Profit from a Property Recession

Michael Fuller

March 31, 2020

If the mainstream economists are to be believed, we're in for a 20% fall in property prices - Does this worry you?

Perhaps you are more concerned about watching your super fund assets dropping significantly further?

Now I'm not trying to be alarmist but if this is of concern and you are an active investor looking for solutions in this 'new normal' then read on...

As the only company in Australia with a proven location scoring algorithm that ranks 15,000 suburbs based on trending supply and demand, we get a unique insight into where the market is heading and WHERE (important).

It's most definitely not all property market doom and gloom as some media headlines will have you believe.

No matter who I talk with these days, many people are worried about how the current situation will play out in the property market: retirees, couples, families, high net-worth individuals, not so high net-worth individuals, accountants, doctors, bankers, tradies...all manner of people.

They are ALL asking the same questions.

What Next? Will my loved one’s be okay? How long will this take to pan out?

Some say 6 months while others say a year or more. Who knows?

Yes, the property market will take a knock. Thankfully, there is no such thing as one homogenous property market rather there are 15,000 suburbs or micro-markets; each with their own supply and demand dynamics.

And this is where it get interesting

The fact is: some areas will do well over the next few years while others (most) probably will not. Even with public auctions no longer permitted, it simply means qualified buyers will view the properties and bid online without the emotional dynamic often associated with auctions. Savvy agents are excited about this.

Is that a bad thing?

Some Economists believe “house prices could fall as much as 20% if the recession lasts longer than 6 months”. I doubt this will happen (read on) but a market fall of 20% is a market AVERAGE.

Perhaps the real question is specifically WHICH locations will experience a big dip and which won't?

During the varied crises over the years there are certain areas that performed better than others and became a good store of value of capital until the markets pushed up again as they did...and always do.

BUT... it’s not only about location, location, location

Within each market there are certain strategies to maximise returns like adding value or ‘manufacturing’ capital growth through renovation or property development.

The micro markets I mentioned also come with unique demographics that are far more suited to an economy in temporary recession. Many people in certain areas won’t lose their jobs or their businesses but may, in fact, thrive during a health and economic crisis.

So the question is, who are these people, where do they want to live and what type of property do they want to live in?

This is important: please read on...

But first...

Beware of buying or selling real estate on emotion

When I created Boomtown 10 years ago; it was built to remove the subjectivity around choosing WHERE and WHEN to invest in property by working out which suburbs have the greatest (and growing) gap in supply and demand.

The app is also a very good lead indicator of when it’s time to sell. It’s proven this in a number of situations. Just look for my Moranbah Case Study on my blog to see a classic example of 'crisis investment management'.

Over the years Boomtown has also proven that the property market doesn't dissolve in times of trouble.

Yes, it shrinks as less people choose to sell and fewer buyers have the capacity, or emotional wherewithal to buy.

In fact, the count of suburbs today Boomtown classifies as ‘hotspots’ with imminent capital growth has already dropped significantly ….but... strangely, there are still numerous suburbs that did not make the shortlist last year but now do because demand is overtaking supply despite the panic from some quarters.

How is that possible?

  • Some of these areas are preferred by cashed up retirees moving to get that home on the beachfront and;
  • Medical professionals moving to that home on the beachfront but within a stone's throw from a modern, brand new medical precinct.

It’s all about lifestyle and value for most buyers today.. and that does not change during an economic recession. In fact, many see the possibility of getting better value buying when everyone else is fearful.

Is this the next GFC or worse?

Despite the fact that the share market has dropped 33% and is very volatile right now, in contrast, there are many factors that may facilitate property price growth once the media and consumers have accept the new normal:

  • Interest rates are at an all time low so those with job security and spare capital are wondering where to go - bricks and mortar is often the preferred asset class in uncertain times.
  • Supply is very low and will continue to drop as construction slows over the short term. Low relative supply pushes prices up.
  • Population is growing - did you know the world population boomed post World War 2 - people need something to do during isolation, not so 😉 *sorry but a little humour goes a long way nowadays*
  • Building approvals - HIA data suggests we are experiencing the lowest level of approvals and construction that Australia has seen for over 10 years countrywide.

Given how long it takes to get both land estates and apartment complexes approved and built, we foresee a growing undersupply for the next two years and beyond. This latest crisis just adds to the undersupply issue.

“Let’s be clear. Only exceptionally well located, highly desirable properties with that ‘X factor’ (uninterrupted 360° views, beachfront, shopping, schools, no traffic, employment) are going to do well in the near term.”

Share market volatility and low interest rates are driving more people to real estate as a capital 'safe harbour' because companies can disappear but houses will not. So this could go some way to alleviating the growing undersupply.

What about property development?

It’s well know that the best time to get into property development is when the market is in retreat.

Why? Well....

  • Development sites become cheaper
  • Funding becomes much cheaper (if you can get it)
  • Consultants are less busy (architects, town planners…)
  • Council approval wait times drop
  • Builders are more negotiable as are trade suppliers
  • Wealthy investors have capital they are prepared to park for a couple of years instead of looking for short term 6-12 month gains (banks might withdraw funding GFC style but the secondary non-bank market is already thriving - funding only the better *beachfront?* projects though).

So where can YOU park your ‘lazy’ equity?

Lazy equity refers to cash sitting in your mortgage offset, SMSF, bak deposit and anywhere else where it's not 'working' very hard.

Investing in specific forms of property development is the counter-cyclical investors preferred approach. But just like there are only a handful of growth locations left to invest in today, it also depends on what type of property development.

Follow the right demographic

At Hotspotcentral, we are targeting the cashed up retiree, professional, interstate sea-change and medical sector. Doctors want to live near or on the beach. They also want to live near work...without an awful commute like many face in Sydney.

So... where are those ‘in the know’ looking to invest in this current climate? If you are concerned about preserving your capital and are inclined to take Warren Buffett's advice to “be greedy when everyone is fearful” then here is a potential solution:

  • An project that links back to the medical sector. I think you will agree with me this is one industry that is booming?
  • And it’s NOT about buying a whole property or taking on more debt or worrying about tenant demand dropping (along with rental income)...
  • An investment with a peace-of-mind feature I call “quarantined profits” (this you will want to know more about).
  • A project with links to one of the biggest medical precincts in Australia (talk about great timing).
  • Only a small amount of capital is required to participate just in case you are a little pensive or have not invested with me before (check out the results section on our website)

So, if you are ‘fearful’ right now, but also don’t like the idea of your capital doing pretty much nothing over the next few weeks, months or even years... or you are not adept at picking shares... or don’t like getting near zero interest rate returns... then remember, there are significant coming out of this crisis. You just need to know how to access them.

That said, this is not the time to merely try things. Our proven systems and know-how are important in times like this as you will discover by registering you interest (we will send you some valuable insights). We are not taking applications yet. Just expressions of interest. So you will have time to do your own due diligence.

They say the best time to invest was 10 years ago but the next best time is today. Indeed, some of the greatest fortunes were made in times like these for those with the vision and the ability to make a calculated decision based on fact and experience.

Thanks for reading.