Key takeaways
Over the last few years, everything we knew about property has been challenged. The RBA increased interest rates 13 times in 2022 and 2023, yet the property markets kept rising, and many people are questioning their next move when it comes to property investing.
The drivers of growth in our property markets are demographics, and escalating property prices are a big contributor to this growing divide. The middle class is disappearing, but you don't need to be afraid of being left behind.
While most property markets around Australia have performed strongly so far this cycle, it's important to realise that moving forward we are likely to have a 2-tier property market, with properties located in the inner and middle-ring suburbs outperforming cheaper properties in the outer suburbs.
As this cycle moves on, I believe there will be a flight to quality properties and an increased emphasis on livability. A good quality well-located property will provide capital growth over the long term, regardless of unemployment, wages growth, economic influences, and mortgage interest rates.
There’s a saying about real estate that suggests sinking your hard-earned money into property is ‘as safe as houses’.
In other words: property is a fairly safe bet; it will always be in demand; well-located property will almost always increase in value; and you can derive an income stream two ways, via rent (cash flow) or price appreciation (capital growth).
But in 2024, will this statement still ring true?
Over the last few years, everything we knew about, well, everything has been challenged.
Many of the theories that we knew about property were flipped on their head as interest rates kept rising, and the property markets kept flourishing.
Not that long ago the RBA told us that interest rates wouldn't rise until 2024 and then they increased them 13 times in 2022 and 2023, yet as I said, the property markets kept rising.
And what happened to all those cliffs that the property pessimists were predicting?
Remember the unemployment cliff, the fixed interest rate cliff and all those other cliffs that were really just little steps?
Now that interest rate falls seem to have been pushed further and further out to the future, many people are questioning their next move when it comes to property investing.
So does investing in real estate still make sense in 2024?
It is really a smart way to build your wealth?
Whilst there are clearly some economic headwinds ahead and some word-wide socio-political problems ahead, there are a number of time-tested rules of real estate that don’t change, regardless of what the market, the broader economy, or even the global economy is doing.
These include…
1. Drivers of growth
Yes, our property markets are still growing – it’s going to take more than high interest rates to stop property price appreciation.
It is demographics that will drive our property markets in the long term.
I don’t know if you’ve been following the trends over the last decade or so, but the rich are getting richer and the middle class is disappearing – and escalating property prices around Australia are a big contributor to this growing divide.
Many people think of wealth distribution like a bell curve, with most of us in the middle and outliers of the ‘rich’ and the ‘poor’.
In reality, it’s becoming more like the exact opposite: a U curve, where the middle class is disappearing.
That may sound scary – but it doesn’t need to be, and you don’t need to be afraid of being left behind.
One of the most powerful and effective ways to make sure you secure your financial future is by investing in real estate.
You may be been priced out of the prime, inner suburban markets, but that doesn't mean you can’t find a well-located suburb with opportunities for growth.
Look for gentrifying suburbs (meaning more affluent people are moving in and upgrading or renovating their homes) rather than ones that are static for the best opportunities for swifter price growth.
But moving forward we’re in for a 2-tier property market.
While most property markets around Australia have performed strongly so far this cycle, it’s important to realise that moving forward we are likely to have a 2-tier property market.
In other words, not all property markets will continue growing strongly moving forward.
Properties located in the inner and middle-ring suburbs, particularly in gentrifying locations, will outperform cheaper properties in the outer suburbs.
While the outer suburban and more affordable end of the markets have performed strongly so far, affordability is now becoming an issue as the locals have had little wages growth at a time when property prices have grown.
In these locations, the residents don't have more money in their pay packet to pay the higher prices the properties are now achieving.
- Also read:Brisbane’s property market forecast for 2024
- Also read:Melbourne property market forecast for 2024
- Also read:Sydney property market forecast for 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:This week’s Australian Property Market Update – Latest Data, State by State June 26th 2024
Others are finding difficulty raising the deposit, as the cost of living and higher rental payments make it hard for them to get onto the property ladder.
As this cycle moves on I believe there will be a flight to quality properties and an increased emphasis on livability.
Many Millennials are entering the family formation stage and are moving out of apartments and looking for homes that provide more space and security, but it won’t be just the property itself that will need to meet these newly evolved needs – a “liveable” location will play a big part too.
To many, liveability will mean a combination of:
- Proximity – to things like parks, shops, amenities, and good schools
- Mobility – access to good public transport (even though this may be less important moving forward) or a good road system
- Access to jobs
This leads me to my next point…
2. Price appreciation
Your long-term aim as a property investor should be capital growth – and that is a long-term play.
There are a number of things that can impact property prices in the short term, such as unemployment, wages growth (or the lack thereof), economic influences, and mortgage interest rates.
But when you own a good quality well-located property over the long term, all of these speed wobbles pale in comparison when you comprehend the price appreciation you’ve enjoyed.
ABS data shows that over the last 40 years, the median price of houses nationally increased at a compound annual rate of close to 8%.
Of course, in some years, that growth would have been less (or perhaps prices went backward).
But who wouldn't have liked to buy the property the appearance board at the price their appearance paid for it, even though at that time it seemed very, very expensive?
Of course, those figures are just averages, meaning some properties outperformed others by 50 to 100%.
And a lot of this has to do with location.
In fact, in my mind, location does 80% of the heavy lifting when it comes to capital growth.
3. Leverage
Multiply the above result over five properties, and you can see how successful investors create wealth from real estate.
While I recognise the importance of cash flow to keep you in the game – it’s really capital growth that gets you out of the rat race.
So most investors buy properties for cash flow, while I buy properties for capital growth.
That’s because I buy properties to allow me to buy more properties.
Let me explain…I did not put any money into the last property deal I did.
The capital growth of my property portfolio gave me the equity for the deposit and the rental income gave me the serviceability.
And that’s why I chose the location of that property very carefully.
That’s because the long-term trend of the rich getting richer and the gap between the rich and the average Australian widening is not going to change – which is why you should aim to buy in areas where the local demographic has higher income levels, so they can afford to pay more for properties and to improve the properties they already own.
People living in many of the cheaper locations and regional Australia will, in general, have very little spare cash left over at the end of the month, so there will be limited possibilities for capital growth.
Of course, many of the tenants in these locations are living there because they can’t afford to buy a property, and moving forward are unlikely to be able to afford rental increases either.
On the other hand, many tenants living in the more affluent locations are living there for lifestyle reasons and since they have higher incomes, in general, they will be able to afford to pay you more rent over the years.
