With so many mixed messages currently surrounding property I thought I should give you some insights based on my close to 5 decades of experience in property and having built what some would suggest is a very substantial property portfolio.
According to our big banks, Australians must brace for the worst housing correction on record as rising interest rates will strangle the property market.
And if the RBA gets it wrong we may even fall into recession.
Obviously, the last couple of years have been an emotional rollercoaster for many property investors, haven’t they?
We’ve had ups, downs and everything in between.
It has also been a time that proved some people right… and others wrong.
It was not really that long ago that all those so-called “experts” told us property values would drop through the floor.
Others told us to sell up our properties and still, others said it was the end of capitalism, as we know it.
They also warned us about the fiscal cliff we were going to fall off, double-digit unemployment and severe mortgage stress when fixed-rate loans converted to variable rates.
Remember all those terrifying headlines a few years ago?
No, they didn't!
Did the world come to an end?
Instead, we experienced a once-in-a-generation property boom where the value of almost every property in Australia increased, and the value of certain properties boomed by 25 to 30% over the last couple of years.
In fact, the total value of residential real estate in Australia increased by $2 trillion in 2021.
And yes...the boom is now over, particularly in the Sydney and Melbourne property markets, but that's after 2 years of massive capital growth.
But real estate values didn't fall 20% like some property pessimists suggested last time they made those scary predictions and it looks like this time they won't come true either.
We're more likely to have a soft landing as our economy is in good shape as are most household budgets so there should be very few forced or mortgagee sales.
I'll explain this a bit more in a moment
The last time the RBA pushed up interest rates was over a decade ago.
In 2011- 2102 rising interest rates brought our property markets to a halt, however (unless you bought in mining towns) prices didn’t really collapse!
It was just like the other economic downturns and recessions I’ve experienced before.
You feel terrible when you’re in them and even worse when you can’t see the end.
But when the clouds lift those who had a sound investment strategy and understood the fundamentals of economic and property cycles ended up in a financially sound position.
In 2017-18 the APRA-induced credit squeeze caused Australia’s largest ever peak-to-trough house price plunge - a total of 9.9 per cent – between December 2017 and June 2019.
What I noticed then was that property downturns weeded out two distinct groups of people.
Firstly, and unfortunately, a large number of investors disappeared.
Some sold up because they were scared by the headlines - and that was a big mistake.
Others invested in the wrong types of property and had to sell up.
And that is particularly disappointing as, many would have lost money buying in the wrong locations or buying the wrong type of property - especially new and off-the-plan apartments or house and land packages in the outer suburbs.
Well… some were given bad advice and sold a property that was never going to perform strongly and the only people who would ever make money from these properties were the project marketers and developers.
Others sold up because they had overleveraged themselves or got involved in the wrong type of loan (maybe once again based on poor advice).
For other investors, their hunger for a quick return took them into exotic terrain.
They forgot the fundamentals of buying well-located properties in the right locations of our capital cities (areas with multiple drivers of capital growth) and ventured into things like property options, buying off the plan or house and land packages, usually to their detriment.
I remember reading Warren Buffett’s advice:
“Never invest in something you don’t understand”.
So one group that disappeared during the downturn will be inexperienced or ill-informed investors or those that did not have a sound property investment strategy.
Many of these people thought they were investing, when in fact they were speculating.
You know what I mean…they bought a property and hoped or prayed it would go up in value, rather than sticking to tried and proven investment principles.
No one ever said property investment was easy (or if they did they were lying to you), but if you are one of those who had a sound strategy and held on to your properties, you are likely to be way ahead – so congratulations!
Those who looked smart during the early stages of the property cycle led many inexperienced investors astray (remember: a rising tide lifts all ships).
Here’s another Warren Buffett quote I would like to share with you:
“Only when the tide goes out do you discover who’s been swimming naked”.
Unfortunately, the strong property market of 2020-21 once again brought out a fresh group of young “property pretenders”.
I was regularly getting emails in my inbox telling me how I can buy properties with my lunch money, how I can attend a weekend webinar and consider giving up my day job or I can buy 7 properties in 7 years or 10 properties in 10 minutes!
And 27 year old were telling us how their "perspective" would help us become better investors.
Here are the 4 common questions I’m asked about in today’s market and some answers you can use.
- How would you categorise the current property market?
- What strategies are working in the current markets?
- What is the biggest challenge facing property investors today?
- What advice would you currently give to investors?
So here are my thoughts…
I guess I should also make it clear that there is no one property market.
Each state is its own stage of the property cycle and within each state, there are multiple markets separated by type of property, price point and geographic location
The Melbourne and Sydney property markets are currently winding back a little, while Brisbane, Adelaide and Perth property values are still growing, albeit more slowly.
So property values will still keep increasing in some locations, remain flat in other locations and drop in value in other segments of the market - in particular in the higher-priced luxury end of the market and also the new house and land / First Homeyer buyer segment.
It's likely property values will fall further in Sydney and Melbourne - possibly fully 6- 8% by the end of the year.
