How to Save $800,000 Buying Property in Four Years

Craig Rowles just bought a home.

For the three bedroom house set on a 1,089 square metre block, he paid the bargain price of $205,000. He has just saved himself $800,000.

How?

Well, four years ago, the same property was selling for a whopping $1 million.

You see, the property is in Port Hedland, the second largest town in Western Australia’s Pilbara region — an epicentre of the property crash in the wake of the commodity price crash. During the commodity boom, demand for property in the area exploded. And the high demand pushed property prices through the roof (pun intended).

Take the house at 18 Edgar Street, also in Port Hedland. The 50 year old three bedroom home sold for $1.3 million in 2011.

The end of the mining boom brought about an oversupply in the property market, which was followed by a price decrease. In September 2016, 18 Edgar Street sold again. But this time for a mere $404,000, a third of the sale price in 2011.

NT News estimates property prices fell between 60–80% since the death of the mining boom. And locals like Craig Rowles are feasting on the spoils.

Meanwhile, in Sydney and Melbourne, the property market is still in a frenzy.

‘Sydney property owners making $200,000 a year for “doing nothing”’ reported the AFR recently.

The headline referred to a two-bedroom apartment on Bondi Beach that sold for $2.155 million. The seller had bought it five years ago for $1.1 million, half the price. That amounts to a $200,000 profit per year!

According to the AFR, prices in Sydney have gone up a whopping 60% since 2012. Yet wage growth in Australia has continued to decline from 3.8% to 2.07% per year during that period. How is this sustainable?

Only by taking on more debt.

As one of the first home buyers told the AFR in the same article, ‘money is cheap and there is no resistance from the bank.

Household debt to GDP in Australia has risen to 125.4%. The International Monetary Fund has already warned that Australian households are bingeing on debt to fund property purchases.

In Sydney, the herd’s eagerness is pushing property demand up. And they continue to buy even after admitting they don’t understand the prices.

Check out some of the buyers quotes featured in the same AFR article. They are clear red flags:

It’s the new norm to buy property. I just want to own one.

Banks are throwing money at buyers.

Some of the prices don’t make sense, but people are buoyed by waves of confidence.

I haven’t seen properties go down, have you?

Well, people in Port Hedland have. And the Port Hedland episode shows demand can be fickle.

You see, the same factors that are pushing prices up in Sydney can also bring them crashing down: a rise in interest rates, unemployment, loss of confidence, or the increase in supply.

In Melbourne, the Reserve Bank of Australia has already warned that apartment prices are set to fall. As you can see in the chart below, there has been a steady increase in apartment construction since March 2014. Yet cranes on Melbourne’s skyline have declined from 148 to 128.

australian-building-boom

Source: AFR

For Sydney, the increase in cranes on the city skyline is much steeper. The last count was 300 cranes, which suggests construction is still going strong.

Morgan Stanley is already warning that the Australian housing market has passed its peak. And as prices plateau, overpaying for property limits the possibility for future returns.

To quote Warren Buffett: ‘Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.

Regards,

Selva Freigedo,
For Markets and Money


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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