Dealing with a softening property market


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The housing market is still healthy with good volumes and stable prices.

However, there are signs of a softening property market across key leading indicators, such as the median time it takes to sell a property and the auction clearance rate.

With recent macro-prudential moves by the Australian Prudential Regulation Authority (APRA) to control the level of housing investment and prevent any emerging "bubbles", coupled with recent moves by the big four banks to increase mortgage interest rates for both investors and owner occupiers, the market is looking more volatile and not likely to continue to grow at the double-digit pace that Sydney, for example, has experienced.

softening property market

This is not necessarily a bad thing - a soft landing followed by a return to a sustainably growing market is better than the potential for a larger bust.

My approach as a growth investor has always been to look at the long-term trend of an asset class and its market, and to ignore the short-term ups and downs.

Rapid rises in price above long-term trends, and above fundamentals such as rental yields and average weekly earnings, cannot be sustained for too long.

For me, what counts is long-term sustainable growth that gives a good return above inflation, especially where that return is a combination of good capital growth and yields that cover the cost of any debt needed to fund the acquisition.

I also think that being able to easily trade into or out of an asset is important - property is at a distinct disadvantage compared with shares and other more liquid assets.

So in the current market where should an investor look?

I took some of CoreLogic RP Data's market trends data and filtered out:

  • Suburbs with an average gain of over 5% a year for the past 10 years (that is, good capital growth); and
  • Suburbs that also yielded over 5% in gross rent (which is enough to cover most mortgages); and
  • Suburbs where there were more than 100 sales in the year (so were highly traded and therefore relatively more "liquid").

With these rather stringent investment criteria, there are 41 suburbs where houses meet all three criteria, and a further 13 where units meet them.

This is a pretty good first list of suburbs to target and find a property to purchase as an investor.

My next approach is to further filter the list using micro market research such as:

  • What is the demographic profile of the area? Are there likely to be shifts in the demand for housing that are not predicted by the good growth of the past five years?
  • What is the profile of employers and the local economy? Are the earnings of the residents diversified? For example, some mining towns in Queensland showed good growth and yields for over 10 years but were too exposed to the coal industry and so were significantly affected by the slump in the coal price.

Once I have then determined a target suburb or suburbs, I look at particular listed properties based on:

  • What are the net holding costs (for example, for units the net rent after body corporate fees)? I include the cost of maintaining infrastructure (such as the pool).
  • How far apart is the listed price for this property from the suburb's median price? Generally for investments, buying close to the median price for the area helps to ensure you are buying appropriately.
  • Has the property been made "market stale" through being advertised at too high a price, and although the price has dropped buyers are now ignoring it. Sometimes the best bargain for a buyer comes from making a "cheeky" offer on a property that has been listed for a long time.

Buying a long-term investment in any market, be it rising or falling, can still be profitable and worthwhile over the longer term. It is much more science than art.

Picking wisely using data at suburb and individual property level is quite easy to do and can make a big difference to your long-term returns.

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