But property values should keep rising in Brisbane, Adelaide and Perth.
Here are some of the negative influences on our property markets:
- Consumer confidence has taken a significant hit and that's affecting our housing markets with buyers being more cautious and many taking a wait-and-see approach, while sellers’ confidence is more fragile.
- Fear of rising inflation and cost of living pressures
- Rising interest rates reduce borrowing capacity
- Affordability constraints
- Uncertainty about our economic future with all the talk of a recession overseas, ongoing geopolitical problems, the share market falling
On the other hand, there are many strong fundamentals underpinning our housing markets
- There is a shortage of good properties for sale and virtually no properties to rent
- International immigration is picking up and this will increase the demand
- There is little new construction in the pipeline – we’re not building enough dwellings.
- Our economy that's still growing and is very resilient
- Unemployment is at historically low levels
- Wages are starting to grow
- Household balance sheets are strong - we had a ‘natural buffer’ with $250bn-$260bn in aggregate savings nationally
- Many borrowers are ahead in their mortgage payments - Matt Comyn, chief executive of Commonwealth Bank said three-quarters of their loans are approximately two years ahead on repayments.
- We have a strong banking system that has been strict in its lending criteria meaning very few non-performing loans
- Construction costs keep rising meaning the replacement cost of properties will rise.
- There are still Government incentives to encourage first-home buyers into the market.
While the value of some properties will still fall further, many "A" grade homes and investment-grade properties are still in short supply and holding their values or slightly increasing in value.
in my mind, this is the best countercyclical opportunity to purchase properties in Sydney and Melbourne for a number of years, and a great time to ride the property wave in Brisbane.
But we're not in for another boom – not any time soon.
So to successfully ride the next property wave you have to know the right places to invest and the right properties to own in these locations.
And this stage of the property cycle is ideal for the value add techniques of renovation or development. So...
Here's what you should be doing...
Since it's unlikely that the market will deliver strong capital growth anywhere in Australia in the next couple of years - remember we have low wages growth, low inflation, a few economic headwinds ahead and tighter lending - the current climate it’s ideal for adding value and “manufacturing” capital growth through renovations and small townhouse development projects.
In fact, these are 2 of the concepts we build into many of our Strategic Property Plans for clients of Metropole.
So what type of property do you buy?
This depends a little on where you live, how much money you have and your property investment strategy.
For most investors, their money will run out before the opportunities will…
In other words, they will only be able to buy one or two properties in the short term.
So to outperform the averages they will have to base their investment decisions on independent research and advice, and not buy on emotion.
What’s independent research and advice?
Sometimes it is a little hard to tell, with so many people out there suggesting you should listen to them.
- 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:Boom to bust: What makes property prices rise and fall
- Also read:This week’s Australian Property Market Update – Latest Data, State by State November 28th, 2023
- Also read:The Boom and Bust of our Property Cycles: A Journey Through the Investor’s Mind
One way is to see who pays them.
Are they being paid by the seller, the developer, or the project marketer?
Even if they back their suggestions with research, you might ask – is it really independent or is it “coloured”?
There are lots of investment strategies and most readers know mine is to buy well-located properties for capital growth, add value and then hold for the long term.
Obviously, there are other strategies and I understand why many beginning investors think they need cash flow to own properties.
I guess the first thing is to have a strategy, to have a plan and then stick with it.
Too many investors don't have a clear strategy and they get easily distracted.
They buy because someone tells them the property will go up in value or they will be given a perceived discount, and not because it will help them achieve their goals.
Are you buying for capital growth? Or maybe you are buying for yield? Or to add value?
As I said…too many investors buy without having a clear strategy.
Most investors I speak with want to develop financial independence and are looking for investment income to replace their personal exertion income.
So they are really after cash flow.
And that’s why many get into cash flow properties, thinking that’s the answer.
But it’s really hard to become financially independent from cash flow positive properties.
It’s just too hard to save the deposit for your next property from the after-tax proceeds of cash flow-positive properties.
In my mind, investors need to build a substantial asset base first, before they can have their own “cash machine”.
In the next few years the growth in value of “investment grade properties” will outpace the growth of the average property.
That’s why my strategy for this stage in the cycle is a top-down approach:
- Firstly choose the right State in Australia – one in the right stage of the property cycle.
- That State chooses a number of locations that have always outperformed the averages with regard to capital growth and will do so in the future because of the demographics of the people living there.
I particularly like suburbs going through gentrification which are likely to experience strong capital growth.
Properties in these locations must obviously fit into your budgeted price range.
- Within these suburbs choose locations that are more desirable than others – you know in your own suburb, there are areas where you would live and others you would avoid.
- These locations target streets with the right appeal.
- Within your target areas choose the right type of property – one with an element of scarcity or with a “twist”.
Currently, we’re buying established medium-density properties with scarcity value and renovation potential, or old houses on sites with development potential.
- Do your research and buy the right property at the right price.
