Is it time to be fearful or greedy in property?

What should you do in the current “interesting” property markets?

Is it time to be fearful or is it the right time to be greedy?Woman Smashing The Word Fear With Her Hands

I know many investors are confused with concerns remaining about the Coronavirus, high unemployment and the many mixed messages forecasting what’s ahead for our economy and our property markets.

While we’re officially out of recession there are clearly many headwinds ahead and we we don’t have to look far to be reminded that the Coronavirus hasn’t gone away.

I’ve noticed two types of emotion in those interested in property:

  1. Last year as it became clear our markets wouldn’t crash like some property pessimists predicted, FOBE was the predominant sentiment – Fear Of Buying too Early – home buyers and investors trying to time the market wondering “what if prices do fall further?”
  2. Now FOMO (Fear Of Missing Out) is creeping back as house prices are rising around Australia.

It is said that the 2 most powerful emotions that drive markets are fear and greed.

In fact master investor Warren Buffet advised: “I’ll tell you how to become rich….Be fearful when others are greedy and be greedy when others are fearful.”

So today I’d like to give you my thoughts on this with a lesson from history…

Twenty eight years ago, as Australia was working its way out of the recession we had to have, few would have thought of property as a good investment.

It was 1993 and interest rates had come down 3 percent over the previous 2 years as the Reserve Bank tried to stimulate the economy and our faltering property markets.

By the way… this brought interest rates down to 10%, the lowest level they had been for 13 years.

Having just experienced the first Australian recession in a long time, consumer and business confidence was low, there were too many properties for sale, buyers were scarce and some properties, particularly in top end suburbs, had plummeted in value.  

A few years earlier on Black Monday of October 1987 a stock collapse of unprecedented size hit Wall Street and the effects reverberated around the world.

Interestingly I remember that day well. I can clearly picture in my mind that we were on holiday in Sydney when we heard the news and didn’t fully appreciate the severity of the consequences.

However, while the stock market eventually recovered, the lumbering savings and loans industry in the USA (which financed many American homes) was beginning to collapse, leading to a property funding crisis which put the financial well being of millions of Americans in jeopardy.

In turn the financial contagion that spread to the rest of financial sectors led to a recession which hit other countries whose economies were previously healthy but were economically closely linked to the United States.

This included Canada, the United Kingdom and Australia.

What was happening in Australia back then?

Property Market

Well…to buy a typical house in mid 1993 you would have paid around:

  • $173,000 in Sydney;
  • $138,00 in Melbourne;
  • $121,00 in Brisbane;
  • $102,000 in Perth;
  • $156,000 in Canberra;
  • $110,00 in Adelaide
  • $96,000 in Hobart and
  • $132,000 in Darwin.

But over the subsequent 3 decades the value of many well located capital city properties around Australia quadrupled, underscoring the wealth of many of today’s Baby Boomers and creating significant property empires for those who took property investment seriously.

Interestingly today’s environment reminds me of those times 28 years ago – we are working our way out of the recession we decided to have (rather than the one we had to have in the 1909s.)

And just like then, many of the same arguments are being floated by commentators explaining why property values can’t keep increasing as they did over the previous three decades.

I accept that much of the gains over that time were related to structural changes that will not be repeated.

The two significant structural events that caused the massive rise in property values over the last three decades were: 

  1. The Reserve Bank kept inflation within a narrow band meaning interest rates could fall at a time when time banks became deregulated and this allowed new non-bank lenders like Aussie John Symond to make cheap finance available for borrowers and over time interest rates kept falling and credit was easily available.
  2. At the same time wages grew and there were more two-income households. This allowed more Australian families to buy new homes or upgrade their existing homes as their families grew.

These factors won’t carry our markets forward in the future, in fact they played out a few years ago and haven’t been relevant for much the last decade.

  • We are currently in a low inflationary, low interest rate environment (not only in Australia but around the world) and there is really no room to lower interest rates.
  • The effect of the extra spending power of low interest rates has washed its way through the system.
  • We are now in a period of lower wages growth and more part-time jobs so it’s unlikely that the average Australian family will have more cash in their pockets to spend on property
  • There are still economic fallout from the recession we decided to have.

