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One of the most common mistakes a property investor can make is to believe that all residential property investments will behave in the same way.  Many people who favour direct property as an investment do so based on a misconception that it is easier to understand than other investment classes, and that strong returns are all but assured.  However, the property market is incredibly complex, and a failure to appreciate the different submarkets at play can lead to very different investment outcomes.
The following tale of three two-bedroom apartments illustrates how investments belonging to different sub-markets have fared in recent years.  The apartments have sold and resold over the past seven years, which is an important time frame that comprises the 2007 share market boom, the global financial crisis, the property boom of 2009-10 and the subsequent property market adjustment of the last couple of years.
 
Apartment 1 
<a href="https://www.realestate.com.au/property-apartment-vic-docklands-111987091" target="_blank">1506/100 Harbour Esp Docklands </a>
<img src="/images/stories/2012/11/fp1.jpg">
Purchased: November 2006 for $460,000
Sold: November 2012 for $460,000
Annual compounding growth rate: 0%
Why?
One of the great marketing tools bandied about the market is to imply that strong population growth in an area is an indicator of future capital growth.  But people who think that population growth is in isolation a key indicator of demand are missing a very important reality.  Strong population growth in an area is a better indicator of a change in supply.  If there is strong population growth there must be a lot of available property for people to move into.
A strong increase of housing supply in an area can drive down prices to a level that entices buyers.  The take-up of excess supply can be qualified as demand for affordable housing.  As long as an area has the capacity for significant increases in supply, any evidence of capital growth in the area will trigger further housing releases, which in turn will water down value growth.
<a href="https://www.urban.com.au/news">Docklands </a>still has an issue with oversupply. Since 2001 its population has been growing by almost 22%. This growth rate is off a very low base of 700 in 2001.  However,  the Docklands population has still been growing by 6.5% over the last five years. This is well above the 1.5% annual population growth of Victoria.
Over the years the Docklands precinct has generally been a poor performer for investors. Many people suggest it must turn the corner soon and that the next 10 years will be much better than the last 10. However consider this, according to the 2011 census one in five Docklands properties is unoccupied.
Apartment 2 
<a target="_blank" href="https://www.realestate.com.au/property-apartment-vic-hawthorn-111057247">109/92 Kinkora Road Hawthorn Vic 3122 </a>
<img src="/images/stories/2012/11/fp2.jpg">
Purchased: June 2005 for $445,000
Under offer: November 2012 for $470,000 
Annual compounding growth rate: 0.86%
Why?
Developers continually fight an uphill battle as they struggle to match rising labour and material costs to produce a product that they can sell and make a profit. The most effective way they can do this it to cram as many apartments they possibly can onto each block of land. To do this they usually compromise the size of each apartment, and the first casualty is the kitchen, as it gets squeezed into the lounge room. Most people would prefer a separate, or at least a properly defined, kitchen area.
Often, developers price their new developments based on the costs to build plus a profit and risk margin.  The traditional method of valuation, where comparable sales are relied on to establish pricing, will only be employed if the subsequent value estimate is higher than the cost method.  Developers can often achieve their pricing through the offer of incentives such as stamp duty savings, rental guarantees, high levels of claimable depreciation, as well as taking advantage of foreign investors.  Such incentives are not available for subsequent purchasers of the property.
When the investor bought this <a target="_blank" href="/news">Hawthorn </a>property he or she could have purchased an apartment for less and made more money!
 
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Apartment 3           
<a target="_blank" href="https://www.realestate.com.au/property-apartment-vic-armadale-111773615"> 2/4 Avondale Road, Armadale</a>
<img src="/images/stories/2012/11/fp31.jpg">
Purchased: June 2006 for $348,000
Sold: May 2009 for $543,000
Annual compounding growth rate since last sale: 16.48%
Resold: Oct 2012 for $642,500
Annual compounding growth rate since last sale: 5.05%
Why?
<a target="_blank" href="/news">Armadale</a>’s population has been growing by just over 0.5% per annum over the last 10 years, only one-third of the Victorian population growth rate. The low level of population growth does not reflect a lack of demand to live in there, as Armadale is a highly desirable location. Population growth is held back because of the lack of supply due to unfavourable town planning laws for developers and scarce development opportunities. This lack of supply puts upward pressure on prices.
Further, the apartment was built more than 40 years ago when labour was much cheaper and developers could make a profit by building fewer apartments in any one development.  They did not have to sacrifice floor space, and as a result the property is more desirable and in strong demand. When it was purchased there was no developer premium paid, as it was sold at auction and market forces determined the price.
Xavier Perronnet is a director of <a target="_blank" href="https://www.ipropertyplan.com.au/">iProperty Plan</a>, which provides independent analysis and tailored advice to investors and home buyers.
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xPerronnet-8mfxFYHVTQ

