Property play proves to be trap

There is a deep-seated belief held by some investors that the price of property rarely, if ever, falls. This curious view of the world is fanned by real estate agents who have a vested interested in pandering to an Australian obsession with property. Briefcase, as you may have guessed, is not a believer simply because all markets rise and fall with supply, demand, and the cost of money – a point made by an example close at hand which is like watching money trickle through the fingers of some unfortunate property punters.

The case study, which is being repeated across Australia, involves a block of units in Cottesloe. As everyone knows, the beach has been the big attraction of the past few years and prices along the coast have soared, driven by twin forces of genuine owner/occupiers and speculators believing that the boom will never end.

Last year, units in this particular block of 12 were selling for up to $400,000. Given that nearby single-residential houses were selling for more than $1 million the units seemed like a bargain. Investors jumped in, bid the prices up and then sat back waiting for the rents to flow and the capital gain to make them richer. For a while, the game worked. Summer was a good time for renting and the units attracted between $250 and $300 a week.

Pause now, to consider the financial equation for the average property speculator (sorry, investor). At the original $400,000 purchase price (plus around another $15,000 in stamp duty), a mortgage of $350,000 was provided by a friendly bank, at a very attractive 8 per cent over 25 years. Repayments on interest and principal came to $2,700 a month, or $2,330 on an interest only basis.

The calculation for our new owner then looks like this. Bank repayments of $2,700 (fools take the interest only option), less $300 a week in rent which pulls in $1,200. For the sake of simplicity, we will leave out other costs and charges that always dog property investments, such as repairs and council rates. Our proud new owner of a piece of Cottesloe only has to find $65,000 of his own, sign up with a bank, and find $1,500 a month (tax deductible) to have a slice of beachside heaven and to own an asset rising in value hitting, say, $450,000 by last Christmas. Yippee!! A $50,000 profit, as easy as that.

Now the dark side of the equation. Summer fades, and the renters move out. The 12-unit block is suddenly half-empty. To cap it off, interest rates are creeping up and look like going higher. Real estate agents sing from a common song sheet with the title of  "don’t worry, be happy." They say property prices in Cottesloe never fall – which is an odd claim given some of the people saying this have advertisements in local papers enticing potential buyers with price reductions of up to $100,000 on some properties.

Now consider the equation. $65,000 of real money invested, a $350,000 mortgage, no tenant, rising bank repayments, and falling property values. Every month our speculator now has to find at least $2,700 ($2,818 if the bank has increased his interest rate to 8.5 per cent) to stay in the game. Worse still, units like his are now being advertised for sale at $450,000, which almost certainly means a sale at around 5 per cent less, which knocks the price down to $427,500.

Suddenly, the notional capital gain is cut in half, the monthly repayments up, the call on cash has doubled because the renters have departed and a beachside investment is looking rather ordinary. Will it take long for all of the $50,000 paper profit to evaporate and the $65,000 in capital to start shrinking? Sadly, no.

SPEAKING of ordinary things, Briefcase is fascinated by a press release headed "Perth ULP cheapest in Australia" found on the website of that very useful government service, FuelWatch.

It starts by saying: "In the past two months, Perth motorists have benefited from the lowest average ULP (unleaded petrol) in mainland Australia, with those using FuelWatch’s cheapest 100 service paying an average 3.8 cents per litre less than their Sydney counterparts".

Sounds OK and FuelWatch is a terrific service. But, when we get to the next paragraph a warning bell rings. It says: "Allowing for a government rebate in Brisbane and Melbourne, motorists who purchase ….."

Suddenly, three problems become apparent, and they come from a government department that has, as one of its duties, the protection of consumers. The problems are the heading about "cheapest in Australia", the matter of so-called government rebates on petrol and the need for a more direct comparison of exactly what fuel costs a motorist at the bowser, not what it might cost "in theory" if government was not interfering in the purity of the marketplace.

To test a belief that apples are not being compared with apples, Briefcase gave the RAC of Queensland a call. Early last week the average price of ULP in Brisbane was 87.1 cents a litre. In Perth it was 95 cents. The difference is rather stark and raises the question as to whether FuelWatch would have been more honest to have compared bowser prices rather than rely on an argument about government  rebates.

Which goes to another point the RACQ makes. It says the so-called government rebate in Queensland is not a rebate or subsidy at all. Many years ago State governments exercised a power to apply their own tax on petrol. Most did. Queensland chose not to and that forgone tax is now estimated (by the RACQ) to be worth about 9 cents a litre, which means FuelWatch in WA, rather than talking about a Queensland rebate, should be talking about the WA Government tax on petrol – and Briefcase reckons we’ll see that over Eric Ripper’s dead body.

In the interests of fairness and to explain why he believes Joe Blow in Perth pays less for a litre of petrol at the bowser than his cousin, Joseph Blow, in Brisbane, Briefcase phoned Prices Commissioner, Pat Walker, only to be told that Pat’s been a bit too busy to discuss the matter. Perhaps he too has been wondering about an arm of the Department of Consumer Protection making a claim about "Australia’s cheapest" when it demonstrably is not, or perhaps he is thinking about launching an investigation – into his own department.

"If you want to annoy your neighbours, tell the truth about them." Petro Aretino.