Here’s why I believe property values will increase in the short term.

You’ve heard me say it before… property is a game of finance with some houses thrown in the middle.

If the ability to borrow money is easy then property values increase; and when the banks tighten the screws and make it harder to borrow, property values languish – just look back over the few years before and after the Haynes Royal Commission into Banking when lenders got jittery and made it harder to borrow.

On the other hand, as many people learned last year, neither a pandemic, a recession nor rising unemployment decimated our housing market, falling interest rates make finance cheap was much more important.

In the past the RBA made borrowing easier and cheaper by lowering interest rates, but that can’t really happen any more.

However, the big game changer that will bolster our property markets moving forward is the anticipated loosening of restrictions on banks’ lending practices in March this year which will give the average home buyer and property investor significantly more borrowing capacity.

More than that, there is a perfect storm of positive factors developing for our property markets – a confluence of multiple growth drivers which will propel our property markets into 2021 and 2022: –

  • Our economy is improving and moving forward further jobs creation, consumer confidence and business confidence (leading to spending and employment) will underpin our housing markets.
  • Auction clearance rates have been consistently strong in the last few months of 2020, not just in the two big auction capital of Melbourne and Sydney but around Australia.
  • More buyers and sellers are in the market and transaction numbers have increased considerably.
  • At the same time the banks are keen to write new business – another positive for our housing markets.
  • Bank loan deferrals have been falling – there’s no chance of an avalanche of forced mortgagee sales as many were worried about.
  • The latest rate cut and the “guarantee” of rates remaining low for at least 3 years, will give home buyers and investors confidence.

Why our property values are guaranteed to increase in the long term

Having said that, I still see strong underlying long-term fundamentals for our property markets.

But don’t get me wrong…

I’m not suggesting we’ll have widespread double digit growth in property values  for a while again (even though some suburbs will still enjoy still strong capital growth.) house property

However, we don’t have the high rates of inflation like we had in the 1980’s and 90’s that required that type of capital growth rates to produce a real (after inflation) rate of return.

While it’s important to understand that while many factors like interest rates, supply and demand and market confidence, affect a country’s property prices in the short term, in the long term prices are driven by two main factors:

  1. Population growth, and
  2. The wealth of the nation

Despite our international borders currently being closed, Australia’s strong future population growth is a given and as a matter of fact so is our increasing wealth.

And this is positive news for the long-term growth of property prices.

The fact remains that as long as people keep having children and residents from other countries seek to settle on our shores, Australia’s population will keep growing at a rate faster than almost every other developed nation.

Australia has a business plan to significantly increase its population.

Australia’s population was forecast to grow to 30 million people by 2030. While we may now only grow to 29 million people in that timeframe, that’s still a significant increase in our population over the next decade.

And there are suggestions that our population could reach 40 million people by 2050

city family urban suburb

Until recently 55% of our population growth was due to immigration and, in general, these are well educated people (particularly from China and India) who are in their twenties and thirties which is the family formation stage of their lives.

Fact is: we are going to need to whole cities of new immigrants to replace the 5 million or so Baby Boomers who are going to leave the workforce over the next 15 years.

These new residents will boost our country’s economic well being through the revenue raised from income taxes and all the goods and services they will buy.

And yes, that includes property.

Of course this means with more and more of us wanting to live in the same four big capital cities (but particularly Melbourne and Sydney which are the economic powerhouses of Australia), and even in the same suburbs of those capital cities, our old friend the supply and demand ratio will keep pushing up the value of well-located inner suburban properties. Economic growth

Inevitably this will make property unaffordable for some who will remain tenants, however others will be able to afford these higher priced properties.

It also means that apartments and townhouses are likely to become the style of housing in strong demand as more people swap their backyards for balconies and courtyards; partly because of cost but also because of lifestyle choices.

They’ll be trading space (big backyards) for place (being in the right location.)

And now post Covid neighbourhood will be more important than ever – something people call the “Third Place.”

