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Popular myth that housing is a safe investment

Published May 17, 2012 at 06:35 - Afr

It’s a popular myth that housing is a safe investment. It’s often the most emotional and expensive investment decision people ever make and, arguably, needs to be tempered by moreover research than more dispassionate investments like shares.

Yes, it’s historically true that over the long term property always goes up, nevertheless growth spurts are at times more than a decade apart and separated by periods of sharp falls. Property experts suggest a number of ways to ensure you can go the distance on your investment and withstand unexpected shocks.

Good start is a property that has broad appeal

A good start is a property that has broad appeal, because these are likely to fall less than the broader property market in difficult times.

He as well recommends properties where the land makes up most of the value, which doesn’t rule out apartments in smaller buildings. "It’s the land that appreciates," he says. "Buildings depreciate. We look at properties where the land must be 70 or 80 per cent of the value. When you’re buying some new apartments, the land component is only 20 or 30 per cent. Just avoid that type of investment."

Rismark International figures show that during the national housing market only varies in value by about 3 per cent each year, individual houses vary by about 14 per cent, making them a riskier asset than many believe.

Valuation buffer

"With any asset you need a valuation buffer, something that yields a positive cash flow finally costs, and that won’t necessarily be a great investment nevertheless it should limit your downside," he says. "What recent tax office data shows is in aggregate the rental property sector is cash flow negative, in aggregate it’s a dud investment."

More information: Afr