I hope you’re taking advantage of the current property boom.
I haven’t seen conditions like this since the early 1970s when I first started investing.
Now you won’t find charts of that particular boom in the various research house statistics, because they weren’t keeping those types of records in those days.
Back then, the boom in property values was in part related to the very strong inflation we were experiencing, and at the time the booming markets of the early 70s and that of the late 80s and the boom of the early 2000s twenty years ago created a lot of Real Estate empires.
I know the boom of the ’70s got me off to a great start and the subsequent booms grew the value of my portfolio allowing me to continue growing it, but I also know there were others who invested through the various property booms who haven’t had the success they hoped for. Even though initially it seems they were heading in the right direction.
So, my chat with you today will be to help you understand the type of property that you should be buying at this stage of the cycle to take advantage of the current conditions that see you through for the rest of your investing life.
Today’s podcast will be in two parts, I’ll initially give you my thoughts and then I’ll have a chat with independent financial strategist financial adviser Stuart Wemyss who will share his thoughts on a big mistake he’s seeing investors make – in the hope that you don’t make the same mistake.
I’m continually being asked questions like:
- What’s the right property for this stage of the property cycle?
- Is this the right or wrong time to invest in property?
- Is it too late to invest this time round – prices have grown so much?
- Where’s the best place to invest in 2021?
First, let's take a look at what is happening.
- Low-interest rates – Low-interest rates are facilitating change from all types of prospective property buyers, many of who are starting to experience FOMO (fear of missing out) and are pushing prices higher and higher.
Rising consumer confidence -- The combination of improving economic conditions, increased jobs security plus the sense that we’re getting Covid under control is lifting consumer confidence, which in turn has created continued strong demand for housing.
- Supply versus demand – Buyers are snapping up properties faster than vendors can list them for sale at present which puts further pressure on prices.
- Pent-up demand – Buyer demand is particularly strong at the moment because it has been pent up for a number of years.
- Demographic changes – Changes in demographics, the structure of family life, and what we want out of our home also shifted during the height of pandemic lockdowns. The desire to live in a 20-minute neighborhood shone through.
If we fast forward another 3 years or so, I expect we’ll find that property values have risen significantly - as much as 25-30% higher than at the beginning of this current property cycle.
By then our economy will have rebounded even further, wages will have increased, and inflation will be starting to rise.
This means the RBA will most likely have stepped in and raised interest rates, but only a little.
When this property cycle ends, I believe we’ll be left with a 2-tier property market.
This is because on one hand there will be the more affluent people who will be able to afford to live in the more expensive discretionary, established money suburbs or the up-and-coming gentrifying aspirational suburbs.
On the other hand, we’ll have the majority of Australians who will find property unaffordable as they’ve only experienced slow or stagnant wage increases.
This means moving forward we’re likely to find see a larger percentage of Australians unable to enter the property markets as owner-occupiers and those who can get a foot on the property ladder will be flung out further and further from the center of our capital cities.
The key takeaway is that if you want to ensure you end up owning the right type of property when this cycle comes to an end, you’ll have to make the right investment decisions today.
It will be important to invest in the type of locations where not only more affluent owner-occupiers live, but where more affluent tenants will want to live because they’ll be able to pay increasing rent over time.
So I suggest investing in:
The “established money” suburbs
This is where many owner-occupiers have been living for 20, 30, or even 40 years and have “old debt”, and in fact, minimal debt against their homes.
The aspirational suburbs
This is where higher-income earning millennials are moving to, with new money and in turn are upgrading, improving, and gentrifying these locations.
Stuart recently wrote about why investing in outer suburbs is likely to lead to underperformance.
Some buyers’ agents promote investing in more affordable locations (i.e. outer suburbs).
I can understand why some investors might be attracted to follow their advice.
But it’s not until you delve into the theory and evidence that it becomes blatantly obvious that such investments have a high probability of under-performing.
Attractions of investing in the outer suburbs:
The price point is a big attraction for some investors.
That is, houses are substantially cheaper.
That means that people can spread their eggs across multiple baskets i.e. invest in multiple properties.
It also means that people that cannot afford a house in a capital city, can still “invest” in property.
Secondly, because properties in outer locations tend to have a lower land value component (land is cheaper than the building), rental yields are higher.
This makes property more affordable to hold, particularly while interest rates are so low.
The first thing to recognize is that the supply and demand fundamentals are significantly different compared to blue-chip locations.
The supply of vacant land in the surrounding locality is typically infinite.
Whereas the demand for property reduces the further you move away from blue-chip suburbs.
The second consideration is the tenant profile.
Tenants in these locations are more likely to be lower-income earners.
That can include young families, often with pets that create a lot of wear and tear on your property.
Lastly, it is incredibly important to recognize the impact that increasing borrowing capacities have had on house prices over the past 3-4 decades, even in outer suburbs.
The average Australian’s borrowing capacity has increased by 2 to 3 times since the early 1980s.
Borrowing capacities have peaked.
They will only rise in line with incomes.
That means the buying power of low to middle-income earners will not increase by the same rate as it has over the past 30+ years.
Putting aside affordability considerations, most people desire to live near the CBD (not in it but surrounding it).
These locations tend to offer a greater array of employment opportunities and better amenities such as entertainment, schooling, medical and pastime activities.
The richest 20% of Australian’s own 64% of all household wealth.
And between 2003 and 2017 this top 20% grew their wealth by 68% (compared to 6% for the least wealthy 20%).
It is this cohort of Australians that can afford to (and will) drive blue-chip property prices perpetually higher.
It is probably tempting for some buyers’ agents to buy property at any price point.
Because, of course, not everyone can afford to spend over $500k on an investment property.
However, the only way you can do that is if you compromise sound investment principles.
And that is a slippery slope and is a sure-fire way to make costly mistakes.
Stuart’s Book – Rules of the Lending Game
Some of our favourite quotes from the show:
“While a rising tide may lift all ships, investing in the current market may not be as straightforward as you think.” – Michael Yardney
“Buying the wrong property now not only affects your investment purchase today, but it will affect your capacity to create wealth over the next 5, 10, or 15 years.” – Michael Yardney
“While you need cash flow to stay in the game, it’s really only capital growth that’s going to get you out of the rat race.” – Michael Yardney
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