Be wary of the investor driven property boom: Mark Armstrong

According to Robert Gottliebsen and Saul Eslake, an investor led property resurgence is on the cards.

Low interest rates are driving demand and the lack of development funding is restricting supply and this will create “the mother of all dwelling booms”.  

There is no doubt the property market is on the move with clearance rates now above 70% in Melbourne and cracking 80% in Sydney.

But the fact that the overall residential market is growing doesn’t mean you can expect to buy any old property and achieve the same result.

When a market is hot there is a perception that every asset will work; you just need to jump in and hold on for the ride.  

Investor driven property booms can cause dramatic spikes in the market because of the kinds of property most investors want to buy.

Investors have different criteria to that of homebuyers. They want low maintenance, good tax breaks and stable rental income.

Home buyers on the other hand usually want space, location and affordability.  

Well-educated property investors tend to buy established properties in high demand areas where they will get consistent rental return and capital growth.

However as the wave of investors hit the market they will be in danger of getting caught up in the heat of the market and make impulse decisions that make sense at the time.  

To minimise risk, investors will need to take heed of the mistakes investors made during the last “mother of all dwelling booms.”

Property prices surged by around 20% each year from 2001 to 2003, when investor-fuelled demand ratcheted up the Melbourne median house price.  

Many of these investors bought property that looked good at the time, rather than property that would still be performing well five or 10 years later.

Some bought into multi-unit developments in the CBD/Docklands precinct, reasoning that a surge in construction corresponded with a swell in demand from tenants and sure-fire prospects for capital growth. 

In fact, the opposite happened.

The majority of other purchasers in these developments were also investors, so by the time the plethora of construction finished, demand from purchasers had run its course.

Without a significant number of home buyers to fuel ongoing demand, the CBD/Docklands market languished in an oversupplied state. Property values stagnated, and in some cases, fell.

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For example, the property pictured above in the Docklands was purchased for $582,000 in 2001. Five years later the investors had abandoned the property market and the best price offered was $455,000. The investor had no choice but to take the loss and move on.            

Property investors make up around 30% of the market and although this can drive markets to new heights, it is home buyer demand that really maintains property values over the longer term.

As we move further into the next phase of the market cycle, property investors will be wise to steer clear of assets that primarily have demand from other property investors.  


Mark Armstrong is a director of iProperty Plan, which provides independent analysis and tailored advice to investors and home buyers.

Mark Armstrong

Mark Armstrong

Mark Armstrong is a director of ratemyagent.com.au, Australia's number one real estate agent rating website.

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