WHAT DO YOU THINK?

Dear Group,

I would very much appreciate your thoughts regarding the following article that was written by a successful property investor and consumer advocate. I am especially interested in what Steve McKnight thinks.

Thanks in advance for your comments.

“IT’S ALL ABOUT NUMBERS & TIMING!

Property is now unaffordable and unprofitable.

Opinion by Neil Jenman

Today’s property spruikers must think investors are mathematically illiterate. They are urging investors to buy in a market that is both unaffordable and unprofitable.

Spruikers are still sprouting clichés such as “Property is a long term investment” or “Rent is dead money”; and falsehoods, such as, “It’s not timing the market that’s important, it’s time in the market.” Nonsense.

Okay, spruikers (and that includes the self-proclaimed respectable set from industry spruiking bodies, such as the real estate institutes and housing associations), tell us this: What do they call investors who pay top price in any market? Mugs, that’s what they’re called.

Sorry to insult you if you’ve recently invested in property but any investor of even moderate experience knows that one of the most important investing maxims is timing.

That’s T-I-M-I-N-G.

And timing is all based on the numbers. Simple numbers based on simple rules.

For example you want your investment to show a profit – a decent percentage return on the capital you invested. Even with the [exaggeratedly reported] soaring rents these days, investors cannot buy real estate in any decent area and get a minimum decent return of seven per cent.

After expenses, typical returns are around two per cent. Many investors are getting zero return on property. It’s a mug’s game, these days.

Okay, the spruikers will tell us that we are not investing for return but for capital gain; that one really breaks me up. What they are really telling us is this: We should buy unprofitable investments in the hope that a bigger mug will come along at a later date and pay us a bigger price for our dud investment.

Yes, it does happen in the madness of booms, but not now. As mugs get stung they get smarter which means they are no longer mugs. (As Oscar said, “Experience is the name we give to our mistakes”).

I don’t want investors to make mistakes. I don’t want them treated like mugs. I want them to get smart, not get hurt.

Smart investors wait for the right TIME to invest.

They know, in Australia and New Zealand, right now, prices are not going to boom again for a long, long time. Not until the numbers are right.

So why buy now?? Unless you can find a property that gives you a return of at least seven per cent and it can be improved and increase in value almost instantly, don’t bother. Wait. It takes no brains to buy property, any mug can do it. Many mugs do. Don’t be a mug.

Never forget that the people telling us to buy are the people who are selling. See the boss of some big institute or association on TV who says the market presents some “good buying opportunities” today and wonder this: “How many properties has he bought for investment lately?”

Real estate in Australia has never been as unprofitable or as unaffordable as it is today.

Call it dramatic (and lots of property players are not going to like this) but it must follow that there has never been a worse time to invest in real estate (especially in Perth; Sydney was worse perhaps back in 2003, but just because it is “less worse” today it does not make it “better”.)

The numbers do not make sense!

The US based property analyst group, Wendall Consultancy, has just prepared a report which contains some excellent property information. It has ranked 159 global cities for affordability. In cities where it takes more than five times the average salary to buy a home, those cities are rated as “severely unaffordable”.

There is not a single city in Australia where real estate is even rated as moderately affordable. Australia is rated one of the worse places in the world for affordability.

Prices cannot go up if people can no longer afford to pay those prices. Either prices will have to fall or wages will have to rise, one of the two.

The right time to invest will be when the affordability factor falls to well under five years. Look at where it was before the last boom.

Study the numbers, work out the figures, use your common sense and you’ll realise something very important about property investing.

It’s all about numbers and timing.

***************************

FOOTNOTE: For those who think “Jenman is always telling us not to invest in real estate”, you haven’t been around me for too long.

In 2004 and 2005, I said the only two “sane markets” were Perth and Darwin. Those two markets went crazy. Not because of me, because of the numbers. The numbers were right. They are not right now. Don’t invest in Perth and Darwin today.

In 2002 and 2003, I told the people of Tasmania that their state was the best place in Australia for property investing. In 2004, Tassie was the state with the biggest price rises (I later got some cranky emails blaming me for the boom following a television interview in Hobart).

In 2003, I refused to say that the New Zealand market was about to crash. On New Zealand television, I said that the numbers indicated the market still had further to rise. It sure did. But stay away from it now.

In 2002 and 2001, I gave more than 80 speeches to around a hundred thousand people at a series of consumer seminars; in areas from Brisbane to Ballarat I told audiences that their local area was the perfect place to invest. “It’s right under your noses,” I would say. The numbers all said it was the right time to buy.

In 1999 and 2000, I argued with several of my friends when I said the western suburbs of Sydney was a goldmine for investing. You could buy houses and borrow the entire purchase price and the rent would cover the entire mortgage payment. That hadn’t happened since the 70s. The western suburbs boomed like never before. It even surpassed the snob suburbs.

In the late 1990s, when it was reported that the population of Adelaide may drop below a million, I was laughed at when I said, “Now’s the time to buy in Adelaide.” You could buy real estate for $49,000 and get $110 a week in rent. I know because that’s what I paid and that’s the rent I got.

In all these places, property has been a wonderful investment. [Provided, of course, that it was bought from mainstream agents and not spruiking outfits.] The reason is simple – it was a matter of the numbers being right.

If the numbers are right, buy; if they are not right, don’t buy. And never buy from a spruiker who flies in from Queensland and tells you that he is a wealth creator and a philanthropist. Yea, you know who I mean (more on him later. In 2007, my wife has asked me to lessen the law suits. I am limited to one a month).

Please understand something, I am not as financially smart as many people. I am not a financial adviser. I am a writer and a consumer advocate (and, yes, I like to expose and annoy the crooks).

But I never call myself a great investor. I am too conservative, too scared of making a mistake and losing money (I don’t like losing). My darling 81-year-old mum is a great investor, not her son.

All I do is let the numbers be my guide.

Oh, and for a bit of fun, I like to use the ‘Dog’ principle (when everyone else shuns something, I get the urge to buy it. I had a row with my accountant when gold was $250 and I insisted on buying some).

In 2003, I told ABC listeners that Baghdad would probably have a real estate boom. In the next year, I think it was one of the fastest price increasing cities. Ouch.

Oh and I absolutely loved David Koch’s column in last Sunday’s (January 21) Sun-Herald when he spoke about investing in “dogs”. I cheered him like a footie fan when I read his results from “collaring dogs” from previous years. Get yourself a copy. It’s a read you’ll never forget. (Mates, just send me an email and I’ll send you my copy).

And start reading people like David Koch and Paul Clitheroe and Noel Whittaker and Peter Thornhill and Scott Pape. When it comes to investing, they are much more financially literate than Neil Jenman (I prefer to invest in books, but that’s just the heart, not the head).

And, speaking of books, in the months ahead, I won’t be able to write as many articles as normal for this web site. I must finish my next book, Stitched! which is all about the hilarious wealth creation industry.

If you know where Henry Kaye hangs out these days, let me know. I want to get a good photo of him for my book. Thanks.”