Want to know what that magic ingredient is that propels property markets forward?
The little secret behind whopping price growth?
It’s not the economy, even though that's important.
It’s not supply and demand, even though that plays a role.
It’s not infrastructure spending, availability of finance, or population growth either.
Although all of these things are important and undoubtedly impact our real estate markets, the truth is there is one major factor that drives property values more than anything else.
And that factor is…homeowners or as we sometimes call them - Owner Occupiers.
While investors look at all types of drivers of capital growth, they often tend to forget that it’s owner-occupiers who primarily drive our property markets forward.
Fact is: they own close to 70 percent of all the properties in Australia and therefore dominate our market and without them, it simply falls over.
So it’s interesting that while owner-occupiers are one of the most significant influences on a property, they are commonly overlooked.
Think about it…with almost 70% of all homes in Australia owned by owner-occupiers, this underpins the steady long-term growth of property values.
On the other hand, investors, who comprise just 30% of the market, create our property booms (often driven by Fear OF Missing Out or greed) and our property downturns (when they exit the market by sitting on the sidelines or selling up) creating volatility.
Here’s a relatively current snapshot of the national property market according to the Australian Bureau of Statistics (ABS) and CoreLogic:
- There are 10.7 million residential dwellings Australia-wide with a total value of $9.8Trillion
- Spread across around 15,000 suburbs
- An additional 130,000 to 160,000 new dwellings are added every year
- The total debt against these dwellings is $2Trillion (giving an overall Loan to Value Ratio for residential property of just over 20%)
- Residential real estate makes up 55.6% of Australian household wealth
- Investors own around 27% of Australian dwellings by number, and 24% by value.
- There are more than 2 million individual property investors in Australia
- Each property investor in Australia owns an average of 1.28 properties
Now, from these figures it’s fairly clear that owner-occupiers comprise the largest portion of the market – in fact, they outnumber investors two to one.
This is why I always give the following advice to investors who are searching for a strong property performer:
Buy the type of property that will appeal to owner occupiers.
You see…in my mind an "investment grade property" must have owner-occupier appeal.
Not that I’m planning to sell it, but I want it to be attractive to home buyers as they will buy similar properties near mine pushing up the value of my property.
And I want it to be attractive to affluent owner-occupiers who will have the money to and be prepared to pay a great price to own this type of property which would be located in an aspirational or gentrifying suburb.
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Now this is different from what most investors look for, isn’t it?
They wonder who the tenant will be, how much rent will they get, and what tax benefits will be available; and then end up buying in one of those Lego Land high-rise apartment towers and wonder why their investment underperforms.
On the other hand, owning a property with an element of scarcity which is located close to amenities, jobs, transport, lifestyle features and cultural, social aspects like cafés, bars, and arts precincts will always attract home buyers.
But these are features that appeal to tenants, too.
If you think about it, your future income from your investment properties will depend upon your tenants' ability to pay higher rent over time.
That's why we invest in affluent locations and in properties that are attractive to more affluent tenants
So if you buy a property that ticks all these boxes, you know you’re investing in a dwelling with broad, lasting appeal.
By now you would know that location will do about eighty percent of the heavy lifting of your property’s capital growth.
But not all locations are created equal.
Some suburbs will be more popular than others, some areas will have more scarcity than others and over time some land will increase in value more than others.
That’s why it’s important to buy your investment property in a suburb that is dominated by more homeowners, rather than a suburb where tenants predominate.
And you’ll find suburbs where more affluent owners live will outperform the cheaper outer suburbs where wages growth is likely to stagnate moving forward.
But it’s the same all over the world.
Go to any major city – London, Paris, Vienna, Los Angeles – and you’ll find that the wealthy people tend to live within a 10 – 15 minutes drive from the CBD or near the water.
Why is this so? The cynics would say because they can afford to.
And in part that’s true.
In general the more established suburbs with better infrastructure, shopping and amenities tend to be close to the CBD and the water and that’s where the wealthy want to and can afford to live, and they’re prepared to pay a premium to live there.
The rich do not like to commute.
Overall, by focussing your research on what those often overlooked owner-occupiers are doing, you may just find an investment that outperforms the market and delivers strong value and growth over the long term.
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