Volatility Exposed

For many investors, the promise of getting strong returns from investment property in small mining towns is too enticing to pass up. Entry level price point, strong growth potential and heavy spruiking by some property investment firms sounds like the perfect investment, right? (And a tad ‘wolf of Wall Street if you ask me!).

What are the pitfalls that many investors fall into when it comes to mining-centric property markets? Ask a property market ‘expert’ and the likely answer would be volatility. What most commentators neglect to mention is that volatility in itself isn’t necessarily a bad thing. For the risk seeking among you, the opportunity for inflated returns could be worth the risk of relatively more significant down turns.

Volatility does, however, make market timing, both in entry and exit, far more problematic. Picking the point of ‘opportunity’ or ‘value’ in a fast moving and frequently fluctuating market comes with obvious difficulties.

If we learned anything from the GFC it’s that market volatility can have devastating implications for investors. Between 2007 and 2012, 51 of the 83 default super options available delivered negative annual returns. Since then, the equity market has regained a significant portion of losses. Those forced to exit the market (retirees) midst downturn, however, suffered significant losses.

A recent article by Louis Christopher from SQM Research provides a sobering account of a property in the mining town of Port Hedland. The property was passed in at auction for $360,000 last weekend. That same house was bought four years ago for $1.3 million. If we assume the pass-in price aligns with the current market price, this represents a reduction of 72.3 per cent! It goes without saying that this unfortunate example is not a standard occurrence. What it highlights is the inherent risks associated with economies driven largely by a single industry. Blue Wealth, in contrast, advocates economic diversity as a means to avoiding systemic shocks to micro economies and property markets.

Over the coming weeks I will be presenting a series titled ‘Where are the Markets?’. These will focus on an analysis of Australia’s capital city property markets and the research on which Blue Wealth’s recommendations are based.

21st May
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14th May
Exploring Brisbane’s booming property market
7th May
Lessons from my mate Ruben and why the RBA didn’t raise rates today
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