It’s an inherently uncertain road ahead for property in Australia, and while ultra-low interest rates could see a spurt in prices over the next year or two, we don’t know what will happen in the period thereafter.
That’s why I suggest that investors utilise the unusually urbanised nature of Australia to their advantage, and seek out the suburbs with massive population growth and constrained supply.
It keeps others in a job, of course, but I leave the ‘hot-spotting’ to the hot-spotters and stick the tried and tested approach of investing in inner- and middle-ring suburbs of cities.
I have less than no interest in finding a ‘spot’ that may or may not be ‘hot’ over the next 6 months or a year. I aim to pick out suburbs which will benefit from fantastic growth for the next 30 years and beyond.
Old fashioned? Certainly. Boring? Absolutely.
Observe what has happened to regional markets overseas and you will note why investing in quality suburbs is important in times of recession.
We haven’t had a recession since 1991-92 in Australia, by the way.
Whilst, for example, London prices are the highest they’ve ever been, regional post-recession British markets have remained in the doldrums for half a decade now (and counting…) and that’s in spite of interest rates being at the bottom of the zero-bound range for years. Many Brits have negative equity and even negative net worth due to plummeting real estate valuations.
That’s a subject for another day. For now, here are 7 quick reasons why property prices are higher than 30 years ago:
1 – Inflation
The chart below explains in part why prices are higher in absolute terms – a massive devaluation of the currency:
Inflation doesn’t explain the graph below, however, which shows that the price of a house is also higher as compared to incomes.
So we need to consider…
2 – Growth in two-income households
Household income has grown very strongly in recent times, in part because so many more households have two incomes instead of one. But, even then, that can’t fully explain this chart:
Why did the use of debt increase? Due to…
3 – Credit growth
In December 1983, the Australian dollar was floated. Foreign banks became more involved in the Australian market which created more competition. As banks sought ways to expand their income streams, lending standards relaxed and a boom in credit was seen which took off with gusto from the mid-1990s.
Did this introduce a risk of mortgage defaults? Yes, but also remember that we now have…
4 – Lower interest rates
From July 1980 interest rates remained in double digits for an entire decade, and by June 1989 they had reached the nosebleed level of 17.00% where they remained for ten tortuous months until March 1990.
Since that time we have seen a structural shift towards significantly lower rates. It remains to be seen whether we ever return to the dizzy heights of double-digit levels again, but today the cash rate is a mere 3.25%…and falling.
What else has changed? Well, there’s a lot more of us, so we need to factor in the rate of…
5 – Population growth
The population in 1980 was 14,515,729.
According to the population clock, the population at this very second is 22,776,709 and growing by around 300,000 heads per annum.
Will the population continue to grow? You bet it will.
Not necessarily a problem in itself, Australia being the immense expanse of dirt that it is, but we also have an issue of…
6 – Undersupply of appropriate dwellings in key urban areas
An ongoing headache.
While there are those who contest that Australia has more than enough dwellings (and this might well be the case on a national level) in certain key urban areas there is a continuing undersupply of appropriate accommodation and this inevitably drives prices higher.
Population growth wouldn’t be so much of a problem if we were happy to rent, but Australia also has a high…
7 – Rate of ownership
Residential property is not a rational asset class.
Australia has, in fact, had a very high rate of ownership for over half a century now – ownership rates reached 70% by as early as 1961, far higher than, for example, the UK at that time, where ownership rates were under 50%.
Most of us desire to own our own little part of this country and the price of that is…well, higher prices.