Monday, 20 April 2015

Are we in a property bubble and if not what next for investment?

In 2010 a leading economist, Steve Keen predicted that Sydney property prices would fall by 40% in the few years to follow. He received a lot of media time including the respected 60 Minutes program.

Well here we are 5 years later so how did his predictions go?

In the last few years property prices in Sydney have risen by over 30%.

So if you had listened to those predictions and not invested because of them or if you had believed it when Mr Keen said on the 60 Minutes program that he was going to sell his properties including his home to avoid the loss, then you would be pretty upset now.

You would have lost hundreds of thousands of dollars.

So why did he get it so wrong and why did the media give him so much credibility and more importantly so much free media time?

He got it wrong because economists look in the mirror to predict the future. Imagine trying to drive a car that way. Well that is what they do! They look at the past, apply some fancy algorithms, some mumbo jumbo and hocus pocus you get an answer.

Past performance is certainly a factor, but it is not the whole story. We will talk more about that in a minute.

So why did the media give so much time to these predictions of doom and gloom?

Because we buy it! We believe the doom and gloom and that sells media.

So why do I mention this now?

Because economists believe that a boom is always followed by a bust… and 30% is certainly a boom. But I don’t agree…!

What usually happens following a boom in one city, (but this won’t get any media time) is provided that the demand remains then properties that have grown will slow down and properties that have not will catch up.

The reason is pretty simple:
  • Sydney prices rose because the demand outstripped supply.
  • Hence people selling properties could ask ever increasing prices.
The demand is still there outstripping supply but Sydney might be getting too expensive for some, so investors will look elsewhere.

The Reserve Bank is talking about dropping rates again in the next few months. They would be doing that because although Sydney has seen almost exponential growth the other states have yet to show similar growth. So the Reserve needs to stimulate the other States.

Melbourne and/or Brisbane are likely to be the next targets for investors.

An equivalent property in Melbourne will be 30-40% cheaper (about $300,000) than Sydney so that makes it an attractive proposition. Melbourne is also the fastest growing city in Australia so that could quickly cause a supply problem in Melbourne which would see prices rise over the next few years similar to the Sydney price rises.

So if you want my prediction of where the next growth is likely to be seen then I would suggest Melbourne followed by Brisbane.

Like always though not all properties will see good growth. Just like some areas of Sydney have not seen 30% growth there will be areas in Melbourne that will under-perform and areas that will over-perform.

If you are considering investing in the next few months then give us a call…
1300 131099


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