Why invest in affluent areas rather than cheaper more affordable areas?
What will rising interest rates do to our rental markets?
How do you stay positive when there’s so much negative news in the media now?
Those are three questions we discuss in this month’s question and answer podcast with Brett Warren.
Poppy B asked:
"We know that falling interest rates were one of the major factors stimulating the major housing boom Australia experienced in 2021, and now that interest rates are going to rise, there are concerns that this will slow down house price growth and possibly even cause a housing slump.
But what effect will rising interest rates have on our rental market?"
While interest rates don’t directly affect rental values, there will however be some indirect consequences pushing up rental rates even higher.
However, let’s start with the fact that Australia is currently facing a rental crisis as national vacancy rates dip to the lowest point on record with most locations around Australia having a vacancy rate under 2%.
In fact, rents for detached houses have risen by as much as 15% over the last 12 months as rental vacancy rates keep falling across all cities for both houses and apartments.
What I’ve found is that once the local vacancy rate moves above 3%, and remains elevated for some time, asking rents start to fall as landlords drop their rents to attract tenants.
On the other hand, rents tend not to rise until the vacancy rates fall below 2% and tenants have to compete for accommodation putting landlords in a better position to increase rent.
However, there will be a side effect of rising interest rates as potential homebuyers will have more difficulty getting loans and this will add extra pressure on our rental markets.
Henry L says:
"Thanks for the great podcast and daily blogs Michael.
I love your enthusiasm and your upbeat tone, but how can I stay positive and take a long-term perspective, when all the news is so negative?"
We have to remember that it’s not the media’s job to educate us.
It’s their job to get our eyeballs onto their website for pages where advertisers already paid to appear.
The media is not a friend of the disciplined and patient investor.
Ignoring the key determinants of lifetime investor returns, the media prefers to focus on short-term returns, market predictions, and negative news.
Of course, it’s also important to understand everyone else’s opinion on property, but that doesn’t necessarily mean giving them the right to give you advice – so be careful of your family and friends and others who tell you what to do.
Only listen to people who have already achieved what you want to achieve.
Here are a few other reasons I've observed why pessimism gets so much attention.
- Optimism appears oblivious to risks, so by default pessimism looks more intelligent.
But that's the wrong way to view optimists. Most optimists will tell you things will get ugly, that we'll have recessions, bear markets, wars, panics, and pandemics.
But they remain optimistic because they set themselves up in portfolio, career, and disposition to endure those downsides.
To the pessimist, a bad event is the end of the story.
To the optimist, it's a slow chapter in an otherwise excellent book.
- Pessimism shows that not everything is moving in the right direction, which helps you rationalize the personal shortcomings we all have.
Misery loves company, as they say.
Realizing that things outside your control could be the cause of your own problems is a comforting feeling, so we're attracted to it.
- Pessimism requires action, whereas optimism means staying the course.
Pessimism is "SELL, GET OUT, RUN," which grabs your attention because it's an action you need to take right now.
Optimism is mostly, "Don't worry, stay the course, we'll be alright," which is easy to ignore since it doesn't require doing anything.
- Optimism sounds like a sales pitch, while pessimism sounds like someone trying to help you.
And that's often the truth.
But in general, most of the time, optimism is the correct default setting, and pessimism can be as big a sales pitch as anything – especially if it's around emotional topics like money and politics.
That’s why it’s important to have an investment plan – a written documented framework or strategy for your long-term financial independence.
That means all investment decisions should be based on this documented plan and not on the media hype.
- Are you a hope-and-pray investor, or do you have a strategy? Do you know how much money you want to live on, and when and how your property investments will help you achieve this?
- This also means that strategic investors don’t try to time the market realizing that buying the best asset they can afford and holding it for the long term will deliver significantly better returns than owning a secondary asset even if bought at a cheap price.
Rohan M asks:
"Many advisers tell you to buy properties in the medium price range or affordable properties below the median.
Michael, you seem to say buy more expensive properties – but this isn’t always easy – why don’t you like cheap properties."
- Most advisors get paid to tell you to buy a property – they don’t get paid to tell you to hold onto your current property and wait for the right opportunity till you’re financially ready, or they don't get paid to tell you to sell a property when that may be the right answer for you.
- Invest in capital growth first.
- Your first asset must be an A-Grade asset, and you should start in Sydney if possible. If can't afford an A-Grade asset in Sydney, buy an A-grade asset in Melbourne. If you can't in Melbourne buy an A-Grade asset in Brisbane rather than a B-grade asset elsewhere.
- Affordability will constrain property prices so we need to buy in areas where people will be able to pay more for their properties or their rent as their wages go up.
- Your future income and prosperity are tied to your tenants’ future income growth.
- Your rental increases will be your future income.
- Find tenants who can sustain their rental payments and rental growth.
- One of the biggest fears for property investors is vacancies – not having tenants paying your mortgage. One way to prevent this is by owning the type of property which will be the strong demand by affluent 10th.
It costs the same to get a plumber to fix the toilet and a cheap house that it does in an expensive house.
- You will not be able to replace your income with the type of cash flow you get from cheap properties. Regional towns have limited economic expectations.
- I often use the analogy of Monopoly and how there are different types of properties, and everyone wants to own the expensive properties like Parklane and Mayfair or Bond Street and no one really wants to own the cheap properties.
No one wins Monopoly owning old Kent Road. Buying in upcoming gentrifying and aspirational suburbs is going to mean that you won’t only be relying on the market doing the heavy lifting, but you’ll be taking advantage of the local market gentrification causing above-average capital growth.
Links and Resources:
Get a bundle of eBooks and reports = www.PodcastBonus.com.au
Some of our favourite quotes from the show:
“Rising interest rates don’t necessarily crash the housing market, and the Reserve Bank doesn’t want that to happen.” – Michael Yardney
“It’s also therefore important to be careful who you listen to and only rely on proven and trusted providers of property market information that give long-term perspectives.” – Michael Yardney
“Emotional energy enables dreamers to take action every day on their dream.” – Michael Yardney
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