Our first place is home and our second place is work or the office, but during Covid for many around Australia the ability to go to a third place that was taken away.

It may be a favourite café, a gym or a place of worship and even local shops and pubs.

They missed that feeling and connection to others, having an outlet to take a break from family or colleagues for a short period to reset.

A gym or exercise centre has been substituted for a favourite walking or cycling path with green space and fresh air.

So, all these features combined, will be a major requirement and will create huge demand moving forward.

These are all features of the 20-minute neighbourhood, that will be built around convenience.

Wouldn’t it be nice is all the things you need in a day would be just a short walk away?

In urban planning circles, it’s a concept known as the 20-minute neighbourhood.

Understanding these factors forms part of the research data we use at Metropole to help our clients find investment grade properties, or A grade homes for owner occupation.

If you’d like to get the independent, award-winning team at Metropole on your side to help you through the maze of mixed messages about the property market, please click here and leave us your details or call us on 1300 METROPOLE

Then there’s all the good economic news

If you’re reading the general media you’d be forgiven for feeling a little pessimistic about the state of our nation.

Maybe you missed some of the good news…

The recession we experienced in 2020 wasn’t due to a fundamental problem with our economy – it was our government putting the economy on hold to get a health problem under control.

But our economy is on the move again and likely to keep grow strongly over the next couple of years; and despite the geo political and trade challenges we will are likely to face, Australia’s economy is well positioned to keep growing strongly.

The bottom line:

While nothing in life is guaranteed, if like me, you are confident that Australia has a prosperous future, and you agree that our population is going to keep increasing and that most of us are going to want to live in much the same parts of our lucky country; you can understand why I see a strong long-term future for our capital city property markets.

Sure there is a risk in buying property, but don’t forget there is also a different risk in not buying!

So what will you do about this?Metropole

Owning real assets is a powerful wealth creator and with our property markets moving on a whole new generation of property millionaires will be created over the new decade.

However, if history repeats itself, and it most likely will, most people who get involved in property investment will not become financially independent.

Many will buy the wrong property or at the wrong time or in the wrong location.

With so many mixed messages out there about what type of what makes a good property investment it’s hard to know who to listen to.

It’s hard to know who to trust.

If 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.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

If you’re looking at buying your next home or investment property here’s 4 ways we can help you:

  1. Strategic property advice. – Allow us to build a Strategic Property Plan for you and your family.  Planning is bringing the future into the present so you can do something about it now!  This will give you direction, results and more certainty. Click here to learn more
  2. Buyer’s agency – As Australia’s most trusted buyers’ agents we’ve been involved in over $3.5 Billion worth of transactions creating wealth for our clients and we can do the same for you. Our on the ground teams in Melbourne, Sydney and Brisbane bring you years of experience and perspective – that’s something money just can’t buy. We’ll help you find your next home or an investment grade property.  Click here to learn how we can help you.
  3. Wealth Advisory – We can provide you with strategic tailored financial planning and wealth advice. Click here to learn more about we can help you.
  4. Property Management – Our stress free property management services help you maximise your property returns. Click here to find out why our clients enjoy a vacancy rate considerably below the market average, our tenants stay an average of 3 years and our properties lease 10 days faster than the market average.
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Michael Yardney

About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit Metropole.com.au


'Is it time to be fearful or greedy in property?' have 8 comments

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    April 17, 2019 Charles Litho

