Direct property investment has been a proven wealth building strategy for generations.
But with leading global economists, the RBA, ASIC and Treasury all warning of the dangers posed by Australia’s housing bubble, investors are understandably concerned about purchasing Australian real estate today.
With the risk of a substantial housing crash weighing heavily on their minds, it’s no surprise that an increasing number of Australians are choosing to invest in less risky overseas real estate markets.
At this stage in the business cycle, the US housing market is presenting one of the most exciting opportunities in decades for Australian investors.
US house prices are in the early stages of a new growth cycle, after having declined steadily between 2007 and 2012. On the other hand, Australian house prices are at record highs, at the peak of a two-decade-long bull run, and in dangerous bubble territory.
In addition, many other economic factors have recently combined to create the ‘perfect storm’ for anyone considering a foray into the American real estate market.
Prior to the GFC (Global Financial Crisis) in 2007, US lenders had relaxed the availability of credit until mortgages were offered to almost anyone – including the unemployed, and borrowers with blemished credit records. NINJA loans (No Income, No Job, No Assets) were often extended to 120% of the property value, so borrowers were in negative equity from day one.
These subprime loans were bundled and sold to investment banks, then packaged into AAA-rated securities and sold to investors as high-yield mortgage bonds. This generated vast sums of money and created a self-reinforcing cycle, leading to a massive speculative bubble.
The unsustainable growth cycle inevitably collapsed, as borrowers defaulted in record numbers, and financial institutions went bankrupt or were bailed out using taxpayer money. Millions were evicted as banks foreclosed on delinquent loans, and US house prices collapsed by 40%.
While devastating to those involved, this economic disaster laid the foundations for what is now perhaps the greatest investment opportunity of our lifetime. As Baron Rothschild first said in the 18th century, “Buy when there’s blood on the streets!”
Fortunes are made when times are tough. But few investors recognise the immediate opportunity. And even fewer have the means (or courage) to take advantage before the brief window of opportunity closes.
“If I had a way of buying a couple hundred thousand single family homes … I would load up on them. I would take mortgages out at very, very low rates … it’s a leveraged way of owning a very cheap asset now and I think that’s probably as attractive an investment as you can make.”
– Legendary investor Warren Buffet discussing American property
The fact that US house prices have already crashed isn’t the only reason you should seriously consider investing in American property today. The USA is a politically stable country that welcomes foreign investors, and there are many other fundamental economic drivers that make this the ideal time to buy.
Consider the following facts…
Unemployed tenants can’t pay rent, and house prices tend to fall when unemployment rises and income growth slows. This makes Australia by far the riskier environment for property investors today.
And this divergence between US and Australian economic growth is likely to continue. Residential construction has been the only sector keeping Australia afloat after the commodities boom ended. Construction activity is now at record levels, while at the same time Australia’s population growth is slowing. The resulting oversupply of homes (reminiscent of the US housing market in 2007) will place downward pressure on house prices over the coming years.
Overall, the probability of further house price appreciation in Australia is low, given the weak employment and wage growth figures, the forthcoming glut of new dwellings, and the fact that prices are already at unprecedented highs.
Conversely, the USA presents excellent prospects for significant house price gains, given the positive income growth and employment trajectories, and the fact that prices have already fallen and are only just entering a new cycle of growth.
As the US economy grows and the Australian economy weakens, the US dollar is strengthening against the Australian dollar. This means the capital growth experienced on US property is magnified by the rising US dollar. If the Australian dollar continues to fall to its early-2000s low of around $0.5 USD, those savvy investors who buy US property today will enjoy a huge windfall when the value of their American property is converted back to Australian dollars.
Exceptional investment properties can be found within the $50,000 to $200,000 USD range. Prices are so low that often the replacement cost of the structure exceeds the purchase price. In some cases homes can be purchased for 50% below replacement cost.
The 2015 Demographia Study concluded that the USA has the most affordable housing market of all countries surveyed, with a median multiple of 3. Australia was ranked the third least affordable country with a median multiple of 6 (i.e. Australia is twice as expensive relative to incomes).
US investors enjoy an average gross yield of 9%, and up to 19% in some markets, meaning a $100,000 property can return $19,000 dollars each year in rent (in addition to any appreciation in the value of the property). This compares favourably to a much lower average gross rental yield of 4% in Australia.
The US property market has turned the corner after its GFC collapse. Prices have already started to rise, and well-chosen property will enjoy considerable capital appreciation. Most economists are forecasting solid gains over the coming years, and the latest data shows growth rates are exceeding expectations in 2015.
Like most Australians you’re probably holding most of your wealth in your own home, investment properties, and your superannuation fund. Super funds are normally invested in the local share market. You may also have direct investments in the ASX. This leaves you heavily exposed to a downturn in the Australian economy.
Rather than keeping all your eggs in one basket, you can diversify your assets by investing in US property. You can even purchase US real estate though an Australian Self Managed Super Fund (SMSF). This means that when the Australian economy enters a recession (which is now overdue, after 24 years without one) your overseas assets will be protected.
Not long. Time is running out to take advantage of the opportunity. Cash buyers are already purchasing US housing inventory at an astonishing pace, and high-quality investment grade properties are becoming harder to source.
US banks are relaxing lending criteria, which drastically increases the number of qualified buyers. As lending policies loosen, more investors will purchase homes, increasing demand, increasing prices, and reducing the available inventory.
Wall Street, institutional funds, and other ‘big money’ players continue to accelerate their investment property acquisitions. These big players don’t sit by and let great opportunities slip through their fingers, and neither should you. This opportunity won’t last forever – the window is closing with every day that passes.
If building wealth and protecting your assets is something that interests you, then don’t hesitate to contact American Properties today, and begin your journey to financial freedom.