Source: Melbourne Investor Feb/March 2007

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Have your cake and eat it too

Source: Melbourne Investor Feb/March 2007

Written by Greg Clough

ONYX

Greg is the CEO of Onyx Finance. Onyx is a privately owned mortgage originator retailing in its own brand of mortgage lending products.

Have your cake and eat it too

“I can’t believe how much property prices have grown,” is an expression you might not have heard in the past three years. However, if that is the case, you may not have been looking in the right places.

During a general property boom most people are aware of their property’s earning potential. Yet, while many lose sight of this potential between booms, the astute property investor can still make money from property price growth.

A common ‘rule of thumb’ is that property values double every 10 years. This implies that there is steady year-on-year growth. A more accurate perspective is that most suburbs will experience at least one boom period once every ten years. This means that there be will periods of rapid increase separated by relatively benign periods of little or no growth in property values.

REIV (Real Estate Institute of Victoria) property price data on Melbourne median house prices supports this idea. A plateau (with some suggestion that prices may now be on the rise), has followed the period of steep increase in prices during 2002 and 2003.

Indicators

This, however, does not give a true indication of the market. Each suburb or region is different and experiences fluctuations at different times. Looking at median price changes by suburb illustrates price increases that vary by over 10 per cent p.a. Some suburbs experience slight negative growth.

Evidence of the so-called two-speed economy in Melbourne prices has been seen in the growth in bayside, inner east and selected inner suburbs as compared to the majority of low to negative growth suburbs on the outer fringes of the
metropolitan area.

REIV Chief Executive, Enzo Ramondo said, “Over the past six months we have seen the median prices in the inner region of Melbourne appreciate by eight per cent while median values in outer Melbourne, populated by families on average income, have witnessed two quarters of stable prices.”

Other analysts have suggested that infrastructure developments, such as the new eastern freeway and the growing demand for water views, will have an impact on localised price growth.

For those who want to make the most of the property market and who lack the patience to wait out a 10- year boom cycle, the temptation is to jump from one ‘set of steps’ in a suburb where prices are plateauing to another in a suburb where prices are growing.

One way to do this is to sell your home and move to a new location. However the selling costs on your current property and the stamp duty and legal costs on your new purchase can chew up any advantage you gain from moving. Not to mention the effect such a change may have on your family.

The words of wisdom from experienced property investors are: ‘never sell property’. The most common strategy used by property investors is to borrow against your existing property for the deposit on an investment property. This way, you may be able to purchase another property in a growing area without moving and without using any of your savings.

Even in a modest boom period the growth in your property’s value should allow you to release equity from that property for the deposit. If the finance on your current property is more than five years old then it’s worth reassessing your situation. Competitive pressures in the finance market over the last five years mean that you may be able to borrow more for less than you thought.

If you do your homework on your finance, as well as the trends in the property market, you can keep your own home and make money from it as well. In other words, have your cake and eat it too.