Property investment is supposed to be as safe as houses but two events in the past week point to that age-old belief being flushed around the S-bend in a wake-up call for anyone expecting a rapid recovery in the flat real estate market.
Property investment is supposed to be as safe as houses but two events in the past week point to that age-old belief being flushed around the S-bend in a wake-up call for anyone expecting a rapid recovery in the flat real estate market.
First came news that one of the smartest people in Australian business, Graeme Samuel, might have dropped a large part of his $50 million personal fortune on a business locked in a failing property deal.
Last night came news that the U.S. housing market has fallen deeper into a hole with home sales plunging by a record 27% in July, ensuring that property market in that country will remain depressed for years.
Optimists will claim that neither event directly affects property values in a fundamentally strong economy such as WA, but they would only be partially correct.
Pessimists will be quick to point out that the U.S. housing slump, just as the boom which preceded it up until 2007, can have a worldwide effect on property values.
We might not like it, but what happens in the U.S. really does have an effect here, especially when it comes to market sentiment, and a reluctance by banks to lend on most forms of property, including housing.
Samuel's problems, while linked to property, are also a reminder that no-one should ever take their eye off their investments, even property which is widely assumed to be a self-managing asset class.
In his case Samuel locked up a large proportion of his savings in a blind trust when he was appointed head of the Australian Competition and Consumer Commission after a successful career as a lawyer and investment banker. He thought that was the correct thing to do as the head of the government agency policing corporate Australia.
What Samuel forgot is that the ACCC is also the agency which routinely reminds investors of the need to manage their funds prudently and beware of investment traps.
That is the unfortunate irony of Samuel's exposure to a business called DFO which owns shopping centres along the east coast, but which has invested unwisely in a dog of a property in Melbourne's Docklands.
It is easy to feel sorry for Samuel who was acting correctly by separating himself from his savings. But, it is also easy to say that he should have done better and has set a poor example for other investors - the people the ACCC lectures on the need to invest wisely.
Behind Samuel's personal problems is a property lesson. It can fall in value just as easily as it can rise, no matter what your friendly real estate agent and other people with a vested interest in property will tell you.
In the U.S., property is emerging as a disaster of monumental proportions. Values have been falling for three years and look like falling further as home buyers and investors flee the market.
The biggest problem in the U.S. is that banks have made their lending requirements so tight after the sub-prime disaster of 2008 that many buyers cannot raise the 25% to 33% deposit required to buy.
Falling property prices also mean that people who own homes cannot afford to sell or they will crystallise a loss. The best they can do is service their mortgage, sit tight, and hope (pray?) that property prices will eventually rise - something that can only happen if the banks loosen their lending restrictions.
It would be easy to say that what's happening in the U.S. will not flow across to Australia, and that might be true.
But, Samuel's personal property experience is a reminder that property can perform in exactly the same way as the stock market, and right now there is more chance of values falling than rising.
