Yahoo Finance $40,000 pitfall: Warning for Aussies cashing in on this booming property market
Perth property values are climbing but still well-below other Australian capitals. So, is it worth getting into the market? Or have you missed the boom?
The property market is booming around Australia. The average property value is up by a whopping 8.1 per cent in the last 12 months alone.
This has come at a time when many were predicting the market would crash. Those forecasts fly in the face of the market ‘wisdom’ and rewards those property buyers that saw through the hype and noise and took action.
And while the average property is up strongly, there are some markets that have done even better.
A standout market has been Perth, where values have increased by a staggering $42,352 or 19.7 per cent during the same period.
WA based home buyers and property investors have made a packet, and with property values significantly higher in the eastern states, the Perth property market has attracted the interest of people looking for a solid investment and more affordable property market entry point.
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But with such strong growth, many are asking whether this is likely to continue, if it can increase even further, and if Perth is the best place for property investors today?
To answer this question, there are four key factors to consider.
The basics: Demand and supply
The first and most important thing you should be focused on when investing in property is the most basic and fundamental of factors, supply and demand.
The supply and demand of property markets is the single biggest driver of how a property market will grow over the long term.
If you look back at the performance of all Australian property markets, you can see that the areas that have grown the strongest are those where demand is strong and supply is limited.
Demand is typically driven by population growth, i.e. how many people want to live in any given area. And supply is determined by the number of new properties being built.
Over the last decade, it’s Australia’s eastern states that have seen the strongest demand through population growth.
This is in turn reflected in the growth in property prices, with the Sydney and Brisbane property markets performing the strongest over the last 10 years (7.1 per cent and 7.3 per cent, respectively).
On the other side of the property supply equation, you will see more limited supply in certain parts of all areas.
Particularly in those areas close to CBD locations, typically the areas are almost fully ‘built out’, meaning there aren’t huge areas of land that don’t yet have properties built.
Any time you’re looking to buy property, you’ll be well served by focusing only on areas where the supply vs demand equation is tipped in your favour.
Short term vs long-term returns
Making your investing decisions based on the short-term results alone can lead to trouble.
If you look back at the property market results from year to year, we see some wild variations in the results.
In any given year, we see some markets perform well and others fall short — but when you look over the longer term the real trends become clear.
For example, while the Perth market is up 19.7 per cent in the last 12 months, the total annual growth over the last 10 years is only a modest 2.5 per cent.
While short-term results are interesting, the long-term results are where the real money is made.
Avoiding buy and sell costs
Property is expensive to buy and sell, because when you buy a property you need to cover the purchase costs like legals and stamp duty.
These costs typically average out at about 5 per cent of a property’s value, meaning that on a property worth $500,000 your costs will come in at around $25,000.
Then if you want to sell a property, again you need to pay legal costs and find a real estate agent which isn’t cheap. These costs typically average at around 3 per cent of the property value, so $15,000 on a $500,000 property.
This means that if you were to buy a property and sell it, you’ll pay around 8 per cent of the property value in costs or $40,000 on a $500,000 property.
The implication is that if you’re buying a property hoping to make some money in the short term in a rising market, even if your property increases in value — you need to factor in the costs of buying and selling to your investment return.
Given the size of these costs, it means your property needs to perform even better for you to actually end up ahead after covering these costs.
Local market knowledge
While the statistics I’ve covered above show the average growth rates across the entire property market, it’s worth noting that some areas have performed better, and others not as well.
Typically the more premium suburbs perform the strongest, because they’re more desirable to both home buyers and renters, and this supports stronger demand and property prices into the future.
Local knowledge of areas can have a significant positive impact on the return on your property investment.
Particularly for interstate property investors, it can be difficult to pick up this knowledge through just research alone, or even by visiting the locations.
This creates a challenge if you’re looking to invest in a property market that isn’t your home base, and means careful planning is required if you want to set yourself up for success.
THE WRAP
It’s natural that any time you see a strong increase in the value of any investment, whether it’s property, shares, crypto, or anything else, it’s natural to get a touch of FOMO.
But making big, long-term decisions based on short-term results comes with a heap of risk.
Property is a big investment that has a big impact on your finances not just today, but for years and even decades into the future.
If property is on your radar, instead of just buying into the noise and hype, focus on the four key areas covered here, and take the time to be smart with your planning and you’ll reap the rewards.
Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth. Ben is about to release his third book, Virgin Millionaire; the step-by-step guide to your first million and beyond.
Ben runs regular money education events to help you save more and invest smarter. You can check out all the details and book your place here.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.
