Residential Property – Beware of the Spruiker!

By Jason Fittler

No this is not one of those rants from a stockbroker about how bad an investment in residential property is. In fact residential property has, over time, proven to be a good investment.

But if you are not careful you can also be sold down the river by those you trust and least expect. If you are a residential property investor, read this before investing, if you know a property investor please forward this on.

Conditions working against the residential property market at present.

1. Banks have tightened their lending practices. This means that fewer people will be able to get loans. In turn this means that fewer people will be able to buy property.

2. Unemployment is on the raise and will continue to do so until December 2010 at least. While unemployment is high less people have the confidence to borrow as such less buyers are in the market place.

3. Average Wage is set to stay at the current levels for the next three years; this will be reflected in housing prices at a minimum holding steady. If your wage does not increase than you can not borrow more money. This has a double effect, generally during this time rental incomes also hold steady, giving investors a lower return. Capping the price you can sell the property for.

The above three issues are the fundamental drivers of property prices, at present they all point to a flat property market.

The media would have you believe otherwise, they tell a completely different story. The media has a lot of influence over the average person, but few understand why. To understand how powerful the influence of the media is you first need to understand what vertical integration means.

Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream buyers. Vertical integration is typified by one firm engaged in different parts of production (e.g. growing raw materials, manufacturing, transporting, marketing, and/or retailing).

There are three varieties: backward (upstream) vertical integration, forward (downstream) vertical integration, and balanced (horizontal) vertical integration.

• A company exhibits backward vertical integration when it controls subsidiaries that produce some of the inputs used in the production of its products. For example, an automobile company may own a tire company, a glass company, and a metal company. Control of these three subsidiaries is intended to create a stable supply of inputs and ensure a consistent quality in their final product.

• A company tends toward forward vertical integration when it controls distribution centers and retailers where its products are sold.

• Balanced vertical integration means a firm controls all of these components, from raw materials to final delivery.

The three varieties noted are only abstractions; actual firms employ a wide variety of subtle variations.

Suppliers are often contractors, not legally owned subsidiaries. Still, a client may effectively control a supplier if their contract solely assures the supplier's profitability.

How does this effect what you hear, see and read in the media?

In Australia today large media companies own the magazines and paper you read as well as the radio stations you listen to and the television channels you watch. This gives them the power to control what you read, hear and see.

All humans are open to suggestions and this is then reinforced by repetition. This means if you read something in the morning paper, then hear it on the car radio on the way to work and finally see it on the 7 o’clock news that night, by the time you go to bed you automatically accept that it is true.

Most people are unaware of the vertical integration of media companies and fail to realize that these are not news stories but in fact paid advertisements. They fail to realize that companies spending their media dollar with that particular media are in the industry which the medium is spruiking.

So how does this relate to property? Property developers and real estate advertisements make up a large part of advertising sales in any print media. It is in their interest to make sure that this continues. But do not take my word for it, next time you read the local paper, Financial review or the Australian, take a couple of minutes to look through and see how many ads there are for property.

Does this mean that the information is incorrect? Not necessarily, but it does mean you should do a lot more research before making any decisions.

Like to know more? Give us a call 07 4771 4577.