Property Prices Up?

Property prices have been on the upside in  recent times after a slowdown only a few years ago. Cities in developed economies such as London which saw prices down or stagnant only a few years back have also recently bounced back and even the chairman of Lippo of Indonesia is now looking to the US to invest in properties.

In Sydney, prices have moved up rather significantly due to various factors including limited supply in selective location, influx of more foreign investments, the rush or fear of missing out factor etc.

Home owners feel good whenever prices move higher. Potential buyers however are unhappy as prices seem to be out of reach and keeps escalating upwards.

Home owners talk about how much they have "gained" since they joined the owners club and are urging non owners to join the club. However is this gain for real?

Let use an example to illustrate this gain:

A buys a property says at $500K for cash (i.e. no loan) which is the average price within the suburb. A then keeps this property for 5 years and voila...the average price in the area has now jumped to $700K, hence a perceived $200K capital gain. The question then arises, did A make the "gain" (leaving interest, transaction and holding cost aside and assume there is no cost)?

A then decides to sell the property and pocket the "gain" and now have $700K. However is this gain real if A wishes to buy another home? He'll still need to spend $700K if he wants to be a house owner again, hence the perceived gain is only real, if A downgrades i.e. buys a lower price home or moves to an area where the average price is lower for a similar property e.g. country or bush land.

Not forgetting in my example above, I've assumed no interest, holding nor transaction costs were included and if one includes all of it, the $200K perceived gain will probably be close to nil.

Just on a similar subject, a colleague of mine recently saw a house for sale which appears to be at a 10-15% discount compared to its average within the suburb. The reason why there was a discount was due to the fact that the house is very close to large power lines which we hanging over very close. Those of you who have some basic knowledge of Chinese "Feng Shui" would want to avoid this and those with some basic understanding of modern science may also wish to reconsider the house (although scientific research about the negative impacts of power lines on human health is still inconclusive, I guess its better safe than sorry).

Although the discount looks tempting, I reminded him the fact that the house will forever be at a discount (unless the power lines are removed) when he resells it in the future, hence the "discount" will never materialise for him.

I guess many of us would like to believe that we are rather smart in buying and/ or investing in property, but the reality is, the market place is also equally if not more intelligent. There is actually not much to be made out there although exceptional circumstances do happen. I guess in life you'll only hear that 1 winning lottery ticket story, but not the other thousands who missed the winning ticket and remained silent.