    Mining does very little for Australia as it employs few people and the resources are not accessible by Australian business. It’s cheaper to buy Australian products overseas than it is in Australia. What is holding Australia back is the restrictions on meeting Australians needs? It might even be a criminal offence to restrict Australians access to the Australian market place.
    In One particular country you can buy a new apartment for $80,000 and the same apartment in my neighbourhood sells for $800,000. Even if you multiply the labour costs by ten we are still too expensive. In Australia $80,000 would not cover the cost of all the people holding their hand out for a share before a builder visits the site.
    We need to improve productivity and get logical about planning in our cities. The short term planning is put out as scientific thought when it’s just about silliness. You can struggle to get approval for four single storey tiny cottages on 1200 metre block, only to see a thirty storey apartment building within 100 metres ten years later. Limiting to two storey apartment buildings on main roads with public transport where it should be five or six means they will be demolished very quickly.
    Australia is a big country but we have less available air transport today than we did fifty years ago. The latest rail line in Victoria is slower than what Britain had in the nineteenth century using steam engines on its main routes.
    We either stop the population increasing at once or get real about governing this country.
    The inept and hopeless Canberra mind set has to end. The Capital of Australia should be moved to Melbourne so we can bring some reality to the political process. We need to limit the number of years anybody can spend in Parliament to no more than two terms and the Senate should be restricted to one term of four years. We need a new Constitution to reflect the Australia of today rather than the Colonial outpost of the 19th century with a population of a few million mostly farm labourers living a serf like existence. The cry of everything is wonderful and cannot be improved further comes out of Canberra only, not out of the real Australians in Queensland, Tasmania and Southern West Australia, and, everything in between.

    Reply

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    April 16, 2019 Charles Litho

    Darwin is a typical Australian situation.
    The free enterprise system is only tolerated when a few people only control the economy. My Great Grandfather Moisi had the same problem with the communists in Russia in the 1920’s.
    The communists were only interested in making life good for themselves and the Party members who were their friends. If you were hungry and complained you disappeared.
    How does any politician justify a housing shortage in Darwin when half the cost of a house is the land and the other half is the cost of walls and roofs in Eastern Australia? If you take away the normal almost 50% taxation on a house and land most people can then afford houses.
    It has always been the Australian way to create shortage of everything we had plenty of. We have plenty of natural resources but we have the world’s highest prices. I have heard every excuse under the sun.
    Can I forget the shortage of meat in Australia that led to the Butcher shops been nationalized in Queensland and then had a bigger meat shortage.
    Keep it a secret but I have to tell you there is a lot of vacant land around Darwin.
    A friend paid a million dollars for some land in in Northern Australia and its now down to $300,000
    He could not understand the realty of value and he would not listen to me; but I should have directed him Michael’s way. My silly anger allowed him to make such a mistake.

    A young and healthy man or woman should find themselves some land in Darwin and build with the earth and a couple of hundred dollars’ worth of lime and cement. Do not be too ambitious three rooms and a Verandah with a shower under a raised rain water tank is all that you need.
    Keep the Government out of your life, as much as possible unless you are rich enough to have the advisors around you to look after you and your interests.
    In a land of peace and no war, no shortage can be justified but we allow a few people to convince us that it is.
    I just convinced a young man today he can and should take up a situation that will give him two free building blocks of land within walking distance of transport, shops and infrastructure at no cost in the inner Melbourne area. Opportunities exist where there is a free market place. The political movement that is ignorant about Australia thinks we will all become rich and stop working.
    They do not understand the creative urge of humanity.
    I can remember one Prime Minister who is still regarded as a hero who openly expressed the idea that there were too many small and medium sized businesses in Australia. Most political movements are about limiting freedom and independence and opportunity.

    Reply

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    October 5, 2017 FXD

    Hopefully there will be real structural transitions in this country to fill the gaps left behind by the winding down industries.
    More specifically, technology innovations in the early stages should create many jobs and at later stage produce goods and
    services not only for local consumption but also exportable globally.
    This should be the future not just for Australia but similarly for most others who can see the strategic direction where a nation
    should align its long term vision to. Our government must do more to ensure and enable the local talents and start ups to stay local
    to prevent serious talents leaking offshore.
    Future of production and manufacturing will in a large part come from intellectual property through technologies innovation.
    One such example is the sharing economy business model where anyone and everyone is given level playing field of becoming
    a service provider to consumer needs.
    Local business are embracing outsourcing offshore to replace the grass roots level jobs but at the same time also leaking
    talents for high value innovations. So we are on the slow path to own demise when all our university graduates find no future or
    good use for their talents.

