What are the Worst Performing properties in a Market Correction
Look with property being so popular, it is the great Australian barbeque topic right now. Everyone wanted to jump on board with what I call FOMO or the Fear Of Missing Out. I think it is really important that people make great decisions around asset selection now cause there are two types of property that I think are really vulnerable when the market moves back to equilibrium or maybe even corrects a little bit. The amateur investor won’t realise that until too late.
So the first property that I think is probably the most vulnerable is large scale off the plan apartments. And the reason being is because there are so many of them and you’ve got no differentiation between the apartments. Quite often people are buying in a speculative activity where they think, “Hey, I might buy it now for $500,000 and I don’t have to settle it for 18 months or 2 years time and by then it might worth $600,00 – $650,000. So I make this profit without really have to put anything down except for my deposit.” It sounds really exciting on paper but I’ve seen it so many times now. When it comes time to settle on the property in 18 months or 24 months time, you really want to hope that the market condition are exactly the same that you bought them in. Because if it flattens off or correct itself a little bit, what you might find is a dozen or 2 dozens other people who are in the same position with you and wanting to do the same thing. All of a sudden there is competition for the buyer when it comes to buying this property. So chances are your price would get driven down or worse, you might not find a market at all. And again, if interest rates move cause we are in a period of remarkable low interest rate, if they start to move up a little bit higher quite often people are forgetting to pressure test their budget at higher interest rate. The sun won’t shine this bright forever, interest rate will move at some stage. So if you have off the plan apartments typically in very high density, I think you will leave yourself very vulnerable to any market correction.
The other type of property that I think you need to be aware now whilst the condition is good is the green field estate, house and land packages. Lots of people sell this property on being shiny, great depreciation, lots of tax back, tenants would love the fact that they are brand new but ultimately at the end of the day, when the rubber meets the road, you want these properties to grow in value. If you are buying in an area where people’s income are limited and they’ve got glass ceilings where effectively, they go to their boss and hope for a pay rise next year rather than being in a situation where they can control their income ie: in a sales position, management position, small business where their income is based on the amount of effort that they put in and the success that they have. Chances are, those properties will also sort of plateau because if you go to the bank and said, “Hey, I’ve bought this property for $440,000 and someone wants to buy it for $440,000 next year”, the banks are going to say, “How much income do you earn? And if you don’t earn enough income we are not going to lend you the money.” So that is where those glass ceilings exist. For me, it is very clear that you need to be very careful during the good times on what property you buy and don’t get caught up in just buying a property because you need to jump on board.
The conclusion is very simple. A-grade properties deliver over the long term very very consistently as compared to the B and C type properties.
So I say to any investors that they really need to think about not just the condition of the market that they are buying in now when it’s good but what about when the market isn’t so strong. Is the property that I am about to buy going to perform well during those times or is it likely that the property is going to leave me vulnerable? If you can answer that very clearly and make sure you get the asset selection right upfront, chances are you would do very well no matter what the cycle. But if you bought the wrong property, you are going to leave yourself very vulnerable at a time when you don’t want to be vulnerable. So the worst performing properties in my view during a downturn are off the plan apartments and house and land packages.