Residential property is going through a crisis of confidence. The market has finally been slowed down by the double whammy of 12 consecutive increases in interest rates and falling consumer confidence from negative messages in the media surrounding the global finance crunch.

There has been a sharp reduction in demand for mortgages, auction clearance rates have dropped and in some areas prices have fallen by 5 to 10%.

In particular investors, and to a lesser extent home buyers, seem to have moved to the sidelines. Over the last couple of years our property boom was like all the other cycles I have lived and invested through – greed and fear got out of balance. And properties in many of our suburbs increased in value by over 20% a year.

Many Australians stopped thinking of their home primarily as shelter and a long term investment, and had begun to think of their houses either as a get rich quick scheme or a very large automatic teller machine.

This was spurred on by rising property values and easy credit. Banks were lending money at low interest rates and very high loan to value ratios. This has obviously all changed now. Banks are much more cautious about who they lend to and how much they lend. And the days of double digit property value growth are gone for a while.

Every day I hear from property investors who are concerned with the negative press about the property markets and in fact the world financial markets. I try to reassure them that the property market is behaving normally.  While the property cycle has peaked, that doesn’t mean growth in values has stopped, it means the markets in the major cities are growing more slowly. And at the same time rents are rising.

The following table shows the latest statistics from Residex:

Source – Residex

The problem is this table doesn’t really indicate what is really happening.  As our cities mature they become more unaffordable. In every state we have multiple property markets with some properties increasing in value while others are falling in value. There is an ever expanding divide between the have’s and have nots and quite simply - the rich are getting richer.

Properties in the outer suburbs are just not performing anywhere near as well as properties closer to the CBD and the water. Many families in these outer areas are suffering more from rising interest rates, food prices and petrol prices as they take up a larger portion of their disposable income.

As the property cycle moves on, more Australians will realise that property markets have always moved in cycles of rapid upward movements, followed by periods of flat or even negative growth, followed by another move upwards. I have often suggested that the sooner an investor has traded or invested through a cycle, the better investor they will be. Then they’ll understand that slower phases, such as the one we are currently experiencing, in the property cycle are normal and they will know to take advantage of it.

You see…shrewd investors, whether they invest in the stock market, property or whatever, share an important strategy. They know that the best time to buy is not when the market is hot, when buyers are out in droves competing for properties that are snapped up at alarmingly increasing prices. Rather, they wait and buy when the market slows down.

Experienced investors know that the market is cyclical. They know that no matter how frantic the market may seem, sooner or later it will slow down and they will be able to buy at their leisure.

In a boom market, buyers often find themselves losing out to another buyer who is driven by fear and greed. The fear of missing out on the property boom and the greed of wanting to own (more) properties – both very human emotions. Now, when there are fewer buyers and competition is reduced, there is time not only for thorough research; but also to compare, negotiate and drive a harder bargain.

Over the last few months I have spent a lot of time researching our property markets, the economic markets and financial matters. I have done this to protect my own property portfolio, to help our private clients and to educate the readers of this e-magazine.

I have spoken to as many experts as I could (not theorists, but experienced authorities) and I have poured over large amounts of research data and compared my conclusions with my “inner circle network” of property friends.

We have come to some interesting conclusions;

1.       We are going to have a property crash in the future – but this isn’t it! There are some great opportunities out there and the markets will reward those who know how to take advantage of them. The next real property crash is some way off yet – it’s really too early to tell exactly when. If you sit on your hands worrying and waiting for a crash you will miss out on some great investment opportunities right now!

2.       The property investment strategy used by the vast majority of property investors during the last property cycle will not work over the next few years (and I’m not talking about positive cash flow, as in my opinion that never worked well anyway!). But there is a strategy that will work well in our forthcoming turbulent times and I will explain it in detail at our upcoming What is Really Happening in the Property Markets seminars that I am conducting around Australia with Ed Chan, best selling author and property tax specialist from Chan & Naylor. Click here for full details and to reserve your place now.

3.       We are in a new era of property investing. I have recently seen or spoken with a number of investors who are hurting from the credit crunch of rising interest rates and changing bank lending criteria. Some have to sell their investment properties. Others are worried they may have to in the future. Clearly their investment strategy did not work for them.

4.       High-ish interest rates and inflation are here to stay – at least for a while.

5.       The impact of the overseas problems will be much less brutal than many commentators are predicting. Our property markets will be underwritten by our generally strong economy, the huge deficiency of housing at a time of increasing demand from strong immigration and changing demographics, rising cost of construction and now the new carbon tax – which is likely to make new housing more expensive. But I’m not suggesting we are in for another boom – not just yet (although I was heartened when I heard an ANZ Bank economist say we are getting set for the “mother of all property booms.”).

What this means is that to be a successful property investor over the next few years and to take advantage of the opportunities this changing market will present, it is very likely you are going to need to take a different approach to the one you took over the last few years.

I am going to explain all the conclusions of my research and go through my own property investment strategy step by step at our upcoming Understand What is Really Happening in the Property Markets seminars that I am conducting around Australia with Ed Chan, best selling author and property tax specialist from Chan & Naylor.

Click here for more details.

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  For 18 years, Residex reports have been helping buyers and sellers of Australian residential property make better informed decisions. Only Residex has Australian residential property statistics based on sales back to 1901. Click here to go to there web site and subscribe to their newsletter or buy a report to help you make a better informed decision.

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