Irrational exuberance?

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Property prices in Sydney seem to be achieving new heights. Reports of sales well above their reserve levels hit the headlines each weekend as results from the auctions come through.

After taking a bit of a hiatus in the last couple of years, it seems Sydneysiders’ love affair with property has returned. Those with investment in property, be it through their own homes or investment options, have a smile on their faces, while those who are planning to get into the property market seem daunted at the task of ever owning their part of Australia.

The reasons for the increase in sales can be attributed to a number of factors. Interest rates in Australia are at long-term lows, largely due to the Reserve Bank’s desire to stimulate other sectors of the economy post the mining boom of the past few years. As they try to move the focus to other sectors, low interest rates allow for increased economic activity.

For those looking for investment opportunities, two or three year interest only rates are about 5.5% to 6%. Rents after costs normally range between 3% to 4.5% and so the difference in funding averages about 2% on an interest only loan. Assuming a borrowing of say $800,000, the servicing cost is about $1,600 pa and can benefit from negative gearing. No wonder there are investors buying for their children.

Overseas monies also seems to be a factor with reports of cashed-up Asian investors keen to get a foothold in the Australian property market. With its highly sought after lifestyle and stable political environment, wealthy Asian investors are attracted to Australia to not only diversify their assets but to invest for the long term. Overseas investing in property is a global trend with often citizens of neighbouring countries buying assets across borders in the middle-east or in Europe. As to how this trend plays on xenophobia in Australia, and if the federal government will step in to make some changes, will be interesting to watch.

Chances are there will be some interference if only to enforce the existing rules which state that overseas investors can only buy new property and those on temporary visas need to sell their properties when they leave the country. While good in principle, these rules are seldom enforced. But according to recent reports, 18% of new stock in the Sydney property market and 14% of new stock in the Melbourne property market is being bought by Chinese overseas investors.

Newspapers and websites also do well out of a property boom. More advertising flows in, and wealth creation stories are good to sell copy. It is little wonder then that most anecdotes relate to how much money a property sale made, rather than the losses investors might have incurred. The fear of missing out on being a property owner is well played out; this fear-and-greed combination simply helps to fuel the situation.

For new migrants, getting into the property market can be a daunting task, but it is important for them not to lose heart. A discipline in saving, as well as good research of where they can afford and wish to live, will allow them to reach their goal.

It may not be what they would ideally like, but small steps will allow them to build up to where they want to live in the long-term. Because property markets will always move up or down and at times perhaps even sidewards, it is important for new migrants to not be swayed by the irrational exuberance in the market. Instead they must make sensible decisions which can lead them to enjoy their purchase, rather than be shackled down by debt repayment commitments.

Profits are made when you buy, rather than when you sell.

Pawan Luthra
Pawan Luthra
Pawan is the publisher of Indian Link and is one of Indian Link's founders. He writes the Editorial section.

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