Australian Property Values & The Global Credit Crisis
Residential Real Estate Prices To Drop By Up To 40%; According To Some!
A History Lesson…
The worst excesses I have seen in the residential housing market was the selling of overpriced property through the 1990’s. Many people have heard of Two Tiered Marketing… where interstate and overseas investors paid a different price to what the locals were paying.
This practice came about as a result of greedy developers flooding markets, in particular the Gold Coast with more property than there was demand for. Driven by profit, rather than demand, the result was a massive oversupply of coastal high rises and Surfers Paradise became Renters Paradise. The law of supply and demand ensured that rents fell encouraging many disgruntled vendors to sell.
Property is so forgiving that even those who paid too much when they bought in the 1990’s, were still significantly better off by the early 2000’s. Let me share with you a real life example of what happened to someone. I’ll call him Ian.
- In 1996 Ian bought a townhouse in Labrador (Gold Coast)
- Ian, who was from Melbourne, paid $140,000… which seemed great buying as he was told at the time
- Ian soon after discovered that the real market value of his property was closer to $100,000 and that he had paid 40% over the top
- Today, 12 years on, Ian’s property is worth between $360,000 and $380,000
- Ian’s property has been cash flow positive for many, many years and “looks after itself”, financially. In fact it adds to his income
- Based on the more conservative value of his property today (i.e. $360,000, not $380,000); Ian’s capital gain is $220,000 or 157% on top of the 40% inflated price he paid
- Yes, Ian was ripped off because his holding costs (interest on loan) should have been less to begin with (and still less today)
- Yes Ian was ripped off because Ian should have a capital gain of $260,000 or 260%
- Ian had friends warn him against his decision. He bought, they didn’t and they later said “We told you so”!
- Ian would have preferred to deal with a more ethical company than the one he did. Nevertheless, Ian is very grateful that he did something as today his property portfolio extends beyond that one investment. He has surplus rental income and the capital gain and is well on his way towards setting his family up financially!
Remember these…
- The biggest risk you will take is to take no risk at all! Successful people will tell you that they failed forward. Failures in relationships, that we learn from, equip us to do better in the future… and failures in business, that we learn from, equip us to succeed at another.
- Learn from those who have achieved what you hope to achieve.
- Don’t blindly accept opinions; rather be considered and get the facts. It’s only when you are fully informed that you can make fully informed decisions
- Don’t let fear rule (any part of) your life
- Be fearful when others are greedy and greedy when others are fearful - Warren Buffet
Happy Investing,
Nick Lockhart
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