Are you wondering what’s ahead for our property markets in 2023?
In my mind, after a tumultuous 2022, investors must be prepared for even more uncertainty this year.
But it will be a year that our property markets reset and a new cycle starts meaning it’s a time of opportunity.
Just don’t expect it to be easy.
In today’s show, I’m going to share my expectations for the year ahead by discussing the major structural shifts that have led to previous property booms, then Brett Warren and I will discuss the property cycle, 8 reasons property values increase in the short to medium term, and 3 reasons property values increase in the long term.
Then I’ll try and tie all this together to give you some expectations for the year ahead and help you make those important decisions homebuyers and property investors need to make.
High-interest rates and inflation will likely keep eating away at the average Australian’s household budget for some time, making property less affordable, so the question I hear many property investors asking is, “what is going to cause property values to increase moving forward?”
I believe demographics (such as population growth, family formation, how we want to live, and where we want to live) as well as the wealth of the nation will be the main long-term drivers of our property market and will be much more important than the short-term fluctuations created by interest-rate rises, inflation or government intervention.
And while forecasting is difficult, especially about the future, history is instructive so let’s look at what happened in the past, even though that’s only part of the way to look at the future of Australian property.
We discuss major structural shifts that have led to significant property booms.
The next significant structural change is likely to occur when the Baby Boomer generation dies off and transfers around $6.2 trillion worth of wealth they hold in their residential properties to their families.
So that brings us back to the question of what, if anything, will drive future property price growth.
The rising tide that lifted all ships in the last boom has now gone, as has the period of rising household incomes and low-interest rates that we enjoyed over the last decade, meaning our property markets will be much more fragmented moving forward, and capital growth will be dependent on local factors including demographics, gentrification, neighbourhood, and wages growth of the people in these locations.
- Interest rates
- Access to credit
- Supply and demand
- Availability and cost of land
- The general economic climate
- Consumer confidence
- Government incentives
- Investor appetite
- Future population growth
- The wealth of the nation
The recent property boom was very unusual.
All types of properties in almost any location around the country increased in value substantially.
Moving forward, our property market will be much more fragmented.
If you think about it, certain demographic segments will find the rising cost of living due to inflation and higher rents or higher mortgage costs at a time when wages are not keeping up with inflation will either stop them from getting into the property markets or severely restrict their borrowing capacity.
This will impact negatively the lower end of the property markets, which will also be affected by the fact that many first-home buyers borrowed to their full capacity and will have difficulty keeping up their mortgage payments at the time of rising interest rates or when their fixed rate loans convert to variable rates.
In other words, there will be little impetus for capital growth at the lower end of the property market.
That's why I would only invest in areas where the locals’ income is growing faster than the national average.
The desire to live on a good-sized block of land with a white picket fence and plenty of space with the family has changed is people are once again happy to trade big backyards in the outer areas for small courtyards or balconies as they search for a more convenient lifestyle
For many people, an ideal neighbourhood would mean most facilities will be a 20 walk, cycle, or drive away.
In urban planning circles, it’s a concept known as the 20-minute neighbourhood.
In my mind, convenience and options will be the key to desirable locations where people will pay a premium to live.
Over the last decade, capital growth has, in general, been stronger for houses than apartments, so many are wondering if apartments are still a good investment.
But these are big-picture “overall” stats and include inner-city high-rise apartments, townhouses, and older apartments in 3-story walk-up blocks. And they’ve each performed differently.
In general family-friendly low-rise apartments in lifestyle, neighbourhoods have still performed well, and more young families have chosen to live in townhouses to be able to afford to live in desirable neighbourhoods, while high-rise CBD apartments have performed very poorly.
Firstly, it’s important to always start with macro factors (big picture) and then drill down to the micro (property) factors.
That’s because your property’s location will do 80 per cent of the heavy lifting, and then choosing the right property in that location will account for about 20 per cent of its performance.
When I changed my investment research criteria from looking at what happened in the past to forecast what is likely to occur in the future, I improved the performance of my investment selections and those of my clients considerably.
Rather than doing the type of research most people do and looking at how a location has performed in the past, I look at the factors that will drive the performance of the location in the future, and these include:
- Demographics and population growth
- Economic and employment growth, which leads to wages growth and the ability to afford properties
- Infrastructure growth
- Supply and demand
I also look for multiple growth drivers because we have all recently seen the result of those investors who chose areas with a single growth driver or single economy, such as during the mining boom.
Investors should pay less attention to short-term trends and understand that median prices (as with all statistics) are more useful when viewed as a change in trend over a longer time frame and not over a month-to-month period.
Median prices are really best used as an indication of the composition of sales rather than a good indicator of changing property values.
That’s why I also look at data such as sales volumes, and market depth and investigate ‘like for like’ recent sales evidence to estimate current property values.
receives abundant natural light compared to a poor orientation, etc.
At Metropole, we use a Top-Down Approach.
I start by looking at the macro-economic environment – the big picture of how Australia’s economy is performing.
Then I look for the right state in which to invest – one that will outperform the Australian market averages because of its economic growth and population growth. property economy market.
Also, I only invest in the capital cities and not in regional areas, because that’s where the bulk of the jobs will be created and where most people are going to want to live in the future.
Then within that state, I look for the right suburb or group of suburbs – ones that have a long history of outperforming the averages.
In general, they’re the more affluent inner- and middle-ring suburbs of our big capital cities, so I check the census statistics to find suburbs where wage growth is above average.
Then I look for the right location within that suburb.
Then within that location, I look for the right property, using my 6 Stranded Strategic Approach. And finally, I only buy at…
The right price, but I’m not suggesting a “cheap” property. I mean the right property at a good price.
Once I’ve found the right location, the next phase of my research is to find the best property for me to buy using my 6 Stranded Strategic Approach, which involves the following steps:
- I only buy a property that appeals to owner-occupiers.
- I only buy a property below its intrinsic value
- I buy properties with a high land-to-asset ratio
- In an area that has a long history of strong capital growth and that will continue to outperform the averages
- I also look for a property with a twist – something unique, special, different, or scarce about the property, and finally…
- I only buy a property where I can manufacture capital growth through refurbishment, renovations, or redevelopment.
Links and Resources
Get a bundle of eBooks and reports = www.PodcastBonus.com.au
Some of our favourite quotes from the show:
“I think it’s really important for new investors to know that the experience of 2020 and 21 are unusual, very out of character for the normal property market, so don’t count on the market doing the heavy lifting for the next couple of years.” – Michael Yardney
“At the moment, the cost of constructing something new is so high that it’s not financially viable.” –Michael Yardney
“The key is to start right now by making the change to walk along this new road in this new year.” –Michael Yardney
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