The naysayers and property pessimists were proven wrong.
Remember all those predictions a couple of years ago that property markets would collapse and prices would fall 15% to 20%.
What about those predictions of the "fiscal cliff" we were going to fall off or the predictions of 11% unemployment?
Despite prolonged lockdowns, no immigration, no international students, the threat of high unemployment, and all the negative forecasting for Australian housing markets, the value of many homes around the country grew by more than 20% - or by as much as 30% in some locations – during the challenging times we experienced during the Covid pandemic.
The past few years have been among the most tumultuous in living memory, and yet Australia emerged better placed than almost any other country and our property markets have surprised just about every commentator.
Obviously, these were unprecedented times therefore we can’t blame some of those forecasters who made predictions early on in the pandemic for getting them so wrong.
But the same forecasters are out there again telling us our property markets are going to crash and values will fall 15 to 20% or even more now that interest rates are rising.
So let’s put some context to what has actually happened over the past couple of years to help us understand what may lie ahead.
Here's what I learned about property thanks to the pandemic.
The government and banks have a vested interest in keeping the housing market propped up.
They are invested with us and when things got tough in the thick of the pandemic, they stepped in to help those in need.
Given the incredible circumstances the past couple of years has thrown our way, the resilience of our banking system is also clear – it is also too big and too strong to fail.
And we can learn from the past...
Since 1990, there have been only five periods when year-ended nominal home price growth has been negative.
Those downturns have never been greater than 10% in year-ended terms.
And in every instance, the preceding upswing has been larger than the downturn that has followed."
In other words, the predictions being made suggest we will experience the worst housing downturn in modern history, despite the economy performing well and unemployment is at a historic close.
Looking even further back to 1880, adjusted for inflation, price declines of 30% have never occurred.
Property investment is a game of finance with houses thrown onto centre stage.
When cash is plentiful and cheap like it’s been in recent years property values rise.
Now, however, the financial landscape is changing with interest rates rising, but it must be remembered that this will only affect a portion of the market:
- 50% of homeowners don't have a mortgage at all
- Many homeowners have substantial equity in their properties and are months ahead in their mortgage payments
- Property investors are enjoying substantial rental growth that will help subsidise higher mortgage payments.
The government knows the best way to guide a population out of a recession is for people to spend their way out.
When we feel wealthy, we are more likely to spend money which in turn makes the wheels of industry go around.
Those who held assets and particularly property, be it their homes or investments, have benefited from government stimulus and therefore have been keen to reinvest in the market.
Of course currently the Reserve Bank wants to slow our economy down to stifle inflation, but it doesn't want us to fall into a recession.
Sure currently consumer confidence is low, but it seems to be turning around, particularly with regard to property, as more and more we're home buyers and sellers are getting on with their lives recognising interest rates are likely to peak early next year as is inflation.
Anyone who could do their work remotely was at an advantage during the pandemic.
These Australians were able to “sell” their knowledge, rather than rely on their hands to make money, which meant not only could they work from anywhere, but they were less impacted by lockdowns.
One takeaway lesson if you are looking to future-proof your career is to consider pivoting to a knowledge-based job if you’re not in one already.
It means your skills are likely to be in strong demand moving forward, you’ll attract higher wages and won't be disrupted in the event of another pandemic meaning you'll have the money to invest in assets.
Whether it’s one job or one business, you need multiple sources of income for financial security - but the rich have always known this.
Next time it may not be another pandemic, it could be a personal health issue or other unique circumstance.
If you have an additional passive income from an investment property then you could live off the rent or even sell a property if needed.
The pandemic was a wake-up call for many Australians to save and invest as they realised they were really only a few weeks of lost income away from being broke.
Having plenty of cash savings provides a safety net in case your income unexpectedly falls, or a large expense crops up.
This doesn’t necessarily need to be in cash – it could be in an offset account.
Ideally, you would want to hold between 6 and 12 months of living expenses in cash savings but depending on your financial position and risk appetite it might make sense to hold more.
That cash buffer just reduces unnecessary stress and anxiety plus ensures you have sufficient time to make whatever adjustments are prudent, including selling assets.
And clearly, this is a lesson many Australians learned as it is estimated we have amassed a war chest of over $200 billion in pandemic savings and an estimated 80% of homeowners overpaying on their monthly mortgage payments.
Many people have been working hard for years (or decades) and have very little to show for it other than their own home and compulsory super.
So building a nest egg outside of these main assets provides greater financial strength to weather any storms – pandemic or not.
For example, if you lose your job and have liquid investments such as shares, then you know you have a fallback position that doesn’t involve selling the roof over your head.
If you haven’t been regularly investing, perhaps Covid is your reason to start.
Property Market corrections are not uncommon, in fact, they seem to occur every 8 to 12 years.
But I don’t try to time them, and neither should you.
- I expect there will be another recession in the next decade, but I don’t know when.
- I expect the property market will correct in the next few years and property prices will fall in some locations - and this will lay the foundations for the next boom - but I don’t know when this will be.
- I expect interest rates will keep rising, but I’m not sure how high they will go.
- I expect inflation to remain high for some time, but I don't know how high it will get and when it will start to fall.
- And I also expect there will be another global financial crisis, but I don’t have a crystal ball to know when that will occur.
There is a big difference between expectations and a forecast.
An expectation is an anticipation of how things are likely to play out in the future based on how I see things have unfolded in the past. A forecast is putting a timeframe on that expectation.
In an ideal world, we would be able to forecast what’s ahead for our property markets with a level of accuracy, but we can’t because there are just too many moving parts.
The lesson is to be ready for times of very high uncertainty so you can stay on the course.
My hometown of Melbourne survived six lockdowns and a total of 260 days of locals confined to their homes.
