Expert Advice: by Sam Saggers
When we talk about the property market, what does that entail?
On the surface, we can talk about the six market drivers: population, demographics, supply and demand, economics, infrastructure and suburb yield. I’d like to drill deeper.
Now, obviously, we do look at the market drivers to see if an area is performing, but what exactly makes a market ‘perform’?
At its core the market is made up of people, so when we use the term property market we’re talking about the result of humans seeking to meet their needs.
When you understand the psychological underpinnings of what motivates people, you can spot those areas that hold the potential to meet those motives.
For example, when gentrification begins to happen - especially near the CBD - you can expect to see the population grow, businesses move in and government infrastructure projects take off.
Why? Because people are social creatures and they also want to be around resources and amenities that will fulfil all of their needs.
Remember what the voice told Ray in Field of Dreams?
“If you build it, they will come.”
Ray “met the needs” of the ghostly ball players by tearing down his cornfield and replacing it with a baseball field. What happened? They came!
The same thing happens when people find an area that meets their needs. They come!
Australia Depends on Real Estate!
The total value of Australian residential real estate is almost $5 trillion. As you can clearly see, residential real estate outnumbers all other forms of investment (commercial real estate is worth $700 billion and Australian listed stocks $1.4 trillion). There’s a very good reason for this and it goes back to my original premise. Real estate - and subsequently the market - is driven by needs, whether they take the form of a psychological need for shelter or the more complex emotional need of living in a prestigious postcode!
Nearly three-quarters (70%) of Australians own homes as owner-occupiers. What do most of them do when there’s a downturn in the market? They hang on for dear life and won’t sell their home.
Why? Because it meets their needs - so why would they sell?
Approximately 30% of Australians own investment properties, however, the majority do not invest heavily. As the table shows below, individuals with four or more properties make up a miniscule proportion of property investors.
The chart clearly shows that a very small percentage of individuals - about 6% - have a great deal of their wealth tied to real estate. Serviceability certainly plays a part in this phenomenon (after all you have to be able to service the debt on your investment properties) but I believe something else is at work here.
I believe that stability - or rather the fear of instability - can be directly linked with the fact that so few individuals own four or more investment properties.
So How Can This Help Me?
Investors know that they have to run counter to the market cycle. In the words of Warren Buffett, investors must, “Be fearful when others are greedy and greedy when others are fearful.”
This is easier said than done because you have to muffle the natural human tendency to meet your need of security by taking a risk, and bucking the trend.
When all the data points to the market being at or near peak, you’ve got to decide ... shall I wait out this cycle or take my money elsewhere?
Likewise, when nobody else seems remotely interested but all the signs point to a market on the cusp, you need to find the best opportunity and be patient for growth to happen.
Finally, trust the data and remember that people will always have a need for real estate. Simply buy the right property in the right location, making sure that your investment property meets the needs of the area demographic, and you’ll enjoy both strong yields and capital growth.
Which of course fills your needs, as well!
Sam Saggers is CEO of Positive Real Estate and Head of the buyers agency which annually negotiates $250 million-plus in property. Sam's advice is sought-after by thousands of investors including many on BRW’s Rich 200 list. Additionally Sam is a published author and has completed over 2000 property deals in the past 15 years plus helped mentor over 2200 Australian investors to real estate success!
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
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