What can history teach us about what’s ahead for property

Business Patient

Is property still a good investment?

The last few flat years in our property markets and concerns about the potential for future capital growth has some worried.

They are wondering what’s ahead for property, especially as they’re hearing some commentators suggesting we’re in unprecedented times.

Some are worried about Australia slipping into recession.

Others wonder what will happened when interest rates drop further.

You just have to look back to see what’s ahead.

The problem is these people don’t have a big enough rear vision mirror.  Some of us with grey hair see clear parallels with the past.

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So I thought that today I’d delve into my memory and see what we can learn from previous cycles to help you understand where our markets are heading.

But before I do, I’d like to remind you that even though we’re currently in the flatter stage of the property cycle, the bottom line is that as a long-term investment, property is hard to beat.

I remember reading a research report a number of years ago from Massey University suggesting that Australian residential property has been the best performing asset class over the long haul.

The study dated back to 1920 and showed that property produced an average return of around 15% per annum (combining rental income and price gains) over all those years.

However, these figures don’t really reflect how good property is as an investment as they don’t take into account how leverage produces an even higher return on your own funds.

When you factor this in, property far outperforms all other asset classes over the long-term.

Looking at the national figures in the context of the combined capital cities and combined regional markets over the last 12 years, the following graphs shows that returns may have slipped a little across both regions:

Annual Total Returns, Combined Capital Cities

 

Annual Total Returns, Combined Regional Markers

Source: Corelogic

The market moves in cycles.

But don’t get me wrong, while there’s little doubt that property is a potent wealth-builder in the long-term, it clearly goes through cycles just as other investment classes do.

This means that the reported high long-term average returns take into account periods of very high growth and also periods when property went nowhere for a few years.

A good example of that is those who bought a home in Sydney at its peak in 2003, or again at its peak in 2012 or in 2017. They would have seen the value of their properties stagnate, or even fall, over the next few years or so.

But I’m getting ahead of myself. Let’s go back in time…

Has this happened before?

Back in the early 1980’s house prices across most of the capital cities were stagnating for a couple of years.

Melbourne’s median house price languished at about $50,000 from 1980 to 1983 then grew steadily but unspectacularly before really taking off in 1987.

In Sydney, the median house price reached about $80,000 in 1981 and stayed there for the next four years.Melbourne1980

Perth prices were falling in 1983, and Brisbane house prices were going nowhere after a year or two of 25% returns in the early 80’s.

It took until 1987 before these property markets all began to boom again.

In Adelaide, there was a major rise in property prices between 1982 and 1984, and then growth slowed, before values only grew around 5% for most of the 90’s until 2000.

After crashing in 1990, property prices in Sydney and Melbourne stayed flat until 1995 and then slowly started moving upwards.

It wasn’t until 2000 that prices in Brisbane finally took off after a decade of growing at 5% or less per year.

In Perth, a short recovery followed the boom and bust of the late 1980s and early 1990s.

The Perth market there ambled along, with annual returns at about 6% until its boom in the middle of last decade after the GFC, where Perth’s median property price overtook all capital cities other than Sydney.

And then of course property prices around Australia slumped for a number of years in the early part of this decade, but in the years leading to mid 2017 mid 2017, Sydney property values almost doubled, and Melbourne property values increased by around 80%.

If you strip away these cycles you can see how well our property markets performed over the last 20 years…

Change In Dwelling Values, 20 Years To Jan 19

Source: Corelogic

So what’s the lesson?

 In short… each state has its own property cycle and there are cycles within each cycle.

Different areas, different prices points and different types of property have their own cycle.

Looking into these further, you’ll find that in each 10-year period there seems to be 3 or 4 years when the market is flat; 3 or 4 years of low capital growth and a few years of strong price growth during the boom stage of the cycle.

Clearly property investor must be aware of and prepared for these cycles.

However, as we’ve learned over the last few years, it’s hard to remain positive in the middle of the flat period of the property cycle.

When you look at the property prices that prevailed 10 and 20 years ago and look at property prices today, it’s clear that property investment is a long-term play.

You need to be patient, as over the long term values of well located properties in our major capital cities have doubled every 10 years or so.

What are the factors behind these cycles?

It’s the old story of supply and demand as well as the availability of finance.Close Up Of Business Graph

Property prices are pushed up by the demand created by a healthy economy, high levels of employment, population movements caused by migration and immigration and positive market sentiment.

They are dragged down when the economy performs poorly, when interest rates rise, when employment and immigration figures fall, when supply exceeds demand and when the market place is nervous about their wealth and their future.

Cycles are an inevitable part of any investment market and our property markets are behaving normally at present.

