There is a saying in real estate: don’t wait to buy property, rather, buy property and wait.
So, even with all the media noise about the recent downturn in residential property prices in Sydney and Melbourne, understanding this important, and cyclical, asset class as well as the opportunities that arise at every stage of its growth story is an important tool in every investors arsenal.
We share with you five compelling reasons why property still remains an essential asset class to consider.
It’s as safe as houses:
Residential property has proven itself to be a very solid performer with an annual average capital growth rate of 8.1% per annum since the early 1960s according to the Bank of International Settlements. This is despite claims by a range of economists over the years that property prices are overvalued and heading for sharp falls. Steve Keen, professor of Economics at the University of Western Sydney, claimed in 2008 that Australian property prices would fall 40% in 2009.
AMP Capital’s Shane Oliver claimed that Aussie house prices were “chronically weak” and “overvalued”, and were heading for “a sharp fall” in 2012. And U.S economist Harry Dent predicted price falls of up to 50% in Sydney and Melbourne in 2014.
So why have Australian property prices consistently defied the so-called ‘experts’?
Approximately 2 in 3 properties in Australia serve the main purpose of providing shelter and a home to its owners. Home owners will almost alway change their spending patterns to prioritise their mortgage obligations. That is they will often sacrifice discretionary spending and even other forms of essential spending to make sure that they keep their roof over their head.
Furthermore, around 1 in 3 residential properties in Australia are owned outright and have no mortgage attached to them. Why would these people sell their property in a downturning market when there is absolutely no need to do so?
Most home owners remain ahead on their mortgages, and almost 1 in 4 Australians have a financial buffer of more than 12 months’ wages in their mortgage, according to a study by Mortgage Choice. And with interest rates at historically low levels, it remains difficult to prosecute the case that most Aussie home owners are going to be forced into fire-sale situations should property prices head into an extended, or deepening, cyclical downturn.
All of these facts combined add a level of stability to residential property as an asset class that simply cannot be matched by any other asset class such as shares, bonds and cash, among others.
Powerful Vested Interests Abound
After the Global Financial Crisis (GFC), governments and central banks around the world stepped in to save investment banks and other financial services providers to stimulate their economies and to stave off an impending credit drought. The term “too big to fail” became common vernacular.
In Australia, property is so endemic to the success of our economy, both directly and indirectly, that it is probably also “too big to fail”. In fact, 42.7% of all the taxation revenue enjoyed by state goverments and 100% of local government revenue come as result of direct property-based taxes.
For example, do you know of any state or local government that can afford to have large decreases to their budget bottom lines for extended periods? Similarly, the big four banks in Australia derive much of their operating profits from the success of their residential mortage books.
So, whilst state and local government can influence property supply via their panning controls, banks can increase or decrease their lending terms and conditions to either stimulate or stifle property demand to residential customers, as well as to commercial developers by making construction funding easier or harder to procure.
The Media is Good At Promoting Fear
Renowned investor Warren Buffet was once quoted as saying, “be fearful only when others are greedy, and greedy only when others are fearful”. Money can, and will, be made in all market conditions. Additionally, the Australian residential property market is not actually a single market at all. Rather, it comprises of properties in six states, two territories, over 15,000 suburbs and over 10 million individual homes.
So beware of general statements like ‘the Sydney market is falling’ as it may have little relevance to your target market. That is, whilst the median price of all the property sales in Melbourne may be falling for example, not every property in Melbourne will be going down, and some will be going up quite strongly. At The Property Mentors, we understand this and have strategies to cater for the different market conditions that present themselves.
- Know Your Investment Timeframes: Warren Buffet was also quoted as saying, “if you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes”. The same could be said to be true about property.
With all the media noise focused on what is happening right now, it can be easy to forget that the small corrections in median prices being seen in Sydney or Melbourne are coming off the back of something like 100% growth over the last decade. The better question to be asking might be, “where will property prices be in 10 or 20 years time from today?”
- They Are Still Coming? While there has undoubtedly been a large increase in property supply, especially in higher density apartments across the major capital cities, the population engine of Australia continues to chug along. Most population forecasters place Australia’s future resident population at around 40 million people by 2050. That is an increase of over 60% on today.
Furthermore, approximately 80% of that population growth appears likely to land in Sydney and Melbourne. Understanding where these new residents will choose to live, as well as the demographic shifts in preferred property types that will be adopted by both downsizing Baby Boomers, as well as Millenials coming into the property market, can help to futureproof your property portfolio.