The property pessimists are out again telling us how a rising interest rates will lead to real estate Armageddon.
There has always been a good excuse to avoid investing in real estate, but while these may seem valid in the short term, the long term trend in property prices has been solid gains.
The next 10 years in property are going to be just as good as the last decade has been, and the one before that too!
Have you noticed?
There will always be someone telling you not to invest in property.
In fact there are many commentators telling you why 2022 is the worst time to buy property.
But that's nothing new.
Sure we currently have geo political problems, rising inflation and the spectre of rising interest rates with many Negative Nellies out there telling us at property market is going to crash.
Over the years there has always been somebody telling us why property investment should be avoided, despite all the positives that investing in real estate can offer over the long term.
Just look back to 2008 when we were working our way out of the Global Financial Crisis, a number of commentators suggested that property values would not increase in Australia for another decade.
Well, they’ve been proven wrong, as owners of well-located properties in most of our capital cities and many of our regional centres have enjoyed substantial growth in the value of their properties.
Then look back two years ago at the beginning of Covid when most of the bank economists warned that property values would plummets 15% or more.
Instead the total value of all the residential residential real estate in Australia increased by $2 trillion over the last 2 years (more than it had in the previous decade) as the value of most Australian dwellings increased by 20% during the pandemic, and some even by 30%.
Yet the property pessimists are out again telling us how a rising interest rates will lead to real estate Armageddon.
Now I know at times their arguments seem to make sense, but history has proven them wrong.
The average price of a home in the major capitals of Australia has just kept going up and up.
Think about it …
What did your parents pay for their house?
In 1978, my parents paid $25,000 for their house and took a 30-year loan from the bank to pay it off.
About 25 years ago my mother sold that house for more than $600,000 and she had done little to improve its value.
Today it would be worth more than $2.5 million.
Yet over those years, there have always been plenty of ready excuses on offer to put off investing in property.
Let’s have a look at a few of the excuses I could have used over in the past:
- In the early to mid 60s we had just emerged from a major credit squeeze and finance had dried up making it hard to buy real estate.
- In 1967 there was an Arab Israeli War and in 1968 Robert F Kennedy was assassinated.
- In the late-60s we had the nickel share boom in Australia and property was proclaimed an inferior investment.
- In the mid-70s we had a recession in Australia.
- In the late-70s we suffered from rising inflation and the OPEC Oil crisis.
- In 1983 there was a recession with high interest rates and peaking inflation. A few years later commentators said property prices were too high and would take years to recover.
- In 1985 the government changed the tax laws pertaining to property with the quarantining of the tax benefits of negative gearing and the introduction of a Capital Gains Tax. Commentators explained how this was going to be the end of property investment as we knew it.
- In 1987 there was the fear of a “1930s-type depression” after a severe “Black Monday” stock market crash.
- By 1989-90, inflation was again too high and led to the famous “recession we had to have” as interest rates rose to well over double digit figures – a heaven-sent excuse for procrastinators to stay out of a property market awash with bargains! I still remember in the late 80s the cry was “Our children will never be able to afford to enter the property market” or “Prices will never go any higher, don’t invest in property”.
- In 1991 Australian unemployment was 11.3% and some unfortunate owners chose to sell their houses at bargain basement prices, as many people felt property values would only fall further.
- The mounting foreign debt and current account deficit of 1993-94 was enough to scare people off buying property.
- The “world economic slowdown” and the “Asian Financial Crisis” were good excuses not to buy property in the mid-1990s.
- In the mid90s we were told inflation was low so property prices would stop rising.
- Rising oil prices, September 11 (World Trade Centre bombing) and an oversupply of investment property in the inner-city areas could have been great excuses not to invest in property in the early 2000’s.
- In 2001 the introduction of GST in Australia was predicted to put a damper on property values.
- The property slump of 2004-06 was accompanied by much negative press and at the time seemingly experienced property commentators were suggesting that property values wouldn’t increase again until 2010. Then there was further confusion about potential changes to land tax, vendor’s tax and interest rate increases.
- Despite many forecasters predicting a property crash in 2008/09 as a result of the Global Financial Crisis, the major property markets around Australia, other than the specialised Gold Coast market, experienced a soft landing.
- In 2011 and 2012 many thought the world’s financial markets could collapse due to the economic troubles in Europe and the USA.
- In 2016 the world’s economy was faltering in part due to China’s slowing economy and falling commodity prices.
- In 2018-9 when APRA intervened and tightened credit property values in Sydney and Melbourne had their biggest fall in modern history slipping 15% and 11%, after growing 70% and 50% respectively over the previous 5 years.
- In 2020 the concerns about Covid stopped many prospective property buyers, but look how wrong they were.
Boy were there lots of reasons not to invest in real estate
Yet through these times the value of well-located capital city residential properties has increased consistently, at around 7% per annum.
The following chart shows real (after inflation) median house price growth despite all the economic challenges since 1970.
- Also read:12 inflation jargons explained: Here’s everything you need to know
- Also read:Why I’m not worried about inflation — and why you shouldn’t be either
- Also read:Where should I buy my next investment property in Australia?
- Also read:How many investment properties do you need to retire?
- Also read:Top 20 strongest global prime property markets for 2022 — and 5 Aussie cities made the list
The first investment property I bought for $18,000 would be worth over $2million today if I hadn’t pulled it down to build two townhouses on the land; and those properties (that I still own) are worth close to $4million
Over the years the rent from my properties has helped pay their mortgages and the capital growth has allowed me to borrow against their increased value and pyramid myself into other property investments.
In fact, I’ve built a very substantial multi-million dollar property portfolio starting with my initial $2,000 deposit.
And I haven’t really much of my own money into my portfolio since. It’s all come from compounding capital growth.
You see… while many people invest in real estate to get cash flow...
I invest in real estate to buy more properties.
That's a very different way of thinking!
The deposit for the last property I bought, and virtually every other property I bought over the years, came from the equity of my previous investment properties.
And the serviceability for the banks has come from the rentals I've received from my existing property portfolio.
Of course that's why I concentrated on buying high-growth properties in areas that are going to outperform the averages with regards to capital growth and locations where the tenants are renting more for lifestyle choices rather than because they can't afford to buy.
This means they will be able to afford to keep paying higher rents over the years as the value of my properties increase.
It's very different from buying cheap properties in lower socio-economic areas where kids are unlikely to be able to pay higher rent over the years.
So what’s ahead?
Sure there are some headwinds facing us and I see future capital growth a little more subdued over the next few years.
But I believe the next 10 years are going to be just as good as the last decade has been, and the one before that too!
I’ve heard it said that if you want to know what lies ahead start by looking at the clues behind you, and if you think about it, a lot has happened in most Australian property markets in the past decade.
If you visited any of our capital cities 10 years ago and came back today you would scarcely recognise the skyline and the impact of the high-rise buildings and city apartment developments.
In Melbourne there is Docklands; in Perth, the Golden Mile on the drive in from the airport as well as the new high-rise apartments, and the Sydney and Brisbane landscapes are now peppered with inner-city apartments.
As well as this many of the old houses in our suburban streets have made way for modern townhouses and apartments.
But look at all the challenges are economy and property markets faced during that time.
In a similar fashion there will be significant changes to our property landscape as Australia’s population heads towards 29 million people by the end of this decade.
And as this happens our property markets are going to be underpinned by this strong population growth that will resume as our borders reopen and the general wealth of our nation, and those who take the opportunity to buy well located residential real estate during the current lull in the property market are likely to look back in a decade’s time and think “Gee I made a great decision!”