While we tend to think like property investors, it’s really owner occupiers who make our housing markets and their incomes and their ability to borrow money (interest rates and the banks’ willingness to lend) is what will drive up property values in the future.

So what’s ahead for property?

The cycle is moving on.

It always does.

There is strong evidence that our property markets bottomed in the middle of this year.

Property values are slowly rising but various headwinds that will ensure we don’t move into boom conditions for some time yet.

Many of the fundamentals for property are good, but our economy is only chugging along in second gear (it’s not in reverse – we’re unlikely to slip into recession.)

However, heaps of new jobs are being created, the participation rate is high and unemployment remains low, which means most Australians feel secure about their jobs and consumer and business sentiment is rising.

donlad-trump

Yet there are clouds over the world’s economy, despite Donald Trump tweeting and telling us we have nothing to worry about.

At the same time most household budgets are in good shape and there are very few in mortgage arrears.

This puts them in a good position to get involved in property.

Some will just renovate or improve their homes.

Others will take the next step and upgrade to a new home.

And more first home buyers will get a foot on the property ladder pushed by rising rents and falling interest rates.

At the same time strategic investors are looking at getting set for the next stage of the property cycle – a once in a decade opportunity to buy counter cyclically in Sydney and Melbourne and to ride the property wave in Brisbane.

However, others will hold back at this early stage of the property cycle, waiting for more signs of certainty.

Of course while they are waiting, many will miss out on significant property price growth the strategic investors who get in early and buy counter cyclically will enjoy.

What about affordability?

Every cycle I hear the cry; “Property prices are too high! They can’t keep going up like that.”Median House Price

I remember it in the early 80’s and then again in the late 80’s when people said house prices just can’t go up anymore. “They are so high our children will never be able to afford a house.” 

But prices doubled over the next decade until they again said the same in 2003 as prices rose through the boom that started in 2001.

Then when property values shot up as interest rates dropped after the Global Financial Crisis the property pessimist kept telling us that property values could not rise any further and were rubbing their hands in glee when our markets stalled in 2012.

But look what happened as the cycle moved on – the value of well located properties in our three big capital cities kept rising.

And many are saying the same again now: “Property values can’t go up any further – prices are just too high and unaffordable.” 

However, the following graph from Dr. Andrew Wilson, chief economist of MyHousingMarket.com.au, shows that homes are more affordable than the 12 year averages and currently home loan affordability is better than it’s been in a long time.

Home Loan Repayment Affordability Index March Q19

 

Sure homes in Melbourne and Sydney are expensive. This is a first world problem related to living in the best country in the world at the best time in history.

If you’re keen to get into the Sydney or Melbourne property markets, which are now global cities, it is unrealistic to expect to buy your first home near town.

If you lived in Paris, New York or London, you wouldn’t really expect to be able to buy a home. In fact, you wouldn’t even expect it to be able to afford an apartment.

Many first-time buyers will have to alter their expectations.

Some will need to rentvest – renting where they want to live but can’t afford to buy and invest in property in locations where they can afford to buy.Businessman Squeezing Piggybank With Tape Measure On Table

Others will have to learn delayed gratification, spending less than they earn and saving for a deposit.

More first-time buyers will have to count on the bank of mum and dad to help them get a foot onto the property ladder

So while I am sympathetic to the plight of those currently wanting to get into the property market, it is unlikely that home prices will become significantly more affordable in locations where most millennial’s want to live – close to where all the action is and where their jobs are.

The bottom line

Our property markets are behaving normally as they work their way through their individual property cycles.

Within each state the property markets are fragmented – at different price points and geographically, but overall increasing consumer confidence is bringing homebuyers and investors back into the market.

Are you ready to exploit the property investment opportunities that will arise this year?

Secret Club

The beginning of a new property cycle is a great opportunity for investors to ride the next property wave and doesn’t come around that often.

2020 will be a good year for property but in the short term there will be some challenges and some great opportunities so it is critical to learn from experienced and successful property investors, from someone who has already achieved what you want to achieve and has retained their wealth in the long term.

If you’re looking at buying your next home or investment property here’s 3 ways we can help you:

Sure our property markets are improving, but correct property selection is even more important than ever, as only selected sectors of the market are likely to outperform.

Why not get the independent team of property strategists and buyers’ agents at Metropole to help level the playing field for you?

We help our clients grow, protect and pass on their wealth through a range of services including:

  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! Click here to learn more
  2. Buyer’s agency – As Australia’s most trusted buyers’ agents we’ve been involved in over $3Billion 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.
fact: our markets are on the move
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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 his opinions are regularly featured in the media. Visit Metropole.com.au


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