the economy crashes for some reason.

How will our property prices fair in any future recession? It’s something you need to think about and plan for.

I’m not saying it will happen, but compared to other countries our property market is a riskier bet.

We actually rank in the top five of countries with ‘the highest housing bubble risks’.

Our consumer debt load is the second worst in the developed world, with only the Swiss with a higher figure.

In short, the risks are high, no matter what the economy does.

And if there is a downturn, there’s simply nothing left to throw at it. We’ve already used the kitchen sink.

My advice to those considering a property investment right now?

Be careful, bargain hard and be patient.

This rally — if it even is one — could fizzle fast…

Good investing,

Ryan Dinse,
Editor, Money Morning

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About Ryan Dinse

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately…

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