All Topics / General Property / Over Inflated Market

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  • Profile photo of Native_MetaLNative_MetaL
    Join Date: 2003
    Post Count: 47

    Hi Everyone
    In light of the recent property boom some people say that many towns and suburbs across Australia are selling at over inflated prices and that they are in line for a possible price correction over the next year or so.
    My question is how does one tell if a given area/suburb is over inflated I mean there must be some kind of chart/poll that shows what prices should be rather than what currently they are.
    A lot of Property guru’s state that good deals can be found in any market this is nice but are they being irresponsible by telling people this kind of information?
    I would like to buy property now but I’m afraid of running into negative equity if a market correction occurs.
    So if markets are over inflated by 20 or 30% as some people are suggesting what can one do to protect them self from purchasing at this level.
    Do we make low ball offers say 40% below the asking price and never have an offer accepted?
    Waite 18 months or 2 years for a possible market correction that may not happen?
    I’m in a pretty good position with quite a bit of Equity in my ppor to start on my investment goals.
    I have planned out my goals and set a time frame to achieving them I want to get to work and I’m watching the clock tick away.
    Hoping I’m not about to make a big mistake.
    Am I being inpatient?
    Anyone in a similar position?

    All Comments welcomed

    Profile photo of Buzz LightyearBuzz Lightyear
    Join Date: 2003
    Post Count: 43

    Native Metal,
    Much of the country have experienced property price increases at above long term growth rates. There are many opinions as to what is going to happen next. However, like most investments, property investment must for the long term. Like the sharemarket crash of 1987, any long term graph shows that this was a small reduction in the scheme of things, however at the time, the sky was falling in. Similar to the early 90’s property market prices. Whilst in the moment, it is hard to see past the doom or indeed the reverse had probably applied in the last few years.

    Property is not the same across the country, suburb or street for that matter. Understand the demographics, population shifts, development (infrastructure) in the area you are examining, historical price movements, comparable sales. Talk to real estate agents, buyer advocates, bankers, valuers.

    Patience is a virtue, don’t think you need to act just because it seems like a good idea. Let your research and the numbers guide you.

    In the past three months I have purchased two properties (one in Melbourne & on Gold Coast). The Melbourne property, was the day after the Henry Kaye saga, and the Gold coast property was a day after the second interest rate rise. I guess I could have waited, but the deals’ numbers stacked up. I understood the current risks and have sought to minimise through various means, insurance, buffer in LOC etc.


    Profile photo of Michael RMichael R
    Join Date: 2003
    Post Count: 302

    “ does one tell if a given area/suburb is over inflated”

    There is a variety of market data available to compare today’s trends with historic statistics.

    However, “over inflated” is in the eyes of the beholder – to some people current valuations are excessive, where to others they are a bargain.

    Real estate is generally a resilient investment. Historic data cannot always predict where a market/location is heading – but if there is a downturn/adjustment, given sufficient due diligence, chances are it will bounce back.

    My point being, do not focus on those who are critical of the market [they have their own reasons], look at each investment closely and evaluate whether it is a viable opportunity.

    A couple of important variables to answer, 1. expected supply and demand i.e. 0-3 years; 2. your ability to withstand a market adjustment i.e. potential higher interest rates, lower rents in 0-3 years.

    And make sure you have a contingency plan or “exit strategy” in place, in case variables determine you cannot sustain the investment in the foreseeable future.

    “A lot of Property guru’s state that good deals can be found in any market..”

    I would agree with this statement. “Deals” are not always contingent upon the wider market – an individuals personal circumstances may dictate the sale of their property at below market valuation i.e. foreclosures.

    The key is closely monitoring the market and finding ways to acquire information that leads to good deals.

    — Michael

    Profile photo of Native_MetaLNative_MetaL
    Join Date: 2003
    Post Count: 47

    Thanks for replying to my Question
    Its interesting to hear others opinions on this matter.

    Michael you talked of having in place an “exit Strategy” in case external influences not being favorable during the life of one’s investments.

    Would you be kind as to share with me your own planned Exit strategy as ive been thinking of this my self recently, I have read allot of books about real estate investment but all these books fail to give good advice on risk management.

    Thank you

    Profile photo of bluecatbluecat
    Join Date: 2004
    Post Count: 106


    Just to make a quick comment – i think having a strategy in place that allows you to investigate each deal will help overcome the over-inflated prices – good deals come along but unless you can check them against your own criteria then you are just listening to what everyone else is saying and seeing the same


    Do today what you want to do tomorrow

    Profile photo of Michael RMichael R
    Join Date: 2003
    Post Count: 302

    “I have read allot of books about real estate investment but all these books fail to give good advice on risk management.”

    The reason risk management and exit strategies are not extensively covered is they can vary considerably subject to the type of investment, stage of investment, financial resources, location and many other variables.

    The exit strategies we formulate are less focused on risk management, and more on maximizing profitability.

    The reason being, we conduct extensive due diligence before making an investment, which highlights the potential risks throughout the holding period.

    We can then closely monitor identified and potential risks, but apply resources to managing the best strategy in terms of profitability – and implementing this [exit] strategy at the appropriate time.

    The reason I mention this is an “exit strategy” does not have to signify “risk management”, it can also signify “profitability”.

    No matter whether the investment is a single family home, or a 1000 unit apartment complex, the same basic principles apply;

    1. conduct sufficient due diligence to identify risk prior to investment.

    2. manage risk throughout the investment lifecycle, but maintain a focus on maximizing profitability.

    In terms of the risk variables that should be considered prior to investment, the common considerations include;

    1. ability to service a mortgage/loan for a pre-defined holding period

    2. potential interest rate increases during a pre-defined holding period

    3. comparable valuations i.e. recent sales of comparable properties in the same vicinity including asking price v. sell price, time on market

    4. what I consider the most important [but difficult to estimate] variable – “supply v. demand”

    The importance of a “pre-defined holding period” is it becomes a benchmark for evaluating the risks prior to investment i.e. plan to hold for 1 year, 5 years or 10 years.

    When you reach the pre-defined date, you then reassess the risks/rewards of holding for an extended period, or implement your exit strategy and move on to another investment – you may find the most profitable exit is prior to the pre-defined date.

    A phrase I try to abide by.. “a wealthy man is not one who knows when to buy, a wealthy man is one who knows when to sell”.

    My reference to this phrase is simply, if on the “pre-defined date” you have made a clear profit, however you are “not certain” of where the market is heading, then you sell. If the buyer realizes a short-term gain, then so be it.

    The key with an exit strategy is setting milestones and implementing them in an effort to maximize profitability. If the exit strategy is overlooked because “greed” becomes a factor, then the investment is likely to become a burden or opportunity cost.

    — Michael

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