There is a card trick some know as 3-card monte, others know it by the phrase ‘Follow the lady’. The idea of the game is that three cards are placed on a table face down, one of the cards usually the Queen of Hearts is shown to the audience, then turned back over and the cards shuffled. The audience member has to guess where the Queen is at the end of the shuffle. The shuffler often says to the audience, ‘Follow the lady’. If you get it right, you win your bet. If you get it wrong, you lose. The card game is prone to slight of hand, it’s a confidence trick, you lose a lot more than you should and the shuffler wins a lot more than they should. If you are trying to understand what’s happening in real estate, simple answer is to Follow the lady. No, I’m not suggesting this is a con game or scam, I’m suggesting there is only one part of the market you need to be watching.

The Australian Bureau of Statistics looks at a lot of information around housing and loans and they often segment buyers of real estate into two separate groups, namely owner occupiers, investors and speculators. Owner occupiers are as the name implies, people who buy a property to live in. When you look at a graph of the numbers of property purchased by owner occupiers it, with few exceptions, looks like a relatively slow, constant incline. In fact growth in demand is so closely linked to population growth and net immigration that the two graphs are basically interchangeable. Owner occupiers are not causing the market to boom. Media and political hype about Asians coming to buy residential property to live in isn’t causing the boom. Owner occupier demand really hasn’t varied enough to cause a spike.

The second part of the market are investors, people who buy property and rent it out rather than live in it. And this is the part of the market that does move around massively over time. Not only does it double and triple at different times in our property cycle but it has the uncomfortable ability to go negative. At certain times in the past, this market segment has had more property leave it than new property join it. Normally this only happens when interest rates hit new highs, economic conditions turn harsh and confidence plummets. Right now as you probably guessed, investors are buying strongly.

Rent growth according to Corelogic, a major data gatherer of real estate activity, released figures to show that rent growth was the lowest they had recorded ever. Their May rental index “shows capital city rents rose an average of just 0.1 per cent in the month and only 1.5 per cent over the past year”.

So is this the end of the investors in the market? No, rent returns are around 3.7%. I’ve not seen it that low, ever. But then I’ve not seen mortgage rates of 4.5% before either. The lower interest rates go, the lower rent returns will go. But it’s the investors that are interesting to look at closely because while there is an argument that buyers are being priced out of the market, there are now more first home buyers buying not to live in but to rent out. People are starting to buy where they can afford and rent as tenants where they want to live. A particularly sound idea and one that uses the tax system to great advantage.

So are investors the Queen of Hearts, the group you need to watch? Well, no actually. As much as they cause booms, they don’t cause busts.

That’s the final group, the speculators. Speculators are a statistically small group within the overall investor market but they usually exert their biggest effect at just the wrong times. And worst of all, they aren’t just buyers, they are often the developers who build and sell property. When speculators are around that’s when you should be careful because the market can and will turn ugly.

Speculators aren’t interested in returns and long term growth. Everything in their world is about a quick profit: get in and get out. As buyers, they want something cheap, do it up and sell quickly. Fortunately our stamp duty cost, borrowing costs and selling costs make it harder for them. Speculators as developers are a nightmare. They can pay too much for sites and expect the building to be quicker, cheaper and easier than it is. The finished product can be less attractive, have less capital growth and a lot more building problems over time. Buyers of the resulting product get burnt.

In our market place we are seeing long term, well established, quality builders selling sites to some of these speculative developers because the prices they are offering will produce more profit on the sale than if the original developers built the block of units and sold. Someone has their numbers wrong, someone might be a bit too optimistic. When things go wrong with these builders, a lot of people get hurt. This is the ‘Lady’ we all should be watching.