- Also read:Predicted House Prices for Australia in 2030
- Also read:This week’s Australian Property Market Update – Latest Data, State by State February 27th 2024
- Also read:Latest property price forecasts for 2024 revealed. What’s ahead in our housing markets in the next year or two?
- Also read:5 ways I’m going to ensure my property investments outperform this property cycle
- Also read:Melbourne property market forecast for 2024
Rather than collapse, Melbourne’s property market showed its resilience during those 260 days Melbournians were stuck in their COvid cocoons.
The fact that the Victorian capital has a range of different industries is living proof that it makes great financial sense to invest in large cities.
The key is to invest in diverse economies that can easily rebound – one reason why I believe you shouldn’t invest in regional Australia.
No small country town could survive a lockdown the length that Melbourne did.
One thing I know many of our Melbourne friends missed during the prolonged lockdowns is their “third place”.
If our first place is home and our second place is work or the office, then that third place – whether it is the homes of extended family and friends, a favourite café, gym, place of worship, the shops, or the local pub – was temporarily taken away from millions of people.
They missed that connection to others and an outlet to take a break from family or colleagues for a short period to reset.
All these amenities will be in demand moving forward and have come to be what some refer to as the 20-minute neighbourhood.
Location does about 80% of the heavy lifting when it comes to your property’s price performance and some locations will outperform others by 50% to 100% over the next decade.
So, how do we identify these locations?
It’s well known that the wealthier people get, the less they want to be commuting or moving around their city in traffic so they are prepared to (and can afford to) pay for the privilege of living in lifestyle suburbs with a high walk score.
Therefore, lifestyle and destination suburbs where there are loads of amenities within a 20-minute walk or drive are likely to perform well in the future.
Many of these suburbs will be undergoing some form of gentrification and will see incomes growing, which will, in turn, increase people’s ability to afford higher prices.
A-grade assets held their own during the downturn of 2020 at the beginning of the pandemic.
They either maintained their values or if they did see falls they quickly clawed back any losses in both value and rents.
In a post-pandemic world, A-grade homes and investment-grade properties will continue to outperform inferior properties.
Owning top-shelf assets means you can harvest that wealth when the current cycle ends.
While it’s nothing new, the price gap between houses and units has never been so large as space became a top commodity throughout lockdowns.
Many established apartments are now selling below their intrinsic value or replacement cost because units largely fell out of favour during Covid.
This upward cycle was led by homebuyers, but they weren’t all driven by pandemic panic.
Millions of Millennials are moving into the family formation stage and are seeking to move out of their apartments and into houses.
This shift just shows that the Great Australian dream is still alive.
In addition, pre-downsizers are buying homes for future retirement but are not selling their current homes.
Although I have praised the power of houses over units, I still believe apartments can be a great choice for investors on a tight budget.
Well-considered family-friendly apartments in medium and low-density complexes that are located in desirable lifestyle suburbs may still make good returns.
Unfortunately, the pandemic has left some members of society struggling financially.
There has been a fragmentation in society – those who have been adversely affected by Covid, and those who have not (or have even soared ahead financially).
Moving forward many potential buyers are being priced out of the market.
This means homes in the median and lower-priced suburbs are likely to languish at a time when those Australians who are still doing well financially fight for the few properties available in the higher price bracket.
On the other hand, prices at the upper end of the market and in aspirational suburbs will keep growing this year.
Despite our borders being shut for over two years, property values not only kept rising but have increased at their fastest pace in decades.
This was mainly due to the fact Australians are upgrading ‘en masse', are making Covid-induced lifestyle changes, and are also taking advantage of historically low-interest rates.
Simultaneously, markets are undersupplied and so when borders open up completely housing availability will be tight, therefore underpinning property price growth.
We have, however, discovered that immigration is very important for our CBD apartment markets. Without students and overseas tourists, these inner-city suburbs have taken an enormous hit.
But now our borders have opened again and the flood of new migrants (who don't bring their homes with them) will put extra pressure on our already undersupplied rental markets.
A shortage of labour and materials has caused the costs of building and renovating a home to surge nationwide at much, much more than the rate of inflation.
And this is likely to continue as the surge in new construction and renovation coincides with the disruptions to supply chains.
This means the cost of a new dwelling will have to rise as builders and developers pass on these costs and, in turn, this will pull up the price of established properties.
NOW READ: How much, on average, does it cost to build a house in 2022?
Strategic investors took advantage of our property markets while others sat on the sidelines over the last few years waiting for the picture to become clear.
It’s likely the next few years will deliver even more uncertainty, so the first step towards your financial freedom is to gain knowledge to take control of your situation.
You’ll need to have the serenity to accept what you can’t control, the courage to control what you can, and the wisdom to know the difference.
My suggestion is to get a good team around you and invest in your future – after all, you’ll be spending a lot of time there.
Currently I see a window of opportunity for property investors with a long-term focus.
This window of opportunity is not because properties are cheap, however when you look back into a three years time the price you would pay for the property today will definitely look cheap.
The opportunity arises because consumer confidence is low and many prospective homebuyers and investors are sitting on the sidelines.
However I believe later this year many prospective buyers will realise that interest rates are near their peak, and inflation will have peaked and the RBA's efforts will bring it under control.
And at that time pent up demand will be released as greed (FOMO) overtakes fear (FOBE - Fear of buying early), as it always does is the property cycle moves on.
We saw an opportunity like this since late 2018 - early 2019 when fear of the upcoming Federal election stopped buyers entering the market. And look what's happened to property prices since then.
I saw similar opportunities at the end of the Global Financial Crisis and in 2002 after the tech wreck. History has a way of repeating itself.
Strategic investors will take advantage of the opportunities our property markets will offer over the next couple of years maximising their upsides while protecting their downsides.