Why some properties gain value while some stagnate: A tale of three apartments

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The federal government’s National Rental Affordability Scheme (NRAS) is being used as a marketing tool to sell property. The scheme was introduced in 2008 and is designed to help meet the social need for affordable rental housing by encouraging investment in residential property through attractive tax incentives.
The scheme provides a substantial financial incentive of a minimum of $9,524 tax-free per house annually to investors who rent approved houses at 20% or more below current market rates to eligible tenants.
However, NRAS is not an investment scheme per se, it is a housing scheme. It aims to provide affordable accommodation and underpins the government’s drive to privatise public housing. 
My concern with the scheme is the regulated choice investors have. Asset selection is limited to new approved developments in areas where there is a need for affordable housing. It aims to supply 50,000 new dwellings, and because these are in defined areas where approval is granted, there is a risk of clusters of NRAS properties throughout the market. This has the potential to cause oversupply issues down the track. 
Further, these developments tend to be in areas where land is available at low cost, which is generally the case when there is limited demand in the area.  However a key characteristic for capital growth is a high land value and limited supply. 
The popularity of NRAS properties is growing as financial planners find ways to market the incentives and make money through their referrals and recommendations. Investors need to be aware that large kickbacks of 5% to 10% of the purchase price are being paid to the advisor who is making the recommendation to purchase, and that these kickbacks are simply built into the purchase price of the investment.
I have come across a number of people promoting these schemes, and the alarm bells have been ringing. In one example an investor was offered a unit backed by the scheme for $356,000. On paper the investment cashflows looked great but when subjected to greater scrutiny, the property was found to have a market value of closer to $300,000.
 
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Investment schemes that are heavily marketed off the back of cash incentives and tax benefits are nothing new. In recent times we have seen a number of investments that have been sold with a focus on up front benefits only to be a disaster down the track.
In the early 2000s a wave of off-the-plan properties were sold around the country. The lure of stamp duty savings and depreciation benefits were used to attract buyers. Fast-forward five years and many of these properties have been resold at a loss. In one example a Docklands property was purchased in 2001 for $582,000 only to be sold in 2006 for $455,000.
Further, the investment time bombs are not limited to the property market. In 2008 many investors got stung investing in agribusiness managed investment schemes such as Timbercorp and Great Southern. Once again these investments were sold with the enticement of upfront tax deductions. However when the dust settled the Australian Securities and Investments Commission (ASIC) was reported to have identified issues with inadequate disclosure of information to potential investors and poor performance of the investments. Once again these investments were sold through financial planning channels where commissions of around 10% were paid.
It is important to point out I am not criticising the NRAS scheme itself, however investors need to understand the true motivations of the scheme. They should be wary of the marketing machine that uses the scheme to make an investment product look good. 
Upfront cash benefits are great, but they must be viewed as a bonus. The quality of an asset should be assessed in isolation of any incentives.  If the investment asset does not grow in value, or worse has the potential to lose money, then why bother? In some cases keeping your money and just going on a nice holiday is a better option.
Xavier Perronnet is a director of <a target="_blank" href="https://www.ipropertyplan.com.au/">iProperty Plan</a>, which provides independent analysis and tailored advice to investors and home buyers.
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Why investing in NRAS property could cost you money: Xavier Perronnet 

