You only have to open any newspaper or turn on the radio to know that many parts of Australia are experiencing a property boom, with the price of many properties increasing significantly above their long term trends.
One of the lessons coming out of the last few years is that property downturns never last, but then neither do property booms.
So how can investors make the most of this new property boom, which on past record may only last a few years? In fact I know some commentators don’t even think it will last that long!
The answer is simple.
Smart property investors will take advantage of this property cycle to build their asset base. They will use the same investment strategy that has worked well for the most successful property investors in the past which is to invest in real estate for long term capital growth.
Based on past performance, and there is no reason to think it will be any different his cycle, strong capital growth will always occur in our major capital cities with median property prices increasing on average by around 10% per annum over the next 10 year period.
Now I know every time I say this a whole group of readers disagree and bring up counter arguments such as: “No this can’t keep happening, property prices can’t just keep going up!” or “We’re in a property bubble and prices will drop like overseas.” or “What about affordability?”
Why am I so certain capital city property prices will keep increasing?
Well…it’s all to do with the value of the land, which is related to the supply and demand for that land.
John Edwards of property research firm Residex, explained it well in an article many years ago. It went something like this….
Imagine someone discovered a new island just off the coast of Northern Queensland and a number of smart entrepreneurs decided to set up business there because land was cheap as no one else really wanted to live or work there.
Over time people would want to move to the island because there were jobs available there. These new residents would need to build houses.
Remember….. it was just a small island so after a few years the island would be full and there would be no room to build more houses. The island was now thriving and more people wanted to move and live there, but there would be no more land left to build houses.
What could they do?
With no vacant land left, they could only buy a piece of land that was already occupied. They would have to pay the people already living there for the privilege of moving to that island and if there were lots of people wanting to move to the island those willing to pay the highest price would get to live there.
The more people that wanted to live on that island, the higher the cost of housing would be. This causes capital growth.
In short, capital growth is highest in an area where there is strong demand for property and the land is scarce. If you look at Melbourne, Sydney and Brisbane, in fact all our capital cities, you can instantly see why house prices grow faster there than they do in regional Australia.
Sydney has almost run out of land because of its geographic boundaries. In Melbourne the perimeters of our city cannot expand because of town planning boundaries. And while there is a huge demand for property in particular South East Queensland, there is still quite a bit of land available for new housing, but it is no longer cheap and as most people want to live near Brisbane or near the water, much of the most sought after land has been taken.
One thing to remember about scarcity is most people want to live in the most desirable locations. In Melbourne it is the inner and south east suburbs and near the water. In Sydney the most desirable areas are in the eastern suburbs, the lower north shore, the inner west and suburbs near the water. In Brisbane the tendency is again to like to live near the CBD or near the water.
Our new property cycle started last year with the stimulus of the First Home Owners Boost. I’ve heard Grattan Institute economist Saul Eslake describe this as a second or third home vendor’s boost, because many first home buyers used the extra $7,000 to borrow another $30-40,000 that they then handed over to the sellers who jacked up the price of their houses.
Armed with a bigger payout than they expected, these vendors then came back in the market as upgraders looking for homes in our more affluent suburbs.
At the same time, as our economy is improving, it will be the most desirable and most sought-after areas that grow most in value. These are usually the more affluent areas. People living in these areas can usually afford to upgrade or improve their houses.
These are the types of properties that have grown in value first at the beginning of previous property cycles and the same is happening this time round.
What happens to those people who cannot afford to buy in the most desirable areas?
They buy in the next most desirable suburbs. This has also been well documented in previous property cycles. Prices will start to increase in the more affluent and desirable areas and then start to ripple outwards to adjoining suburbs.
How can investors take advantage of this knowledge?
Firstly…understand the big picture. Understand where we are in the general property cycle. I explained my thoughts on this in a the last issue of Property Update. You can check it out by clicking here.
We are in the upturn stage of the cycle in many of our capital cities.
Next…. become an expert in the suburbs that are going to grow in value first.
Get to know those areas so you can pick the great investment opportunities in those suburbs near the city, near the water or in these more desirable suburbs.
If you buy a good property in those areas you are likely to achieve excellent capital growth in the next 5 years.
So what is the right type of property? It’s one bought below its intrinsic value, in an area of proven strong capital growth and one to which you can add value.
Then over the next few years the suburbs one ring further out will start to make good investment sense. It is only near the end of the cycle that the outer suburbs, those that have traditionally been first home owner areas, get good capital growth.
This spread of capital growth from the inner to the outer suburbs is called the ripple effect and of course there will always be exceptions to this general rule.
It’s been said that property investment is a bit like the game of chess – we all have the same pieces on the board – but those that can think 3 or 4 steps ahead are the ones that win.
That couldn’t ring more true today than any time in the last 20 years. Positioning yourself to be where the new property wave is going to create winners is critical today because during this new property cycle the winners are going to win big, while others will be left on the sidelines.
The surge in property prices is likely to be specific in nature, not general. If you find yourself standing in the wrong spot, it may just pass you by. And we really don’t want that to happen – do we?
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