Today's real estate market is substantially different from the heady highs achieved during the recent boom. For example, home loan interest rates are higher and auction clearance ratios dramatically lower. All-in-all, the once optimistic talking-up of property prices has been replaced by nervous wondering about just how far local values may have slipped.
While it's not panic stations as such, the uncertain nature of the current real estate market makes it a stressful place for the faint-hearted, and a downright dangerous climate for the thin-skinned property speculator.
Despite the deterioration of key real estate fundamentals, can, in April 2005, you still make money in property?
Some industry stalwarts would have you believe that the boom times are about to return and that now is a great time to buy while prices are somewhat cheap. At the other end of the spectrum you have professional analysts suggesting that property has had its day and that shares are now the talk of the smart-money end of town.
Personally, I'm both a property buyer and a property seller in the current market, reflecting my belief that profit-making real estate opportunities still exist both in ample quantities and in many forms. Having said that, I feel it's very important that I immediately qualify this statement to highlight that the possibilities before us now are substantially different to those that existed during the past seven years.
At the risk of stating the obvious, the Australia-wide property market enjoyed a sustained and unprecedented growth cycle, fuelled by historically low interest rates, which lasted from roughly 1998 until 2004. In this time house prices in many suburbs doubled, trebled or even quadrupled!
With the benefit of hindsight, the simple winning strategy during the recent boom was to buy as much real estate as you could possibly afford, and then to sit back and allow the capital gains escalator to carry you upwards for as long as possible.
However this strategy is not effective for the current climate, meaning those who still haven't woken up to the changed market conditions risk handing back some, or perhaps even most, of their recent easily-gotten gains as yet another redistribution of wealth unfolds in the marketplace.
This exchange of wealth is no Robin Hood fairytale. Already we can see a systematic flow of profit away from those who continue to rely on luck in the form of general market capital appreciation, towards those who are using investing skill.
For example, the property market has not changed direction overnight. The Reserve Bank of Australia has repeatedly given two direct and obvious warnings to investors - firstly that interest rates would eventually rise, and secondly, at a yield of between 2 and 3 per cent, the price of real estate was not sustainable.
Those who understood this language took action to sell underperforming properties while prices were still high; those who were driven by greed ignored the danger signs suggesting reasons why history would not repeat and that property values still had plenty of run left before a downturn.
Nevertheless, as investors we need to look to future rather than missed opportunities. The profit-making possibilities as I see them depend on whether you're buying or selling.
If you're BUYING: The rule used by all professional investors is: buy on fact and sell on emotion. As such, make sure the price you pay reflects the current market conditions rather than someone's emotive best-guess about what the property may be worth at some time in the future. Specifically unless you have an excellent reason, it is unwise to invest against the tide of the momentum of the market.
If you're SELLING: It is imperative that you listen to what the market is telling you! One of the biggest mistakes that I've seen repeated time and time again is vendors holding out for what they think the property is worth, when in fact they are not the one's buying. If your property has been for sale for some time now then look for, embrace and then action upon feedback about why it hasn't yet sold.
If you're NOT DOING EITHER: As an ex-basketball coach I would remind my team, at least once a game, that "offense and or defense... if you're not moving on the court then you're not in the game." Just because you're not actively buying or selling property does not mean you can't be positioning yourself to capitalise on an as yet unforeseen opportunity. It would be wise to at least be managing your debt to ensure you're not inappropriately exposed to further upward movements in interest rates or caught lacking in cash reserves at a critical moment.
The worst place to be right now is sitting on a large unrealised capital gain at the same time as being unsure about what to do, for investor uncertainty in an uncertain market will only lead to losses. The old adage is true... those who fail to plan, plan to fail!
Profit making opportunities still exist in the current property market, however they are not necessarily obvious nor are they just for those buying; they are present for all who take continual action in the pursuit of making progress towards their investing goals.