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18 March 2009

To Buy or Not To Buy

That is the question. Here are some answers.

by Neil Jenman

So, you’re thinking of buying a property, but you’re not sure if it’s the right time.

And, if you’ve been doing even the slightest research, you’re probably more confused than ever.

Let’s see if I can help you.

Right now, there are a lot of divided opinions, probably more than ever before.

Leave aside those silly spruikers who always tell us that “now is the time to buy” and consider only the genuine commentators and experts.

And this is where opinions do seem to be genuinely and deeply divided. There are some really good people who are making really good arguments about why this is not the time to buy.

And, in the other camp, the opposite is true. A lot of good people think it is a good time to buy.

If you’re a would-be property buyer, it must be driving you nuts. Who do you believe?

Well, the first way to answer the question about whether or not it’s a good time to buy is to stop looking at the property market (for a moment) and, instead, start looking at your personal situation.

Answer this question: Why are you thinking of buying property today?

You see, I believe the simple truth, of whether or not it’s a good time to buy property, is this: For some people it’s a bad time to buy and for other people it’s a good time to buy. It depends on who you are and what you want.

So, let’s look at some different ‘types’ of buyers – and I will give you my opinion.

First-home-buyers. Last year, when the Rudd Government announced an increase in the first home owners’ grant, I advised first home buyers to “grab the grant quick“.

I mentioned that I had recently been to the outer Melbourne suburbs and it felt cheap. With the impetus of the first home grant, it had all the ingredients for a rise in prices.

And that’s what happened.

Prices have risen in some of the cheaper areas, those favoured by first home buyers who have been taking advantage of the government goodies on offer.

Are these buyers making a mistake by buying now?

Yes and no. It depends on their level of commitment.

Here’s the test of whether you should be buying a home now if you’re a first home-buyer.

Assume the interest rate on your loan is four per cent higher than the current rate (i.e. say 9.5 per cent instead of 5.5 per cent). If you can still comfortably afford to make the repayments (on one person’s wage) then leap in and buy. Go for it. There are few greater joys in life than to buy your own home.

However, there are few greater miseries in life than to be lip deep in debt and battling to make repayments on a home. If you are a couple and you will need both your wages to meet the current quoted repayment on a home, forget it. Do not buy.

Repeat home-buyers. These are the people who are buying their second or third (or even more) home. Well, you know what it feels like to move in for the first time.

You know all about those hidden expenses that land, like scud missiles, in your letterbox. You know that if you buy a home for $2 million, you’re going to need about $200,000 more for legals, stamp duty, moving costs and agent fees on the sale of your old home.

Can you handle it? Comfortably? Is your current job safe? No, is itreally safe. If yes, then go ahead, especially if you intend to live in the home for many years.

If you’re buying at well above half a million dollars – ideally between $800,000 and $2 million, you can pick up some great buys in this market (in comparison to what they sold for a year or two or three ago).

Last weekend, I read about some superb apartments at the Gold Coast where the developer had slashed the price by a whopping $600,000. It’s genuine too.

Such deals are almost everywhere now.

There’s a gorgeous apartment in Sydney’s Woolloomooloo. It was sold a few years ago for about $1.3 million. Today it’s being marketed at “$900,000 plus”; however, one of Sydney’s best buyers’ agents told me it can probably be bought for “somewhere in the $800,000s”.

Now, that’s good buying.

Even if, in the near future, it drops in value by another hundred thousand or more, it doesn’t really matter if you can afford it and you intend to live in it for many years.

By the time you come to sell, it’ll be worth a lot more.

Big ticket buyers. Well, if you think the above examples are good, try this one.

A prestige block of apartments in Sydney’s Kirribilli. A couple of years ago one of these glorious apartments with breathtaking views sold for $5 million.

Today, there’s an identical apartment for sale at $3.5 million – and the good news for buyers is that there are no buyers even at this price.

So, try an offer of $3 million. No, make that $2.8 million. Be cheeky. Be daring.

Yes, if you’ve got plenty of cash, there are some really good buys at the moment.

Oh, wait a minute, I mean “good buys” compared with the prices of a few years ago. There’s still some sensible opinion that prices at the top end will fall even further.

So, if you don’t really care if you buy or not – and you are well cashed up – then get yourself a good buyers’ agent and tell them to contact you when the “bargain of the year” comes up.

