2nd April 2008
Steady Income In Unsteady Times
Each year we get asked by numerous investors . . . are bricks and mortar investments such as mortgage funds safe havens? The latest residential price indicators showing strong increases across the nation could not have come at a better time. With many investors considering a diversification of assets away from the stock market, the sight of some property markets - Melbourne, for example - rising by 20% is clearly compelling.
However some investors seem to be considering a quick foray into property to capitalise on predictions that some sectors of some markets will continue to show similar price increases throughout 2008.
What many have latched onto is the annual median house and unit prices released by Australian Property Monitors several weeks back and published in all major newspapers. These national, composite figures came during a period of continued stockmarket dive and showed Melbourne, Brisbane and Adelaide recording spectacular price growth above 20% while Sydney lagged, registering a rise of just 5%.
Headline writers made much of the fact that Melbourne, if it continued at this pace in 2008, would catch up to and even overtake Sydney as the least affordable city in Australia. They didn't emphasise the "if". Melbourne surpassing Sydney is highly unlikely, but it's the sort of speculation that makes investors refocus on property.
The first question the "novice investor" seriously needs to ask is, "Why do I want to invest in property and why now?" A simple question? You bet! And the answer is crucial.
If it's because the investor is exiting the stockmarket and wants to park some funds in property related assets in the short term, with a view to making a big profit based on expectations raised by short-term data, then our answer is equally simple, "Put the money in the bank."
If, on the other hand, the investor has made a firm commitment to using property to create wealth over the long term, then it's a case of studying the ground rules before plunging in - particularly in relation to careful and correct asset selection and taking a considered, educated view of property and how it works as a long-term strategy.
With property, the bottom line is ensuring the asset will perform consistently over time and through a variety of economic conditions and influences. We urge all investors to pay attention to preservation and protection of existing wealth-creating assets. If an existing property investor is secure in the level of capital growth, long-term potential for ongoing growth and in their ability to financially service the investment, then some strategic and diversifying planning needs to be applied to any additional purchases.
Many have predicted that price growth will continue to diverge across the major cities. Sydney is predicted to remain subdued. Perth and Adelaide are expected to cool after hitting peaks last year and analysts predict Melbourne (the standout in 2007) may see rises in the most sought-after investment property sectors in the order of 5-8%. They predict that we may, repeat may, see some increases of around 10% in the early part of the year when the market opens off the back of pent-up demand left over from last year's strong close. But that is likely to apply to very specific assets in specific inner city (20km radius from the GPO) locations.
Once investors have taken a careful and educated approach to correct asset selection in what may initially be an unfamiliar asset class, the most consistent, long-term growth properties will usually outperform the second-rate ones this year, next year and the year after.
But, anybody who thinks there are quick "windfalls" to be had over the next six months to a year in the residential property market is not only barking up the wrong tree, they're just plain barking!
In times like this, some investors panic and some make a fortune. Of course many people are also busy selling out of shares and digging into bricks and mortar via Mortgage Funds.
Property, the trusty staple of the Australian investor diet is being eyed longingly again by many who just want to be able to walk through the front door of their investment and not through the front door of their broker worried about the volatility of their money.
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Head of Funds Management
t +61 3 8610 2811
Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.
La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.
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