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The property market is cyclical, and buyers will only stay out of it for so long. Many are sitting on the sidelines watching proceedings from the safety of their non-committal mind set. However last week’s 25-basis-point cut to the cash rate is just one of a number of factors that suggest buyers will return sooner rather than later. 
When we look at the broader financial indicators that drive consumer confidence in the property market I see a few clear signs that will entice buyers back to the market over the next 12 months. 
Affordability – reports during the week suggest unemployment is on the way up, with some experts expecting it to top 6%. The RBA’s tool to combat rising unemployment is to cut the official cash rate in an attempt to entice business spending and job creation. While the banks will not pass on the entire rate cut they will pass on a large part of it, and those not caught up in the unemployment cycle will benefit from lower interest costs. 
Buyers rushed back to the market in 2001 and 2009 due mainly to falling interest rates. The main difference this time around is it will not come packaged up with increased first-home buyer incentives. This means that first-home buyer markets may lag behind the broader market. 
Capacity – According to the RBA household savings rates are at the highest levels since the mid-1980s. They have been trending up since the mid-2000s and now hover around 10% of disposable income.
<img src="https://www.urban.com.au/images/stories/2012/10/rbaoct10.png" width="470">
Many borrowers have been making substantial excess principal repayments in recent years, and this has increased their equity and cashflow positions.
For many people, myself included, money begins to burn a hole in our pockets. The people who have been saving and have job stability, which is 95% of the population, will start to realize that the sky is not falling in and will begin to consider making their move. 
Demand – Home ownership in Australia is very high, with around 70% of people living in a property with their name on the title. The needs of a home owner change over time, whether it be needing to upsize or downsize. Although many owners have put these plans on hold, the necessity to change will force them to eventually make their move.   The lifestyle nature of residential property means that there is always a degree of underlying demand. 
Further, property is a great Australian pastime, and this continues to be the case. Web statistics show that, although competition from buyers has been relatively soft in 2012, web browsing continues to be very high. Nielsen’s online analysis of real estate portals suggests more that 3 million Australian’s search for property each month. That means around 15% of the entire Australian population are actively looking at property at any one time. 
This activity flows onto the physical market, with many agents reporting high numbers at open for inspections for good quality homes. Despite the level of interest, many people have had the mindset that 2012 has not been the right time to buy. It is only a matter of time until this mindset changes. 
As a result of these factors, supply and demand for residential property will become more balanced over the next 12 months.   The property market will begin to find its feet and move into a more sustainable growth pattern.
Xavier Perronnet is a director of <a href="https://www.ipropertyplan.com.au/" target="_blank">iProperty Plan</a>, which provides independent analysis and tailored advice to investors and home buyers.
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Why confidence is returning to the property market: Xavier Perronnet 

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Earlier this month, the big four banks gave their predictions on the official cash rate’s likely movements over the next year. Although none of them predicted an increase, the figures were startlingly different. 
NAB: No change
Commonwealth: -0.25 percentage points
ANZ: -0.5 percentage points
Westpac: -0.75 percentage points 
The big four’s predictions varied by three quarters of a percentage point – demonstrating that even chief economists, who are highly knowledgeable about and attuned to interest rate cycles, are really only making an educated guess. 
Small wonder that most home buyers and investors are confused about interest rate movements. It doesn’t help, of course, that most people decide to choose or switch to a fixed rate based on commentary about likely variable rate movements. 
The fixed-rate interest cycle always runs about six months ahead of variable-rate interest cycle. That’s why, even though the big four’s recent variable rate predictions differed wildly, their fixed rates are almost identical. Their current three-year fixed rates range from 5.59% to 5.64% – hardly a piece of paper between them. 
Fear and greed: the sure routes to poor decision-making 
History tells us that when the variable rate is rising, a fear of further rate rises drives people to lock in their interest rates. By contrast, when the variable rate is falling, greed drives them to avoid locking in their interest rate. In both cases, they are motivated by a desire to get the timing exactly right. 
The following graph from RP Data shows the percentage of fixed term loans as a proportion of all home loans over the last 10 years.
<img src="/images/stories/2012/09/xaviersept25.jpg">
The graph shows that in 2007, when the share market was booming and interest rates were at 7%, around a quarter of all new loans were fixed. Because a fixed interest rate is essentially a hedge against future variable interest rate rises, most people would have fixed their home loan at this time based on a fear that variable rates would keep rising. 
By contrast, in 2009, when the cash rate was down at 3%, less than 5% of new loans were fixed. Based on a desire to obtain the lowest possible variable rate, the other 95% would have waited until they believed variable rates had hit bottom before making a decision about fixing their loans.
 