And, believe me, “bargains of the year” are coming up once a week at the top end right now.

Investors. I don’t like being right about a gloomy prediction; however, back in 2004, I wrote an article called ‘Finding Today’s Worst Investment‘.

I chose the apartment market in Auckland and I particularly targeted the Kiwi spruikers who were taking full page ads in the Aussie newspapers.

Today those apartments – that were sold back in 2004 – are now being re-sold for about half price. I haven’t checked, but I get the feeling they could be a good buy right now.

Apparently you can get 10 per cent return. Those are numbers I like.

However, do you want to know what I am sure are today’s worstproperty investments?

See all those big ads in the Sunday papers? They invite you along to a seminar to listen to the pitch about how not to be poor in retirement and ya-dee-da-dee-da.

Well, I am tipping that, five years from now, these properties will turn out to be the worst investments of 2009.

Stay away from them.

I still do not believe that now is a particularly good time to be investing in property generally. The simple fact is that “the numbers” (being yield and affordability) are not right; however, I do believe that now is an excellent time to start getting interested in real estate.

Follow some of Terry Ryder’s research. Go to some auctions – and watch how the agents “crunch” the weeping sellers. It’s not pleasant, but it’s the reality of how some agents force prices down.

Here’s what I would call a fair investment in today’s property market. A well located property in a popular area which can be bought for less than its selling price of a few years ago and which can show a gross return of at least seven per cent.

If it’s not possible, do you know what that means? Don’t buy.

I make no apologies for being a safe and conservative investor. You may have heard about those properties in America that are being sold for one dollar. That’s right, one dollar.

Well, I wouldn’t buy any of those properties if you gave me ten thousand dollars to buy every one of them.

You know what most novice property investors forget about? The holding and maintenance costs. Property eats cash. Remember that.

Oh, and please, beware of investing myths.

Every day, these days, I am spending time finishing my next book,Stitched!, and if there is one message I can give you from that book, it’s this: Beware of the ‘TIME MYTH’. That’s when spruikers say something such as, “It’s not timing the market that’s important, it’s time in the market.” Rubbish.

Timing is an essential ingredient of investing. Just ask those investors who bought Rio Tinto shares 12 months ago for $150. And then speak to someone who bought them for $30 recently.

Now tell me that timing is not important.

If ever you hear someone telling you that “time in” is more important than “timing” when investing, run, run, run. These are the people who sell over-priced properties.

I love property. I love the topic of investing. But I love people more than property. And I love security above all else. I want people to be safe and secure. I want people to have the knowledge to pick the difference between genuine experts and slippery spivs.

Recently I bought a copy of Paul Clitheroe’s latest book, Making Money (the tough times edition) and I marvelled at his brilliance on the basics of investing. I will never forget, many years ago, watching Paul give a lecture on investing. He showed graphs of the stock market over a series of years. When the graph was high, people were buying. When the graph was low, people were not buying.

Of course, most people were doing the opposite to what they should have been doing, namely, buying in the gloom.

Now, to be sure, there’s a lot of gloom in the property market right now. And that’s why it seems like a good time to be investing.

But investing in property is more than just about buying in gloomy times, it’s also about buying when the numbers are right. If you’re going to buy an investment property and you’re going to be losing money on it every week (and justifying it by saying it’s a tax deduction and you are buying for growth), then I believe you have not made the best property investment decision.

It is my strong opinion that property need to be self-funding. I love the words ‘set and forget’. I don’t like anything that puts its hand in my pocket every week and takes money out. And that’s still what’s happening with most property at the moment.

And for those of you who think I am too negative or too conservative or too cautious, here’s an optimistic prediction: The day will come when property, once again, will show good returns and be priced so that you can buy it and create profit from the first day of purchase (or, at the very least, break even). That day has not quite come.

I will repeat, though, that right now is a really good time to be learning about investing in property.

Read the good books, do the hard yard research, get the reports from the experts like Terry Ryder and APM (Australian Property Monitors).

Once you know what you are doing, you just might find that bargain investment. Even today.

So, to buy or not to buy, that is the question.

The answer is obvious. If it’s safe and profitable for you to buy now, then buy now. If not, stay on the sidelines.

There’s going to be plenty to see in the property game in the months and years ahead.


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