EDITOR’S NOTE: Exciting news! We’re making some changes to your daily Profit Watch service. I’m going to bring you a broader array of analysis and ideas to help your trading and investing.
I also need some help to carry the workload. Writing every day is great fun. But my premium trading service Catalyst Trader is now ‘officially’ live…and I’ve got dozens of stocks to track and trade.
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We’re still here to brighten your day, sharpen your mind and challenge your preconceived notions…and maybe even give you a laugh every now and again. I’ll keep you posted on the timeframe for this slight shift. Thanks for your continued support!
I did an interview the other week with Martin North, the principal of Digital Finance Analytics (DFA).
You can listen to it here.
I like talking to economists like Martin. It gives me a chance to tell it like it is.
Like taking the veil off the real estate industry spruik.
And there’s plenty of it around.
You just have to scroll through the numerous Facebook and Instagram adverts from the property industry.
Promising easy gains on the back of a forthcoming real estate boom.
Same story repeated for years
Many have fallen foul of the poor advice offered.
Take the pitches for Brisbane for example.
For years I’ve heard numerous spruikers make wild claims about Brisbane’s real estate market.
The story usually goes that it is on the cusp of a turn.
And that is understandable.
Between mid-2012 and 2017, Melbourne and Sydney had a dramatic run-up in price growth.
You would naturally expect that to overspill into other markets — and Brisbane would seem the obvious option!
And then in 2017, an email from a reputable investment firm crossed my desk claiming the following:
‘…the last 15 years Brisbane has been the best performing Australian property market. Brisbane’s Cycle lags Sydney and Melbourne which is why its growth this cycle (5- and 10-year returns) looks like it has only just begun…’
It caught my attention because Brisbane has in fact performed very poorly over the last 15 years!
In fact, in the 10 years to the recent downturn in 2018, the median price for houses in Brisbane only increased 1.9% per annum.
And if you think that is bad, unit medians have barely moved at all.
The reason so many were spruiking Brisbane is due to record numbers moving to south east QLD.
But of those numbers only around 5–10% are heading into Brisbane (it varies each year).
Approximately 48% of QLD’s population live in the city.
The lion’s share of population growth is going to the Gold Coast, Sunshine Coast, Moreton Bay, Cairns, Ipswich and the Scenic Rim…
Some of these areas have stronger local economies than Brisbane. Sunshine Coast, Moreton Bay, and the Gold Coast for example.
That means less competition from cashed-up buyers wanting to situate in *just* the centre of the capital.
It’s because QLD is the nation’s most decentralised state — and has been throughout its history.
So if you don’t identify where the population is heading, and know little about how the land market will react to the incoming surge — you’re going to make expensive mistakes.
One of my readers did just that. Writing to me:
‘I purchased 2 properties (in Brisbane) to benefit my retirement. To cut it short both these properties current market value are still considerably below their purchase price and the rents in both have reduced over time, all in total contradiction to the Property Clock.’
I expect similar mistakes will be made on the back of a COVID ‘work from home’ migration into regional areas.
Some property markets will see a benefit. Others will go nowhere, despite increased population growth.
I teach readers how to identify the regions that are going to boom in my newsletter ‘Cashmore’s Real Estate Wealth’.
Darwin and Perth in the midst of a rental crisis
But for now, two areas that I have my eye on are Darwin and Perth.
They’re in the midst of a rental crisis.
Real estate agents reporting locals and inbound migrants from Melbourne starting to fight for dwindling numbers of rental properties.
‘In one property we had 42 people through, with five applications,’ said a Darwin agent.
‘None of the applications came in at the rental price. It was advertised as $550 per week, the lowest that was offered was $560 and the highest offered $620.
‘One client gave us notice he was going to break his lease.
‘Then two weeks later he withdrew that notice because he couldn’t find anything as good as he was in, and all for $200 more.
‘If you’re in a rental right now and you’re thinking you’re paying too much, think again.’
Similar is happening in WA, with the vacancy rate hitting its lowest point since 2007.
The real estate cycle has a number of stages.
Homer Hoyt detailed 20 of them in his classic text One Hundred Years of Land Values in Chicago (1933).
These are the stages that make up the property clock.
It always starts with rising rents
Rising rents come as a result of increasing demand (population growth) against low rates of construction.
Rents feed into increasing land values.
Banks willing to lend investors more — calculating the rent as payment for the interest.
As rents rise, renters become buyers.
Developers start to make healthy profits.
And on it goes.
We’re not at the end of this mid-cycle by any means.
But there are good opportunities out there if you know the cycle, and where to look.
For Profit Watch