Property Boom. Watch the Sharks!!

Sydney auction clearance rates are just under 90 percent and Melbourne’s clearance rates are a little below 80 percent.

According to RP Data, Sydney house prices have risen by more than 5 percent over the past three months and Melbourne house prices rose by more than 6 per cent over the same period.

That sounds great for those who own a home but the temptation for novice investors to rush in without having a plan and considering the risks could prove to be too tempting and could create substantial problems down the track.

While high property prices make the people who own them sleep well at night, it makes others, who don’t own property, feel compelled to rush in before they go even higher. The problem is that when comparing Australian house prices to medium income or rental yields, Australian house prices are already high by world standards. The results of those calculations suggest that Australian house prices are about 20 per cent higher than overseas house prices and that was before we had seen the recent rises reported by RP Data above.

(Click to read OECD report)

I continue to hear that same old reasons as to why Australia’s property market is different to other countries. Reasons like, Australians live in a few relatively large cities. We have beach views. Immigration and demand remains strong, and the rules are relatively liberal for the purchase of real estate by foreigners. But ultimately demand for housing is fueled by the availability of capital, both debt and equity, and its cost.

Right now many Self-Managed Superannuation Fund trustees are taking advantage of low interest rates and a new source of capital previously beyond their access. This boom has the potential to see housing prices soar even higher than where they are today over time. But it will end one day and when it does, as Warren Buffett famously says, its only when the tide is out that you see who is swimming naked.

I have no idea how long this cycle will last for and when the demand for housing investment will slow. But for the moment the money is flowing and doesn’t look likely to slow anytime shortly. But before you take the plunge, make sure you have a clear head and a clear plan and consider the things that could go wrong and make appropriate provisions for them. A bull market in property doesn’t release you from your responsibility to do the necessary research and planning. In fact it is exactly the time when you should be extra diligent.

It is often in calm waters when the property sharks begin to circle and I’ve met a couple of them recently. It seems I get a phone call, email or Linkedin connection daily from someone trying to push the latest property deal.

Be careful, do your home work and background checks and get uncompromised advice. Advice where your adviser is working for you, not the seller.

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