Saturday, December 11, 2010

Strategies for the Property Plunge (Dumb and Dumber version)

If you are looking for some incredibly stupid investment advice, you probably can't do much better than this recent article in The Australian. It's a perfect example of how 99% of the property market coverage in Australian newspapers is utterly useless, deluded, and in fact, quite dangerous.

The title, "Strategies for the Property Plunge", is at least promising, and makes one think the author might go out on a limb and suggest that maybe, just maybe, the forces of gravity have not been suspended down under. But of course, you would be wrong. Instead, we are treated with a deluge of advice from four property "experts" that verges from the sublime to the ridiculous.

This advice purports to cater to a range of investor types including "risk averse", "adventurous" or "patient" -- and mysteriously recommends buy, buy, and buy for all these cases respectively. The first strategist, who shall remain unnamed (and has written a book titled something like "How to Grow a Bazillion Dollar Property Portfolio in Your Spare Time Without Even Trying") says the investor has to "get his foot into the market". He then offers the following sublime piece of advice.
I suggest our investor use $40,000 to $45,000 of their money to put down as a deposit and borrow the balance of their investment purchase, using a loan-to-value ratio [LVR] of 90 per cent. They can do this by using lenders mortgage insurance [LMI] —a one-off premium that allows you to leverage money better.
If there is in fact a "property plunge" coming -- which the article suggests in its headline -- then how could it possibly be sensible advice to leverage oneself up to the hilt to buy an overvalued illiquid asset? With a 90% LVR, just a 10% price decline and you've wiped out your entire equity in the property.  In any case, the article continues with some even more ludicrous advice from the "experts"...
Karin Mackay of Australian Property Buyers advises our investor to buy into suburbs with an average of 10 per cent capital growth over the past 10 years... ‘‘When we look at the growth Melbourne has experienced, the suburbs that haven’t [achieved] an average of 10 per cent per year for the past 10 years will probably never achieve an average of 10 per cent,’’ she says. ‘‘Capital growth grows the wealth, not the rental income"
I'm not even sure where to start with this one. It's a bit like if someone had told you at the height of the tech bubble "only buy internet stocks that have grown 100% a year for the past three years. Forget about all those boring companies, that, you know, actually make stuff. They've never grown as fast as the dot com companies and they never will."

In other words, Karin Mackay is advising people to buy into the most overheated and overvalued areas, because, by jolly, if house prices in these areas have grown at 10% a year for the past 10 years, then why can't they continue growing at that rate for another few millenia? The sheer stupidity of this advice is mind boggling.

The article ends, almost sheepishly, with something that at least approaches sanity -- advice to save up more for a larger deposit and "wait like a tiger in the grass" for prices to fall further. However, this piece of advice still doesn't get to the real issue, which is not surprising since the authors of these articles only talk to "experts" who are hell bent on lining their pockets by flogging us more property.

The problem, of course, is that the entire premise of this article and most of the property investment advice in Australia is completely wrong. The question is not WHAT and WHERE to buy. It is WHETHER OR NOT to buy. As I have argued before, at current prices in Australia, it is very difficult to envision a scenario in which you will be better off buying than renting, even over periods of a decade of more.

Have you ever read a financial expert in The Australian advise people to rent instead of buying, and park their savings in a term deposit that gets you close to 7% entirely risk free? No. Instead, the "orthodoxy" is to tell people to spend years scrounging up enough money for a meagre deposit, and then leveraging this amount up to the moon in a single, highly illiquid asset that is overvalued by 30-50%.

Take anything you read about property in an Australian newspaper with a grain of salt. Read this, this, or this instead.


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