If you are at all interested in property investing and take note of news and media related to property investing—and let’s assume at this point that you are, given that you’re reading a property investing magazine—then you must no doubt have heard about amazing opportunities to be had in the US property market. It certainly took me some time to take notice of the media hype, though I’m sure that people ‘in the know’ were investing in the US market well before I knew anything about it!
Certainly if you just look around at many of the well known property investment ‘gurus’ in Australia you’ll find that they have been investing in the US market since the opportunity first presented itself. Steve McKnight from PropertyInvesting.com, Rachel Barnes from Property Women, Dymphna Boholt from I Love Real Estate—all examples of well known figures in the property investing space in Australia who are all active investors in the US and have been now for some years.
What happened?
So what actually happened in the US real estate market and the economy in general that lead current circumstances and opportunities for Australian investors? I certainly don’t profess to be an economist or expert in the US housing market and after having read many articles outlining the history of events that lead to the sharp downturn in property values and huge number of foreclosures it appears that quite a number of economic factors seemed to come together to form that ‘perfect storm’ for the US.
Much of the blame seems to lie with questionable banking and financing processes which saw thousands of people in mortgages that they, perhaps, should never have been in to begin with. The following shop front window shows a typical advert for a subprime mortgage in the US, one of many sold to would-be home owners.
Although it’s beyond the scope of this discussion for us to delve into each of the economic factors leading up to the financial crisis in the US, the diagram on the following page helps to summarise some of the causes of the housing bubble that formed back in 2006 in the US.
Wikipedia, http://en.wikipedia.org/wiki/Subprime_mortgage_crisis
As we can see, there were decisions on the part of individual as well as decisions on the part of lending institutions that contributed to a financial climate of high levels of debt, elevated housing prices and high risk borrowing behaviour in the US.
Far reaching effects were felt as the flow on effect from the housing market, to financial markets to government and industry came into play.
By 2008 the market had fallen significantly. In fact between June 2007 and November 2008, Americans lost more than a quarter of their net worth.
The domino effect is highlighted in the diagram on the following page. Once again, a detailed discussion of each of the factors in these diagrams is beyond our discussion here today, but it is interesting to see how a chain of events, actions plays out with such far reaching consequences.
The result of all of this, in terms of an investing opportunity for Australian investors, was the abundance of hugely cashflow positive property investments. The cost of housing in some locations in the US were, and still are, unheard of in Australia. We’re talking properties that cost $35,000, earning rents of $650 per month.
Many Australian investors, me included, could simply not fathom these sorts of numbers! Others, quick to spot and jump on an opportunity, got on board quickly.
So what is the opportunity now? We’ll take a look at that in our next post. Tune in!