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Fixed rate cycle set to bottom out 
Home buyers and investors who wait to fix their loan until the variable rate bottoms out will always be around six months behind the fixed interest rate cycle – meaning they will never fix at the most advantageous time. 
The current standard variable rate home loan for all the major banks is around 6.9%, and most home loans include a 0.7 percentage point discount off the standard variable rate. This means most people are on a variable rate of 6.2%. 
Even if the Reserve Bank cuts the cash rate by the most bullish prediction of 0.75 percentage points over the next year, and even if all the banks pass on the rate cut in full (which, on recent form, isn’t likely), this will only bring retail variable rates down to a similar level as the current three-year fixed rate. 
What's more, the best fixed rate of any major lender in the downwards phase of the last fixed rate cycle was around 4.99%; and that offer only lasted a couple of weeks. There is no doubt that we are very close to the bottom of the current fixed rate cycle. Historically speaking, this means the current three-year fixed rates are extremely good value. 
The bottom line? 
Any decision about whether or not to fix your interest rate should always be guided by your individual circumstances. However no one, not even the big four’s chief economists, ever knows for sure what will happen to the variable interest rate. If it is right for you and you lock in now, you can be sure you are not making a big mistake. 
Yes, lenders may put slightly better offers on the table over the next six months, but that won't mean you've made a blunder. You might not have gotten it 100% right, but you might have gotten 90% right — and as Warren Buffett says, I'd rather be vaguely right than precisely wrong! 
Xavier Perronnet is a director of <a target="_blank" href="https://www.ipropertyplan.com.au/">iProperty Plan</a>, which provides independent analysis and tailored advice to investors and home buyers.
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If you are thinking of fixing your mortgage, now could be the time: Xavier Perronnet

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It’s a time-honoured property marketing technique: encourage vendors to sell during spring because their gardens are in full bloom, the weather is warmer and buyers are out in full force – emotionally responsive and ready to spend big to secure their dream properties. 
In reality, a spring marketing campaign could be a somewhat less lucrative endeavour. <del cite="mailto:Fiona" datetime="2012-09-11T12:24"></del>
Since the mid-1980s, the popularity of residential property as an investment vehicle, rather than simply a lifestyle vehicle, has grown significantly. 
Today, residential property is far more widely accepted and visible as an investment asset. <del cite="mailto:Fiona" datetime="2012-09-11T10:35"></del>
Investors don’t make purchasing decisions based on the same degree of emotion as home buyers. They buy based on personal financial considerations and an assessment of market conditions. This means they are no more likely to enter the market to buy during spring than at any other time. 
On the other side of the equation, home buyers are no more likely than investors to turn out in droves during spring. At this time of year, the market is interrupted with school holidays and major events like football grand finals and racing carnivals. Pre-occupied with family and social activities, the home buying public is less inclined to participate in the property market. 
In short, if you expect that investors and home buyers will be out in full force and waiting to secure your property simply because it’s spring, you could be in for a letdown.
Oversupply could subdue prices this spring 
With little on the short-term horizon to suggest a significant shift in demand from investors and home buyers, supply looms as the main catalyst for property price movements throughout the rest of 2012. 
Figures from the Real Estate Institute of Victoria (REIV) show there have been significantly fewer residential property transactions in 2012 than in previous years. There were 41,019 transactions across Melbourne between January 1 and September 3. This represents falls of 8%, 19% and 16% compared with the same period in 2011, 2010 and 2009 respectively. Preliminary data from the Real Estate Institute of Australia suggest similar trends in Sydney and Brisbane. 
At the same time, auction clearance rates have remained steady at 61% since 2011. This suggests vendors are deferring selling their properties in line with falling buyer demand. 
The pattern of diminishing property transactions suggests there could be a growing build-up of deferred sales. The decision to sell a property, whether it is motivated by personal need, personal preference, financial factors or a combination of the three, is something that can only be put off for so long. 
If vendors adhere to the market cliché that spring is the best time to sell, the resulting surge in supply this spring could be greater than the standard seasonal upswing. The effect of oversupply on what is already a fragile and patchy market could spark a fall in prices that would be difficult to arrest. 
The wrong kind of competition 
Vendors invest in marketing to draw attention to their properties in the hope that it will generate competition between buyers and increase the sale price. The combined effect of limited buyer demand and a surge in supply this spring would increase competition between vendors instead of buyers. This would reduce auction clearance rates, prolong marketing periods and ultimately, drive down prices. 
What are the alternatives? 
As a vendor, one of your primary considerations should be: “Will this time of year bring the most favourable price for my asset?” If the answer is no, and your individual circumstances mean you’re not under pressure to sell in the next three months, it may be worth considering deferring until a time when there are fewer properties available than is often the case in spring. 
Xavier Perronnet is a director of <a href="https://ipropertyplan.com.au/" target="_blank">iProperty Plan</a>, which provides independent analysis and tailored advice to investors and home buyers.
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