Market Comment – Monday March 9th 2009

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We have seen another surge this week in sales in Melbourne. Sales were up 1.3% on sales for the same week last year and only retreated back 30% on last weeks sale numbers. This time last year Labour Day weekend showed a reduction of over 40% on the previous week. Don’t be confused by solely relying on the auction clearance rates or numbers of auctions. The market is changing and auctions are no longer the preferred method of selling, even in Melbourne!

People are putting their money in the only safe bet in town right now. And they are proving it in droves. Good land in good locations with tenantable, or the ability to easily renovate to be tenantable, properties are selling very quickly. Whilst the banks maybe making many margin calls a day on people who invested and leveraged heavily in the stock market, those who have leveraged to buy residential property near the Melbourne median price would not be getting those calls. In fact with the increase in value over the last 5 years, most people who have bought property in Melbourne are leveraging to purchase more property now.

Under a margin loan arrangement, it is the investor’s portfolio of shares or managed funds itself that provides security for the loan. The risk is that market fluctuations reduce the portfolio’s value to a level where it no longer provides adequate security for the loan. Once values of shares have fallen far enough so that the ratio of the loan to the portfolio value exceeds the maximum set by the lender, it will step in and make a “margin call”.

The lender will ask for additional funds or assets to reduce the loan size and bring the loan-to-valuation ratio (LVR) back below the maximum. If investors are unable to make the extra loan repayment in cash, they may be forced to sell part of their investment.

Melbourne residential property prices close to the median will have dipped only a couple of percentage points in the past twelve months compared with the stock market shedding about half its value and substantially more in some cases. This year I believe property prices under $600k will grow by 5% – 10% based on supply vs. demand.

Anyone with cash can buy residential property in Melbourne and get between 4-5% return on investment, whilst getting good long term capital growth. Only some very special bank accounts are offering above this return and there is no potential capital growth beyond the yield.

Anyone with equity can borrow at around 5% for residential property; this will be almost fully covered by the rental return allowing for a secure capital growth at a leveraged rate which should not attract margin calls.

Good property is both hard to find and then very difficult to purchase. JPP Buyer Advocates can assist you in purchasing good property at the right price. It doesn’t matter whether it is to occupy or as an investment; buying good property will bring good long term results.

Give us a call or drop us an email. Our first meeting is absolutely obligation free.

Ian James

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About the author

Ian has been operating his own businesses for more than 25 years. During this time the self taught lessons of building the business, dealing with staff, suppliers, clients and economic woes have been invaluable. Ian is a fully licensed Real estate Agent, a member of the REIV and registered with the Business Licensing Authority.

Buying property is not just sticking up your hand and outbidding your rival. It is an emotional, fiscal and psychological decision that needs to be planned and well executed. Ian is usually involved in over three hundred property negotiations per year; ranging from the $250,000 first unit purchase for a young couple to multiple million dollar residential developments. Ian's business background and endless numbers of negotiations make him one of the industry's leading negotiators.

Ian is married with two adult children, living in Patterson Lakes. He is a keen fisherman when weather and business allows the time.