    Reply

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    July 11, 2013 Michal

    I like the helpful info you provide in your articles. I’ll bookmark your weblog and check again here frequently. I am quite certain I’ll learn plenty of new stuff right here!

    Reply

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    July 2, 2013 Nigel

    Hi Michael,

    I can see a bad situation happening in Darwin and Im also living it first hand. The house prices for a two bathroom four bedroom house in a suburb near the city are all at a medium average of $600, 000. The house stock is majority houses built in mass after cyclone tracy so are in need of renovation so add $50 000 – 100 000 to this after purchase. A new house in a new suburb is a minimum $750 000 with no pool or shed. Rents are 700 – 800 dollars a week.

    My point in all this is that how can people in the service industry (taxi drivers, cleaners, childcare workers etc) that support the workers on $100 000 plus afford housing ? If they cant afford housing, they do not support the higher earners. Darwin does not have a outer, outer place where they can live. I have spoken with many Taxi drivers who are moving to Melbourne for this reason, and our local Labour member was very concerned about’ the hollowing out of Darwins economy)

    Reply

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    July 1, 2013 Jarred

    Hi Michael. I certainly understand your prediction for ongoing price rises of property (and scarcity) based on population growth and everyone seemingly wanting to live in the main cities but my concern for property and indeed the wealth of the country is to do with the mining boom and its eventual wind down. If this happens and governments have not properly set aside capital (which no side of politics ever has) from mining investment, then once this slows right down, it will be felt through the entire economy (of Australia). Mining taxes are one issue but these are minor when you consider that the rocks cannot be replaced – once they are mined, they are gone. The situation makes me think of other nations that were resouce rich such as Sth Africa but now, the people do not share the wealth at all. When this scenario eventuates (a winding back of mining), will it not likely cause a domino effect that will see a major correction in property prices nationally & wages & living standards?
    Your thoughts appreciated.

    Reply

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    June 28, 2013 David Isom

    Hi Michael, I agree about population growth, yes, that’s inevitable but where is Australia’s future wealth going to come from? I am an optimist but pessimistic about this prospect. We are rapidly losing our essential primary industries and ability to produce enough of our own food as the supermarket duopoly source cheaper supplies from overseas . Farmers are given little help and have to pay the same interest rates and taxes as those on high salaries with tax deductible investments.
    The RBA’s obsession with low inflation and inability to see what those of us in the property game have seen what is coming has kept our interest rates relatively high , one of the main factors in keeping the AUD high and therefore contributing to us being less competitive with our exported goods. Australian manufacturers are going off shore to produce more cheaply and satisfy shareholders..this includes tertiary industries (eg. ANZ moving jobs off shore, Ford closing down, GMH looking shaky).
    Look around Melbourne ,the factories and warehouses that once produced and distributed goods and now being turned into apartments. So what are we producing? Very little and less and less ,so where is the wealth going to come from? The wealth of a country is dependant upon what they produce in the form of goods and services. We are losing our ability to produce our own food, our manufacturing industries have mostly gone or are going .We have had dysfunctional governments who do not encourage business innovation and opposition parties who along with the media preach negativity…so apart from the inevitable population growth where is our future wealth going to come from ? Australia is not being clever and productive like Germany but is more like Spain or Greece where people expect the government to provide for them…I don’t wish to sound negative but I think we’ve seen, and had the best of this country .Lucky for us..I’m about your age but what hope for the our children and the future. Cheers, David Isom.
    ps I’m on my yacht at Mackay heading for the Whitsundays then hopefully around the world..thanks to property investing over the last 30 years which has been a ‘no- brainer’…but I don’t believe the next 30 will be the same !

    Reply

      Michael Yardney

      June 30, 2013 Michael Yardney

      David
      Thanks for your thoughts. I agree that I can’t see a great future for our manufacturing industries – our cost of production is too high.
      I do hope our agricultural industries will remain competitive and help feed the growing Asian population.
      Where I see most growth is in the service industries – health, education, technology and finance. This may mean the way we are educating our children may have to change otherwise we’ll have to import a lot of he new workers from overseas

      Reply


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