If you caught a snippet of 60 Minutes on Sunday just gone, you’d be forgiven for spending the week curled up in the foetal position, crying a thousand tears while you used your mortgage papers as tissues.
As the esteemed investigative reporter (I didn’t catch his name) declared, “If you’re thinking a housing bust will never happen in our suburbs, think again”.
It happened in Moranbah.
Hold up. Where?
Moranbah, “the canary in the coal mine for the entire Australian property market”.
That clever little statement was by the same reporter as above. I’m not sure if he comes up with his own material, but seriously, that was gold!
The Australian market is being promoted as the next market (internationally) to collapse. Jonathan Tepper, who is a “world expert in Mortgage Debt”, said so (on 60 Minutes) and he’s willing to bet his own money on it happening. If I was a gambling man, I’d take him up on that bet.
The Australian financial and property markets are fundamentally different to other foreign markets, like the US, Ireland and Spain, who’s property market did bust. The Australian system helps give some price security to our domestic markets.
It’s unlikely that house values will plummet nationally by 30 – 50% as was stated on the acclaimed 60 Minutes. Unless of course, you’re buying up the entire real estate sectors in blink-and-you’ll-miss-it towns in the middle of the Australian desert. Those investment-rich mining boom towns are very likely to see a massive decline in their value.
There’s so much hype surrounding property investing and the imminent housing bust, it’s fair enough for mum and dad investors to hold their pennies close to their chest. But really, it’s sensationalised media bullsh*t. Don’t fall for it. Be smart about your property investments and you won’t suffer the same fate as poor old Kate and Matt Moloney.
Quick back story. Kate and Matt went a bit crazy with borrowed money – to be fair, they were advised by so-called experts – and long story short, they bought multiple investment properties in the little old mining town of Moranbah. They had a couple of good years of high rental returns, and now are finding themselves facing bankruptcy. They kinda quit their jobs in the meantime and did a nice long stint traveling the world. But don’t let that detract from what is a disastrous property investment story.
So, how do you avoid your own business-class trip into the bankruptcy courts?
- Look for markets that don’t follow the boom and bust trend. Check a centre’s history. If people didn’t live in the town before the mining boom, it’s likely they won’t be living there when the mining giants pack up and move on. Larger inland cities, like Bathurst, Orange, Dubbo or Wagga, for example, are stable investment markets. They offer similar services for residents, and if one place becomes too expensive to invest in, investors have the option of another city in close proximity that is cheaper, but still offers the same value. As a result, no one regional centre over heats. The exception of course is if there’s a major industry event that drives the economy of one location more than the others, such as mining or other major infrastructure programs.
- Take responsibility for your investments. Seek guidance, but be shrewd in who you take advice from. If, while speaking with your expert advisor, your eyes start glazing over with the vision of semi-retirement in a few short years, just consider getting a second, or third, opinion. And use your common sense.
- You need safety buffers in your investment portfolio. Maybe you can’t buy 20 properties in a year, or 20 in the same town, but you won’t go bankrupt if there’s a 10% or more value reduction, or a rent correction in the market. Diversify your investments, and in turn, minimise the risk.
- Ask if the profitable rental yields are sustainable. A mining boom creates high rental demand, so naturally, rental prices skyrocket. Great if you already own a place there, not so great if you’re forking out exorbitant amounts to buy one. Look into the future by looking into the past. What kind of rental returns did the property get before economic boom? Better yet, was the house even occupied before the miners set up camp?
- Don’t put all your eggs in one basket. Spread your property investments. Sure, if Moranbah, or some other never-before-heard-of place is booming, look into it. See if the risk is worth the payoff. But don’t forget about the rest of Australia, which is still ticking along without the headlines.
- Make sure you can afford the repayments if your investment does go belly up. Unlike shares, property portfolios are not valued daily. If there is any drop in real estate prices and you don’t need to refinance, then the bank will not ask you to chip in extra funds or sell the property if the loan to value ratio goes below a certain level. So, if the market does suffer a decline in value, and you keep your borrowing to what you can afford beyond an economic boom, you should be safe.
One final piece of wisdom. If the name of the town is hard to pronounce, or you’ve never heard of it, proceed with caution.