GAME OVER

Don't follow players, follow indicators.

by Neil Jenman

The worst time to invest in property is at the peak of a boom.

Unfortunately, no official siren sounds to indicate when prices have peaked. On the contrary, most property players – from agents, to spruikers, to developers, even to investors themselves – keep sprouting clichés about the wonders of property, no matter what's happening.

Unless you use unethical or deceitful methods (such as wrapping or loan frauds), profits from property are almost impossible, in the short to medium term, if you buy in today's market.

Of course, one of the common clichés pushed by the players is that property is a long term investment. Yes, it is, but if you invest today, you are going to have to take the ride down in price before you take the ride back up – and that could be a long time coming.

Many of those who invest in property today are going to find themselves in an awful bind in the future. They won't be able to afford to keep the property and they won't be able to afford to sell it. It's going to hurt.

The property investment game is not hard to figure. The hardest part is realising that it's really quite simple. You also need the moral nerve to break away from "the madness of crowds". When you do the opposite to what the majority are doing, be prepared for ridicule or abuse.

The recent property market has been one of the easiest in history to predict. Here's why. There are three factors (or indicators) by which you can predict what's likely to happen in a property market.

The first is the return on the investment – the yield. The second is the national affordability of property. And the third is the herd factor.

Let's look at each one, briefly.

Yields – As prices rise, yields fall. The further the yields fall the less safe the investment becomes.

A good yield on property is ten per cent. If the yield goes below seven per cent (the minimum level you should accept), be very careful. When it drops below five per cent, stay away.

Over the past two years, especially in the major cities, the common cry of would-be investors has been, "But you can't find a seven per cent yield." The answer to that is simple – don't buy.

The only thing that keeps prices rising when yields are falling is the herd mentality. Irrational exuberance. When prices rise above the true value of a property, there is one thing you can count on – they'll fall back to their true value. This is what's happening now. It's the start of the fall.

Affordability – Another obvious reason why the property boom is over is that people have run out of money. They have been squeezed to their limit. It's the blood-from-the-stone syndrome.

The foundation of a property market depends on the ability of homebuyers (more than investors) to raise a deposit and, more importantly, to afford the loan repayments.

The percentage of the average income needed to repay the average mortgage is a key indicator to the future of property prices. The comfortable level has always been considered to be 25 per cent. The stress level kicks in at 30 per cent. Nationally, it is now above 30 per cent.

In many areas, especially Sydney, the percentage of the average wage needed to pay for the average loan is near 50 per cent. How does one measure that level of stress?

Back in 1997, when property was out-of-vogue (rejected by the herd), the national affordability level was around 17 per cent. Those were the days when buying was cheaper than renting, when yields of 10 per cent abounded. And when few people wanted to buy.

Which brings us to the third factor.

Herd – According to ABS figures, 95 per cent of retired Australians live on less than $25,000 a year. The scary words are "less than" because it means that those who have $25,000 to spend each year are the lucky ones. 80 per cent of retirees have an annual income below $12,000.

The most shocking statistic of all, however, is that less than two per cent of retirees have an income above $40,000.

What these figures tell us is simple – most Australians (98 per cent) are not savvy investors. Therefore, whatever the majority is doing, the secret is to do the opposite. Or, at the very least, do some thorough investigation before investing. Follow the golden rule – spend as much time investigating where to put your money as you spent earning the money in the first place.

Oh, and before the property players and their armies of salespeople use these appalling retirement figures to frighten you into taking their investment advice, consider this – one of the main reasons that millions of Australians face financial strife is because they have been following the advice of the property players.

All the indicators are clear. Now, is not the best time to be investing in real estate.

For now, the property game is over.


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