Sunday, May 13, 2012


Here is a reprint of an article I wrote in October 2008, the month of the GFC.
Have a read and see if there is any relationship to our experience over the past 31/2 years and keep it in mind when the prophets of doom next start predicting the end of the world.
Lots of people are expressing their fears in response to the turmoil on the stock exchange and some of the talk has moved to the future of real estate in W.A.
First and foremost is the concern about the “R”word (recession).
While am not an economist I cannot see how this state can go into recession
given the many pluses which exist here.
(Just yesterday I received an email from the Chamber of Commerce and Industry expressing the same sentiment)
Australia has a rapidly increasing population (260,000 in the past year) and W.A. is picking up more than it’s share.
They have to live somewhere and the building of new homes is not keeping pace.
Remember the key to all things financial is supply and demand.
It is also about what people believe and unfortunately many do not read beyond the headlines.
What about the talk about real estate values dropping by 20%, 40%, or similar amounts?
The way I see it every time a new subdivision of land is being produced, each metre of road is more expensive than the last subdivision.
That is due to rising costs of fuel, wages, and producing kerbing, etc.
The same can be said of constructing a house.
Each brick, metre of timber, wages, etc. will be more expensive than one built last year.
So that brings in to play the replacement cost of homes.
If you look at many of the homes for sale today in Rockingham, you will find they are below replacement.
The other factors which help to make Rockingham stronger than other areas is the fact that 70% of Australia’s navy families are based here and they spend there money right here every week.
Add to that the number of families for whom Kwinana industrial strip supplies employment and we have more factors which underpin our local economy.
The events in the U.S.A. bear little direct comparison to Rockingham or even Australia.
In the USA they can unilaterally opt out of their mortgages with no further liability just by returning the keys to the lender.
Here you will remain indebted to the lender if you were to abandon the property.
That is why there are so many homes for sale there.
Traditionally investors have returned to the property market when rents have approached 5% Gross return.
The easy way to work that out is to say that if a property is rented at $260 per then investors have in the past been interested when the price of the property has approached $260,000.
We are getting to that stage with some homes now.
The only way to turn a paper loss into a real loss is to sell.
So if you have the option at the moment it is better to stay out of almost any market place if you are a seller.
If you are a buyer look at buying as soon as you can.
Do not make the mistake of waiting, thinking you can pick the bottom of the market.
Did you pick the top or the bottom last time—odds are the answer is no.
The best definition of an economist I have found is “An economist is someone who has predicted 28 out of the last 3 recessions.
And please keep in mind that the job of a newspaper is to sell newspapers not necessarily to report accurately.
Ross Cutten
Owner / Director
Noble Real Estate

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