Have you ever read the headline of a newspaper or on a website and find that the article is not even remotely about the headline?
Sure you have. We all have. Headlines are there for only one purpose: to grab your attention.
When it comes to the economy, prices, housing and all the rest, writers have to write something that stands out or they’re out of a job…
That’s why, too often, news reports are slanted toward the negative. For some reason, human beings react to bad news much more than they react to good news…
Fair enough. That’s human nature.
But when you look beyond the “bad news” headlines, you usually find that things are not as bad as they’re made out to be.
There are no bubbles!
That brings me to the “Bubble” headlines we’re starting to see in different places in the media.
“The real estate bubble”, “the housing bubble” or “the price bubble”, are becoming more common in headlines these days…
But here’s the only question that matters: is it true?
The answer will probably surprise you…
You see, there really are no bubbles! Not how most people think of them, anyway, especially in real estate.
Like most real assets, the real estate market goes in cycles…
Prices rise and prices fall.
When prices are low relative to other similar places, demand rises and prices soon follow. But other factors are involved, too…
Things like government policy on interest rates, infrastructure improvement projects and military expenditures will all impact an area…
And cause demand for services to rise where there was less demand beforehand.
As that dynamic unfolds, demand rises.
When demand rises, housing supply tends to increase, doesn’t it?
Construction companies get on the move and begin building more in response to the higher demand.
On the other hand, in those areas where prices are near the top of their cycle, what happens?
Supply expands too much in an attempt to capture the high prices.
But buyers begin to look elsewhere, at similar kind of areas that are more affordable…
They look for places where the housing prices are in the earlier parts of their cycle.
No mystery there!
That’s why the saying, “the cure for high prices is high prices” is so powerful. It’s simple but true.
At some point, housing prices will be too high for market tolerance in places like Sydney and Melbourne…
Two things will happen. First, people will be looking elsewhere to buy.
Buyers will be less willing to pay the high prices…
Second, housing sales figures will begin to fall. Prices will drop.
The key for you as a real estate investor is to get invested where the rising demand cycle is in its beginning stages…
Where growth is beginning to take off.
Sydney & Melbourne?
Those dynamics are happening in Sydney and Melbourne. Prices have risen in those metropolitan areas steadily and steeply. They’re still going up, but the rate of increase has slowed a little here and there.
But even with a slight dip in the growth rate, both Sydney and Melbourne remain the most active housing markets in the country.
Demand is still healthy in those two capital cities, as are values…
For instance, Sydney’s home prices gained over 13 per cent last year while Melbourne’s average home prices rose 11 per cent, and jumped 3.2 per cent last month alone!
But analysts are beginning to think that those two areas are getting pretty far along in their cycles.
Is there still profit to be made in both places? Absolutely.
And the reality is that demand in both Sydney and Melbourne will always be higher than most other areas simply because they’re the two largest cities in Oz…
Each metropolitan area has about 20 per cent of the population living there and a major center of business, commerce and government.
That means that housing prices, along with other costs of living, will likely remain higher than average in those cities.
Deals are there to be had of course…
You will just have a higher than average entry cost. But that’s no secret, is it?
Also, with higher prices, rental yields in both cities are low or becoming flat.
Or Brisbane & Perth?
Now, in terms of both opportunity and affordability, Brisbane and Perth have a different story to tell…
Perth had record growth of 5 per cent growth last year and Brisbane’s was 3.8 per cent…
But entry costs into those markets won’t be nearly as high as in Sydney and Melbourne because they’re much earlier into their growth cycles.
Rental yields will also be greater there as well.
Hobart is another city that is early into its cycle, showing high growth rates with good rental yields.
Prices are relative
These macro economic factors show you where you can look for positive cash flow deals that are also affordable…
It all depends upon your personal situation.
That brings me to another fact regarding real estate cycles…
They are not all in the same place at the same time.
Demand for property is low in one area and high in another…
Prices in one area keep you out of the market, while prices in another invite you in.
But there’s no doubt about it. The opportunity is there…
You just have to know where to look.