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3 risks of investing in property

Margaret Lomas
Friday, October 12, 2018

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Many spruikers or other property commentators may like to suggest that property investing is low risk but this isn’t always true.   All investing carries risk and property no less than any other investment.  There is the market risk (the sector won’t do as well as other investing sectors), the specific risk (the property chosen won’t do as well as other properties may do), and of course, the pure risk (investing anywhere is not as good as keeping your money in a jar in the kitchen!)  

Where property is concerned, and to help you to decide if it’s a risk worth taking, let’s take a look at some of the more common risks that people worry about when they do buy property:

1. Will property fall in value?

If we considered the property market in Australia as one market, then this is a question I would have to answer with a ‘yes’.  If we combined the value of all property in Australia today, the value of that combined figure certainly may indeed be lower next year than it is right now. This will be due to the fact that our two largest markets, Sydney and Melbourne, have hit their peak and will now either stabilise, or in some cases, fall in value.  Depending on when you bought into those markets, this fact will either mean that your property does indeed fall in value (if you purchase at the tail end of the boom), or you still end up with a property worth more than you paid for it (if you bought any time up until around early 2017). We saw frenzied buying and prices paid way over the true underlying value of some properties.  Now as we come to the end of this, we can expect a period of adjustment in that market. 

But, just like the highest rung in the ladder has the greatest height to fall from and the greatest chance of pain when you do fall, so it goes that properties at the peak of their market, if that market overheated, have the greatest chance of a fall. And because of the high values of these properties, their value decreases will provide a big impact to the overall reading and, in fact, skew the results.

Having said this, at the present moment, we are seeing a ramp up of confidence and interest in many other markets, such as Adelaide and Brisbane. This improvement to the value doesn’t register when measured in the one ‘Australian Property category (due to the drag of those falling markets), but when considered alone will grow in value. Many of these markets show a severe undersupply of housing, and more people pouring into the rental markets than we have had for many years.  I expect upward movements in these markets for some years to come and that properties in some of the lower price ranges in highly populated areas will do well. 

2. Will property perform less well than other assets?

The debate has long raged about which has the better long- term outcome: shares or property? I don’t know which one will ultimately perform better over the long term but I do know that it is important that, whatever asset you choose, you become educated about it first.  In the share market, or the property market, you can suffer poor performance, if you buy a poorly performing asset, buy at the wrong time or in the wrong market.  On the other hand, you can certainly go a long way to ensuring that, whatever asset you choose, it will perform well if you stick to the fundamentals and learn how to research before you buy. Not all property goes up and down. Not all property follows a cycle. And not all property exists in areas that are rich in growth drivers. Learn what those growth drivers are and how to uncover them, and you will most certainly improve the performance on any property you buy, as you are less likely to buy property that was never going to perform in the first place.

3.  Are there times when it’s better not to invest anywhere, including property?

If you keep your money, or the equity in your property, uninvested, then you do have a guarantee: the guarantee that you will lose nothing but you will also gain nothing. If instead you choose to invest now, and improve the potential outcome of that property investing by learning how to pick markets most likely to either grow, or withstand any economic turmoil, then you can only do the same, or better than you would have, had you not invested at all. I have been investing in property, and advising others how to do it well, for 25 years now. In all that time, while I have seen many cycles, I have never seen a period of time where all property in every market in Australia performs badly. There are markets within markets, and it is possible for you to be able to pick a market that will grow in value, even while other markets are falling.

Investing does carry risk – but don’t think that if you do not invest at all that you are avoiding risk. There is, in my opinion, just as big a risk doing nothing as there is taking the chance and investing carefully.

Published: Friday, October 12, 2018


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