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 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 (cashflow) or price appreciation (capital growth).
Over the last few years, everything we knew about, well, everything has been challenged.
Other than travel and tourism, no industry has been impacted quite like real estate, with more emergency laws and rushed legislation passed this year than we normally see in the space of a decade.
All of the truths that we knew about property were flipped on their head in space of weeks, if not days, with landlords forced into a position where it became illegal to evict a tenant for not paying their rent.
Yet despite all this our property markets flourished, creating a boom the likes of which we haven't seen for decades.
Now that we are emerging out the other side of the pandemic – in the respect that we are now learning to live with the virus, rather than react to it – many people are questioning their next move when it comes to property investing.
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, but 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.
Yes, our property markets are still growing – it’s going to take more than a pandemic to put a permanent stop to 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 – 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-city 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 (other than the inner city of high-rise apartment market), 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 minimum little wages growth of the time when property prices have boomed.
In these locations, the residents don't have more money in their pay packet to pay the higher prices the properties are now achieving.
More than that, Covid19 has adversely affected low-income earners to a greater extent than middle and high-income earners who are likely to recover their income back to pre-pandemic levels more quickly, while many have not been hit at all.
Also, high-rise apartment towers in our CBDs, which were already suffering from the adverse publicity of structural problems prior to Covid19, will now become the slums of the future as they are shunned by homeowners and investors.
- Also read:Here’s how to avoid these 12 common reasons property investors fail to build a Multi Million Dollar Property Portfolio
- Also read:Heat comes out of the housing market as values across Melbourne dip and Sydney slows | Corelogic Home Value Index
- Also read:Latest property price forecasts for 2024 revealed. What’s ahead in our housing markets in the next year or two?
- Also read:Sydney property market forecast for 2024
- Also read:Home Price Growth Still Strong Over November | Latest Housing Market Stats
And as we start to emerge from our Covid Cocoons there will be a flight to quality properties and an increased emphasis on livability.
As their priorities change, some buyers will be willing to pay a little more for properties with “pandemic appeal” and a little 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…
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 into comparison when you comprehend the price appreciation you’ve enjoyed.
CoreLogic data shows that over a 20-year period, the median selling price of houses nationally increased at a compound annual rate of 7.2%.
This means that on average, house prices increased just over 7% per year.
Of course, some years, that growth would have been less (or perhaps prices went backward).
But overall, those people who bought a property in year 1, by year 2 owned an asset that was worth far, far more than they paid for it.
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, location does 80% of the heavy lifting when it comes to capital growth.
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 while 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 have 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 experience minimal wages growth over the next few years, 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 is 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.