How investors can make
property gains by
playing the long game

The Australian property market is in a downturn but the cyclical nature of the property market means we’ve been here before and shouldn’t deter property investors who can profit through patience, taking advantage of opportunities and playing the property long game.

Christopher’s Housing Boom and Bust report suggests in 2019 prices will continue to fall in Sydney, Melbourne and Darwin, be relatively stable in Perth, Brisbane and Adelaide and rise in Hobart and Canberra.

All predictions have a slight range either way depending on global economic trends, the result of May’s Federal Election and if the Reserve Bank of Australia lowers interest rates.

BIS Oxford Economics Residential Property Prospects 2018-2021 study predicts the recovery will be relatively smooth and that property price falls are due to oversupply and tighter lending conditions. They expect all capitals to be growing in three years with Brisbane leading the way.

Trilogy Managing Director, Philip Ryan agrees with BIS Oxford’s analysis. He has experienced the ups and downs of the Australian property market for over 30 years and in 1998 started the funds management vehicle that evolved into Trilogy. He has extensive experience in property investment helping produce attractive returns for investors.

Lessons learnt through experience

Philip understands better than most that the property market moves in cycles.

“I’ve been through a number of difficult cycles ranging from the high inflation times of 1970s, the high interest rate and inflation period of the 1980s, the flat period for the Brisbane property market in the 1990s, the Brisbane boom period of the early 2000s, and the GFC in 2008,” he said, but for him, “residential property on Australia’s eastern seaboard, has been a great investment over the long term.”

He started buying shares in the 1970s while still a high school student and bough his first property in 1985. One early property purchase, while not strictly a loss, was a pivotal moment that made him appreciate the importance of upfront costs like stamp duty and holding costs and how they must be factored into overall numbers.

“I bought a residential property thinking I could buy it, renovate it and sell it quickly,” Ryan said.

“Over a six-month period, I renovated the property and made a gross profit of $16,000 but after renovation and holding costs, I only made a net $1000.”

He learnt that if you’re going to make a mistake it’s better to do it when you’re young.

The outlook for 2019

Philip believes the first half of 2019 will be difficult for the property market due to the Royal Commission, the New South Wales Election and the Federal Election due for May.

“The Labor party proposals will only be negative for residential property – property prices have been steadily decreasing notwithstanding that these changes haven’t been implemented.”

It means investors will be reluctant to buy “if they perceive that prices will decline.”

Philip thinks if there is a Labor government, “these policies may well ultimately be abandoned and Labor could stimulate housing through measures such as the First Home Owners Grant.

“Overall, I would expect the property market to become steady in the latter half of 2019 because the downturn in Sydney and Melbourne for residential prices in particular has been unusually quick and severe.”

Localised markets

Philip says the current climate is complex and there are “many different markets” on the eastern seaboard.

Some regional areas affected by the downturn in mining are now seeing prices rise as economic conditions improve and commodity prices increase.

Even within each area or city there are micro markets. Mid-market parts of Brisbane have been steady and even in Melbourne and Sydney, worst hit in 2018, “the downturn has largely affected those areas of over supply while other markets remain steady.

“In a crisis you would expect all markets to be declining and that hasn’t been the case,” which points to a correction not a crisis for the Australian property market.

Property investment strategy

To make gains over the medium term, Philip thinks property investors could use the current downturn to their advantage.

“Employ a counter cyclical approach – buy when prices are at cost or below.”

He cites the Trilogy Industrial Property Trust portfolio which bought two industrial properties in Mackay after the mining downturn. This market is now recovering and these properties have benefitted as a result.

“I am a big believer that you make your money when you buy. Similar opportunities will present themselves in the residential market.”

But investors must prepare themselves both mentally and financially to cope with peaks and troughs.

“It’s crucial because most people have a cognitive bias to purchase assets when times are good and to sell them when times are bad. It’s human nature to do so, but of course the perfect investment strategy is to do the opposite.”

Getting the fundamentals right

It’s vital to understand the markets you invest in, choose the right location and the right type of property and manage cashflow sensibly.

“Knowledge is power and the key is to educate yourself about the areas you want to buy in.

“For instance, a purchaser looking to buy their first investment property could look at areas close to their home because it’s the area they are most knowledgeable about.”

Budget prudently and allocate a bit extra for anticipated expenses like interest costs and renovations.

“A classic time where people lost significant amounts was in the early 2010’s where people thought tiny mining towns offered a great opportunity, such as Moranbah and Dysart in Queensland.”

Tenants working for the mining companies “were prepared to pay enormous amounts for rent and investors in these areas subsequently suffered when there were rental vacancies and a collapse in capital value following the commodities downturn.”

This meant after buying at the top of the market, they couldn’t meet interest requirements and had to sell at the worst possible time.

To be successful in the current climate investors should educate themselves and study previous cycles to understand market psychology.

Much of what east coast Australia residential property is going through at the moment is relatively self-inflicted, by a combination of over-exuberance, lending restrictions and the Royal Commission,”

“Ultimately, however, property will find a base and resume a normal market cycle.”

Be ready to pick the right time on the property cycle clock to invest in the Australian property market.

The material on this website is intended only to provide a summary and general overview on matters of interest.  Trilogy is only licensed to provide general financial product advice on its own products and does not consider your objectives, financial situation or needs when providing any information or advice. You should consider whether the advice is suitable for you and your personal circumstances and we recommend that you seek personal financial product advice on your objectives, financial situation or needs and obtain and read the relevant product disclosure statement before making any investment decision.