Don’t lose sight of the fundamentals

Currently, the Melbourne and Sydney property markets are generating auction clearance rates that were last seen in the “boom time”. With these key areas of the Australian property market really starting to hit their straps I wanted to point out that not only are the potential benefits for investors increasing, but also the risks may only get bigger from here, if you are not aware of the real picture which can often be obscured by all the hype.

Strongly performing property markets mean that one of the biggest risks in real estate is going to be magnified. That risk is the cloud of market hype and how it can create a false environment where people think they can never lose.

Now it is true that many smart investors have been securing properties and development sites over the past few years in a market where a negative sentiment cloud seemed to be hiding opportunity from the majority. Those same investors, and any new entrants to the market will have to be more diligent than ever to ensure that the property investment decisions they make are priced on stable financial foundations and not on a momentum of hype.

In share trading there are strategies employed which are based on waiting for a particular market momentum to become established and then to start trading on this momentum. This can be either buying on an upward/positive momentum or short selling on a downward/negative momentum. This can be a valid strategy and I know of many who have done it successfully but in no way can you call this investing in shares. This activity would, in my mind, be called “speculating” or even gambling.

The only saving grace for me of this strategy is if you only trade on the momentum of companies that also have very sound financials and show an upside potential of value. This would mean that the share is a good investment at any time and that if the momentum gamble goes your way you can get above average performance but if it doesn’t go your way you still have a good investment with fundamental upside potential.

The same can be said for property. There are areas that look like they are going great at the moment (good momentum). Some of these areas and trends have real financial value behind the property (affordability, demand and upside potential) while other areas and trends may only have hype and emotion behind them.  Both can have opportunity but one will provide low risk investment grade upside potential and the other requires a perfect roll of the dice to get the timing of your exit strategy right or risk losing the rapid gains.

I had a conversation with someone just yesterday that was a perfect example of the risks I mention. He had followed a hyped-up market into one of the mining areas of Queensland. He rode a momentum wave and appeared to be making a lot of equity in next to no time. But now his property has been vacant for 15 months and he is still looking for a tenant. This isn’t hurting him that much because there was a lucrative rental guarantee offered by the property spruikers but what happens when that ends or when the spruiker runs out of money. Nothing in the town is selling so he couldn’t realise his equity even if he tried. This investor is now stuck with a gamble that is backed by nothing real.

Now I do want to stress that this is a fantastic time to invest. Maybe its even one of the best opportunities we’ve seen for years, but it is also the time to stay firm on your fundamentals of investing and make your decisions based on numbers and value, not hype.

To find out which markets offer real value without the hype, please book yourself into our next Wealth Acceleration Workshop or call us to organise a one-on-one consultation. You can speak with Natalie on (03) 9868 7500 or email her at natalie@investorsdirect.com.au

Happy Investing.

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