Property Market Basics – Prices, Investment Value and Risk Management

property-market

The property market’s frantic booms are not typical. Not all property investors become millionaires. A lot of people got on the property bandwagon at the wrong time, and wound up carrying losses for years. Nothing in the property market, except perhaps home insurance, is necessarily consistent, reliable or straightforward.

Prices

“Market forces” in the case of the property market refers to a range of factors impacting sales and asset incomes. Rising interest rates may affect the housing market to the extent of a few grumbles. Rising unemployment, on the other hand, can kill the property market stone cold dead in a couple of years or less. A combination of both will keep people out of the market and depress property prices for years more.

The prices have another nasty trick to play on investors in these situations. Inflation raises the cost of property ownership, particularly investment property ownership, significantly. Investors who’ve borrowed can be on the wrong side of the balance sheet in several ways:

  • Getting stuck with a static capital investment in a falling market, which isn’t a great return.
  • Paying rising maintenance costs, also affected by inflation
  • Rates
  • Water rates
  • And the most unambiguous of all, a drop in actual dollar price.

The upmarket end of the property sector is the most vulnerable area. If you’re thinking of buying multi million dollar properties, you may be interested to hear that a figure of 10% is being given for the drop some of Australia’s top suburbs at the moment. Commercial properties can be even worse.

Investment value

Investment value is the longer term income and capital value of an investment property. This value is also subject to multiple market forces and price issues, and over a period of time, the net returns can be a menagerie of rates, from excellent to barely deserving to be called mediocre. The problem, again, is capital commitment.

In addition to the price issues, income for a rental property for example can be erratic. The net asset value is a combination of capital value and rent, minus all of the price factors and management costs for the property. Over a period of ten years, projected earnings from a property like this can be a tangle of costs and shortfalls in returns. Best investment value is a realistic appraisal of costs, returns and issues, relative to realistic capital and income expectations.

Risk

Risk in the property market is easily defined, but not always easily recognized.

For example:

  • Paying top dollar for any property is always a significant risk. A slow market tends to reduce prices, and can leave you holding either a paper or real loss for years.
  • Older houses or jerrybuilt new houses are risks by definition. You can become the proud owner of a lot of very necessary expenses.
  • A wonderful new housing estate on a landfill, when the problem came to light, cost investors millions.

Other standard risks include fraudulent vendors, dodgy agents and “expedient” valuations.

The moral of the story: Trust nothing but your own good information sources, never pay top dollar, and don’t have unrealistic expectations of asset performance. The rest is relatively easy.

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