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If you own a home or investment property… or are thinking of buying either in Queensland, today’s Money Morning will make you think twice.

After spending a week holidaying on the Gold Coast we’ve come to the conclusion that Queensland house prices could fall and stay low for up to 100 years!

It’s a big claim. But we’ll explain all in a moment. First…

You might think the Queensland sun has damaged your editor’s mental capacity. And after catching up on the news from the past 10 days, we’re having doubts too.

Because this morning we agree with something written by Michael Pascoe in yesterday’s Age:

“Just when we were getting used to the ‘$X billion wiped off shares’ stories, along came a week that wiped $90 billion back on, but neither headline is particularly healthy.”

We even pretty much agree with his final comment:

“Let the traders worry about stocks bouncing around, I’m happy for my super fund to keep accumulating shares in solid companies as cheaply as possible for as long as possible. Never mind the gyrations, see the opportunities.”

As we say, maybe it’s the Queensland sun.

But Pascoe is close to spot on. Capital growth investing is no longer the realm of investors. It’s for traders who punt on short-term capital growth… and punters who bet on high-risk, high-growth small-cap stock plays.

If you’re an investor (someone buying for the long term who doesn’t want to sell) there’s only one stock type you should invest in… and that’s dividend-paying stocks.

That means buying shares in “solid” companies that are likely to keep racking up profits. And if the share price doesn’t do much, so what, you’ll still collect the dividend.

The capital growth stuff is for the punter who wants to make small short-term profits trading blue-chip stocks… or big medium- to long-term profits from small-cap stocks.

And as it turns out, the same approach should be used for the property market too. Forget capital growth. Housing investors need to realise that income is now more important…

This brings us back to our Queensland observation.

If you’re a property investor who’s invested hoping for quick gains, you should act now to switch to an income-focused property portfolio… before it’s too late.

On the bus ride as we took the kids out to the theme parks, we went past some pretty swanky houses… lots of “marvellous water views”. Plenty of jetties… boats of all sizes.

Trouble is, after later reading through the local papers and property brochures it seems there are more swanky houses for sale than the market can ever absorb.

They were built on the promise that house prices always go up and there would always be demand for houses close to water. And the bigger the house and the closer it is to the water… the bigger the profit.

But now the Queensland property market is seeing what happens when a bubble pops. Contrary to popular opinion, prices don’t plateau at a high point waiting for wages growth to catch up. Prices fall.

The latest numbers from RPData show that. In Brisbane prices have declined 6.1% over the past year. And don’t forget, by then prices had already started to drop.

On the Gold Coast things are even worse…

Several of the estate agents we walked past made vendor losses a selling point. One told passers-by the vendor had paid $640,000 for an ocean-view apartment and was now selling for $420,000. (Although we dare say if anyone puts in an offer of $400,000 the vendor will take it).

Although we’re not sure what that marketing strategy does for the confidence of the buyer. But that’s their problem.

Interestingly, in its latest press release RPData makes a big point of looking at housing income returns:

“If you let your house, you receive rents in dollar terms. If you own your home, you save the market rent. This is the same as a business owning and occupying a building (it similarly saves on rental payments). The higher the market rent, the greater the saving (or ‘imputed rent’).”

Of course, while the home owner may save by not paying rent, they lose out on mortgage repayments. So adding imputed rent doesn’t give an accurate figure. Still, RPData says if you take into account rents, Brisbane prices are only down 1.6% over the past year.

That won’t be much comfort for the mega-mortgaged buyers who have seen prices fall at least 6.1% and then suffered another 6% or so loss on interest payments. But at least they’ve saved by not renting!

The bad news for Queensland is things are set to get worse. You see, Queensland has a bigger problem than other states. It has what you might call an “itinerant crisis”… migrants and investors who flocked to Queensland for sun… and profits.

Both caused property prices to rise and created a huge building boom.

The only problem is: easy come, easy go.

Let’s be honest, aside from resources and tourism, Queensland doesn’t have much of an economy. So when the proverbial hits Australia, Queensland is likely to suffer the most.

And because the population is full of migrants, there’s not much to keep them from moving on. Or worse, there’s not much to attract migrants in the first place.

That’s why property investors need to sort their portfolios out quickly. And not just Queensland investors. The whole of Australia is at risk of an “itinerant crisis”… as those who flocked here for the money and sun lose interest…

So the old tactic of borrowing as much as possible to make big capital gains won’t work.

Property portfolios need to be re-aligned for income. That means deleveraging – selling properties before prices drop further.

But even those investors won’t get off scot-free. Because the Aussie housing re-alignment will take years. In fact, given the size of the boom and over-investment in the Aussie housing market, we wouldn’t be surprised if Queensland house prices fell and stayed low for 30, 50 or even 100 years!

Such is the extent of the housing over-supply and an economy that has benefited from a resources boom that is set to end.

Yes. We’re afraid to say it. While Australia has sat pretty and basked in the sun of the resources boom, it has made the mistake of thinking it can last forever. And that has caused the economy to become lopsided and reliant on a single source of income.

Unfortunately, most Australians don’t realise it yet. They’re told the problems with the global economy are a “European thing” or an “American thing”… and that Australia will be fine.

It won’t. The slump in the resources states of Queensland and Western Australia is simply the beginning. The good news is, it’s not too late to do something about it… to protect the wealth you’ve built and prevent the losses you’ll make if you don’t act.

We’ll have more on this in the coming weeks.

Cheers.
Kris.

via moneymorning.com.au