Now, this doesn’t mean buying a bargain – that’s almost impossible today as our markets hot up, but you should buy below the property’s intrinsic value.
- I then like “manufacturing” capital growth by undertaking renovations or development and adding value to my properties.
Maybe I should tell you what types of property not to buy…
With the growth in property values painting the growth in wages over the last couple of years more and more people will find well-located properties unaffordable.
The mistake many investors are making is considering cheaper properties, thinking they will remain affordable.
This is the end of the market that will hurt the most moving forward as they are likely to be located in areas of low wages growth which means little impetus to push up property values or rents.
This type of property will also suffer if our economy slumps putting pressure on employment in these blue-collar areas.
Yet at the same time, the residents of the middle ring suburbs will always have more disposable income and push up the value of properties in their suburbs.
The bottom line is the rich will keep getting richer.
Also, I see 3 sure-fire ways of losing money in property over the next few years was to buy:
- Off the plan properties.
- House and land packages in new estates.
- Properties in secondary locations
I think the biggest stumbling block for many property investors over the next few years will be financed.
But there’s nothing new here.
Today those who understand how property finance really works will still be able to borrow to build substantial property portfolios.
They will need to understand what banks look for when assessing how much they will lend you, how to choose different lenders and more importantly in which order to choose them (this could increase your borrowing capacity considerably) and how to unlock equity by uncrossing – collateralising their loans.
We are working our way through a phase of the property cycle where there will be some great opportunities for a select group of property investors who know how to take advantage of it.
The last time we were at this stage in the property cycle most investors bought the wrong types of property and missed out on the profits made by a small group of strategic investors.
So if you do what most investors do, and if you listen to who most investors listen to, you will get the same results most property investors get.
And we know that most don’t ever get the financial independence they deserve – 90% of property investors never get past their first or second property!
As the property cycle moves on investors who embrace the changes, focus on sound investing fundamentals, and take a long-term perspective on their investment will come out ahead in the long run.
Staying on top of the economic fundamentals (separating the facts from the opinions) will be essential to not only survive but prosper in today’s market realities.
Education and knowledge will be critical to your success.
After having the right mindset, the most important asset to a real estate investor is their knowledge.
In today’s era, unbiased expert information is a critical asset.
Keeping on top of, in fact keeping ahead of, the ‘reactionary masses’ is critical for your long-term success as a property investor.
The best advice I can give someone looking to invest in today’s market is to take your time, surround yourself with people who will support you in your goals and get fully educated by people who are taking action.
However, if the last few years have taught investors anything, it is to expect the unexpected.
That’s why I suggest you should prepare for the worst while hoping for the best.
In other words, maximise your upside while at the same time covering your downside.
Some of the ways you can prepare for the inevitable storms ahead are:
1. Ensure you have a holistic, strategic property investment plan
Property investment is a process, not an event, and the property you will eventually purchase will be the physical manifestation of a whole lot of decisions that must be made in the right order.
That’s why you can’t just run off and buy any property or just speak to a buyer’s agent.
You need to plan to become the person you plan to become, and that way you know what you should and should not be doing. It will stop you from getting sidetracked by the “white noise.”
If you want to understand more about the benefits of a Strategic Property Plan, click here.
2. Correct asset selection
To see you through the ups and downs of the economic and property cycle you need to own the types of properties that are strong and stable.
- By strong, I mean your property should outperform the averages and increase in value at wealth-producing rates of return.
- By stable, I mean the value of your property should not fluctuate much when the property cycle slumps.
This is why you must only own investment-grade properties – the type of property that will be in continuous strong demand by a wide demographic of more affluent owner-occupiers and one that is situated in the big capital cities of Australia because these locations are underpinned by multiple pillars of economic support.
As your portfolio grows, it makes sense to own properties in various states, so that when one market is flat, you’ll benefit from the growth of your properties in another state.
It’s also worth remembering that at the slump stage of the property cycle when fewer people are buying property, more people are renting and this usually increases rentals and this is good for your cash flow.
4. Don’t speculate or overcommit
5. Have a financial buffer
Rather than gearing to the max, strategic investors take a more prudent approach by building an emergency financial buffer to buy themselves time to ride through the storms.
6. Build a buffer or buy a bargain
The other beauty of being financially prepared is that when everyone else puts the brakes on and competition in the housing markets slows down, you’ll be in the position to take advantage of the opportunities that abound by using some of your LOC or the funds in your offset account as a deposit on your next property investment.
Remember – you need to be proactive with your property strategy and be in control of your situation before the market changes.
So what will be your next steps?
Are you going to take advantage of the opportunities the property markets will offer up or are you going to get caught by the traps ahead?
If so, and you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.
Remember the multi-award-winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased and they are delivering the frameworks and strategies developed over five decades we have been helping clients for over 20 years.
Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy, do a review of your existing portfolio, and help you take your property investment to the next level.
Click here now and organise a time for a complimentary chat with one of Metropole’s property strategists.