There is currently a small contingent of Australians looking to buy property for investment in the US. People are seeing homes selling for the price of a deposit in Australia and they’re thinking: ‘hey, that’s a good deal’.
Several companies are actively marketing tours to the US for Australian property investors and many people have asked me whether US property is worth looking into. While I suspect that buying the right investment property at the right price in the US will prove financially rewarding for those who truly know what they are doing, it is not a great idea for ordinary investors. There are simply too many risks, including possible currency fluctuations.
Here are the main problems.
1. If you have no knowledge of the US market, less alone the states or specific counties you’re looking at buying in, how do you determine what is a good property and what is its true market value?
2. Research is a critical part of property investment. To buy in the US, you really need to get on a plane and spend some significant time in the specific market you’re looking at. This is obviously costly. The alternative – buying over the internet, is highly risky.
3. I generally recommend that investors buy in markets they know of, such as neighbouring suburbs to where they live or work. You already have knowledge of these areas and being close by means you can quickly deal with things when they go wrong.
4. Consider the sleep-at-night factor. How can you be sure your asset in the US is gaining value? What happens if the rental market falls over and you can’t get a tenant, or perhaps unemployment continues to be a factor and your tenant can’t pay?
RP Data recently released a report summarising the state of the US property market. RP Data is an independent Australian property research company and their report was produced using data from US property, finance and consumer research company, CoreLogic.
Briefly, here are their main findings:
• Since the market peaked back in 2006, US home prices have fallen by -32%. The sub prime lending crisis led to the GFC and many continuing mortgage defaults.
• While the magnitude of home price declines has moderated since early 2009, the US housing market is far from out of the woods. Home prices are still falling, transaction volumes remain well below normal and almost a quarter of all homes are showing negative equity.
• Distressed sales (ie homes that are being sold by the lender or sold at a price lower than the amount owed on the property) comprise 30% of all sales in the US.
• The number of ‘short sales’ (homes being sold for less than what is owed on them) has tripled over the past two years. CoreLogic estimates this will rise by another 25% by the end of 2011.
• The percentage of homes that are at least 90 days in arrears is slightly higher than 8% in the US. Comparable data for Australia shows delinquent housing loans remain well below 1%.
As you can see, there are a lot of issues.
The good news is if you’re looking for highly discounted property for investment, there are opportunities in your own backyard. The specific market offering the most highly discounted property right now is the Gold Coast, where property prices have fallen between 20% and 40% in premium beachside and canal suburbs.
Many Australian markets recovered from the GFC in 2009/2010 but the Gold Coast is one market that has yet to begin its recovery. I think it is likely to provide some outstanding growth over the next three to five years with far less risk compared to buying discounted property in the US.
Buying well can result in a significant boost to your long term capital gains. But be careful – you’ll need to hold your Gold Coast property for the long term to reap the rewards.
