The property investment pandemic: How to avoid spruikers and bad advice

GUEST OBSERVATION

Like the common cold and flu that creep up when you least prepare, so do bad property investment seminars and advice.

A sickness fuelled by greed and the notion of a “get rich quick” investment solution. Do we blame the ones spreading the plague or the ignorance of the people voluntarily subjecting themselves to what is to become a property investment pandemic.

You only have to read online media and main stream posts to notice the two schools of thought. On the one side, the pro property investment at any cost spruikers. Their train of thought also coupled with an alarming push for new property and the further push, to use self-managed super funds (SMSF) to acquire the property.

The other side, most pro-property investors refer to as the “property bubble doomsayers”. These thinkers are often belting out article after article on the oncoming bubble bust.

Is there a middle ground, the safe zone if there is one, and how can we vaccinate ourselves against the property investment pandemic? A pandemic that is saturating the airwaves and our inboxes with advertising.

Two factors to consider

Property investing is a personal investment strategy that has to be tailored to suit each individual’s requirements. It should consider income source and financials, to property taste and the main reason/s for investing in property in the first instance.

The cliché, “location location location” also rings true when looking at property investment strategies. In some parts of Sydney you can literally cross the road and be $50,000-$100,000 apart when comparing like property. Why? Different council, aspect and selling agents marketing strategy are a few reasons which come to mind.

Property has its inherent unique qualities, this can be noticed even when comparing units in the same complex as each other.

What are the magic elixirs being sold at investment seminars?

Before attending these property investment seminars, we need to ask the question, what are they actually selling? Some disguise the virus as free property investment strategy information, but ultimately present a project that has been priced appropriately to sustain the 8% - 10% commission. Some sell educational packages and yet, still direct you to a property project that happens to fit the topics learned.

There are many strategies being presented. Some property strategy seminars do come with good intentions and do provide great information. It is up to us to be clear on what it is that we personally believe will suit our individual financial requirements and wants in our property investment journey. Yes, it’s a journey not a flash in the pan, get rich overnight scheme. There is no magic potion to warp us there at light speed, it’s a strategy.

Schools of thought

As we look at the current climate and the hot property markets, I feel there is a strong need to sift through volumes of information. Further consideration and close attention is needed to assess what many spruikers and doomsayers are saying. Only then can we begin to chart a course for an effective strategy and one based on fact and less on emotion.

The information presently comes in many forms, shapes and people. From the ex-RBA economist Jeremy Lawson’s warnings of our household debt-to-income ratio being dangerously over 150%, to the AFR columnist Christopher Joye’s articles on cash being sacrificed for easy credit and his belief that the property bubble is already upon us.

Then there is Jesse Colombo, a renowned global economist, that predicted the GFC before it hit and is now a prolific writer on global property and economic bubbles.  Jesse warns many readers to look at global economics and not just local economics to make rational property investment decisions.

We do have our home grown local property gurus. Dr Andrew Wilson for one. On a discussion on radio 2UE, he shared his belief that we need not fear the overstated dangers. I asked the question of income to house price ratios. This is the comparison of, the median home values in Sydney to average household wages. A figure that represent 1,300% difference. Basic terms, we earn on average 13 times less per annum than what a house is worth. Normal ratios would be 300%-450% or a 3.5:1 ratio. 

Supporting the argument of the “don’t panic elixir vendors, it’s all steady as she goes”, are the four economists of the major banks; Bill Evans from Westpac, Alan Oster from National Australia Bank, Michael Blythe from Commonwealth Bank of Australia and Warren Hogan from ANZ. All in unison advising the government that homes are still very much affordable and there is plenty of credit still.  Is there when the average household debt to income is at 150%?

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Easy money and my opinion

Easy money contrary to popular belief does not make housing affordable or easier to purchase. Utilising super funds for purposes of deposits on homes will not work in my view, also supported by the super fund fiasco created in Canada.

Home grants passed on by the state governments and other government or non-government incentives only fuel home values. Perhaps many are of the opinion that developers and builders don’t listen to the news because they are too busy building? Allow me to burst your bubble. Any easy money given out, makes the developer and builders grin with inner most joy as they can increase the value of the end property product by double that which is granted.

Then there is the mother of all incentives. The commissions payable to the agents to promote overpriced property. The term agents in this case does not only refer to “real estate agents” it also refers to but not limited to; mortgage brokers, financial planners, property clubs, accountants and other institutions that moonlight as property expert advisors. Only yesterday I was offered to sell a project in Melbourne with a fee of 12% commission. After a lengthy discussion with Catherine Cashmore, we both determined the true value of the complex to be 15 to 20% over valued. Why did they source me to have a crack at promoting the magic? It could well be my connection with agents who have investment syndicates and overseas investors. Unfortunately, local are also caught in the project.

How do you avoid catching the property investment plague?

Here are some simple tips on how to avoid being caught up with the hype and property flu. These are a few of what I share with family and friends. Tips that keep you and give you a healthier sight of investing in property.

• Personally, research the area where the spruikers and buyers agents are taking you. Don’t just rely on the so called experts.  
• Don’t rely on rental returns from one industry, such as mining. Check out local rents paid by the locals within the secondary stock.
• Call on local agents to see what they have to say about the project.
• Ask the local agent for comparable sales of near new secondary stock. Even other new property that may be available.
• Ask for commission statements payable to the group providing the seminar.
• Is the seminar geared to a single project or perhaps two?
• Is the seminar’s single focus on new property alone?

EDWIN ALMEIDA is managing partner and licensee-in-charge of Just Think Real Estate.