5 ways to avoid a property investment disaster

Hardly a day goes by without our attention being drawn to the buoyant residential property investment market, particularly in Sydney and Melbourne. Not only are record prices being achieved by sellers, but clearance rates at auctions have been tracking at very high levels, with weekly reports of clearance rates of 80% being achieved.

But what happens when things go wrong?

All investments, be they shares, property, bonds or cash, move in cycles. That is, markets go up and markets go down, over time. Sometimes these market fluctuations are driven by fundamentally sound economic reasons but often they are influenced by emotion and irrational behavior.

Which brings me to the theme of this article.

Over recent years Australia has been experiencing a boom in the mining sector, driven by an insatiable demand for minerals from China. But that boom is now over. Prices of raw materials have fallen as a consequence of declining demand, and as a result, our miners have been scaling back their operations.

With the boom in the mining sector, towns in regional areas experienced significant growth. Many of these towns had their own “mini” property boom as demand for accommodation drove property prices and rents to previously unheard of levels.

Just recently I was reading [1] about the property market in Morandah, a coal mining town of around 8,500 people in Central Queensland. At the height of the mining boom, houses were attracting prices in high hundreds of thousands of dollars, off the back of promised rents of thousands of dollars a week. But, sadly for investors, those days are now over.

It was reported that at a recent auction, a four bedroom house purchased for $850,000 at the height of the boom, was passed in at auction when bidding failed to reach the reserve of $220,000.

The investors have all left town!

A search on realestate.com.au showed there were over 150 properties available for rent, and almost as many properties for sale, in Moranbah. And this is only one town!

So, what are the lessons we can learn from this?

1. Investment markets go up, and investment markets go down, over time;
2. Euphoria fuels irrational investor behavior;
3. Investments should never be made off the back of a whim or an investment “feeding frenzy”;
4. Only ever invest in things you understand;
5. If an investment sounds too good to be true, it probably is.

[1] Australian Financial Review – 18 August 2015. p 8

The Realise Your Dream blogs are written by Peter Kelly and Mark Teale. More information about the authors can be found here