The deadly formula of bad investment advice
So many people have bad experiences with property investment. It happens, I believe, because Australians are fed so much misinformation.
Here’s the deadly formula that leads people to buy in the wrong place at the wrong time:
- Writers on real estate who know little about real estate.
- Media outlets which do little more than re-cycle press releases.
- Researchers who don’t clean up the statistical absurdities spat out of their computers.
Mix those ingredients together and it’s a recipe likely to poison, rather than nourish, the finances of anyone who reads the resulting article and acts on the “advice”.
Here’s a stunning example published this week by a real estate magazine. The magazine took some figures from a research organisation that tends to be careless about its data in its haste to generate profile and it came up with this headline: ‘10 scorching hot suburbs for cash flow hunters’.
Top of its list was a town in Tasmania called Queenstown. If there’s a more depressing town in Australia or a more depressed property market, please tell me about it. The town resembles the film set for a western movie, with tumbleweeds in the main street.
The median house price ($70,000) says a lot. It’s 12% lower that it was a year ago. It’s lower than it was three years ago. Hell, it’s even lower than it was five years ago, having dropped an average of 3% per year since 2009. The typical house on the market takes nine months to sell.
Remember, a national magazine has placed this town at the top of its list of “cash flow hotspots”, even though the vacancy rate is 15% so the chances of achieving any cash flow at all are near zero.
But wait, there’s more.
The top 10 list of scorching hot suburbs recommended to investors also includes Kambalda in Western Australia. This is a godforsaken mining town in a “semi-arid environment” 600 kilometres east of Perth, split into two town sites 4 kilometres apart. The median price is $150,000, after a 19% decline in the past 12 months. Prices have fallen at an average rate of 6.5% per year over the past five years. If you have a house to sell there, expect to wait eight months.
And if you’re expecting scorching hot cash flow, the vacancy rate of 20% might present a problem.
Keep in mind that the magazine said all of its top 10 scorching hot suburbs were places “where rental yields are strong despite the solid growth in property prices”.
Another of the suburbs listed among the top 10 is described as “Maluwa Bay” in New South Wales. I’ve searched but cannot find a place with that name.
There is a Malua Bay, a small town on the South Coast of NSW where the average house takes almost a year to sell and where the long-term capital growth rate is zero. Sorry, that’s not fair – it’s 0.1%, which is the average annual growth in prices over the past 10 years.
That’s so scorching hot I can feel the heat all the way up here in Queensland.
The magazine lists the median weekly rent in this place as $925 per week, but that is a statistical error commonly made by the research source used by the magazine – whereby they list the holiday rental rate, rather than the rental rate for permanent tenants, and come up with a median yield which assumes properties are occupied by tourists 52 weeks of the year, which of course they are not.
The median weekly rent for Malua Bay is actually $350 per week and anyway buying there would be seriously into negatively geared territory. So, no cash flow there, either.
I could go on, but you get the picture. This is the worst kind of misinformation, presented by a national magazine as credible advice to property investors.
God help anyone who bases an investment decision on this disgraceful piece of non-journalism.