We all have one of these stories.
I’m referring, of course, to the ‘one that got away’ in the property market.
If we haven’t personally looked back on a property that, in retrospect, we could have bought for next to nix, then we know someone who does.
This was the case with a Sydney investor I met recently, who lamented the fact that his grandma sold her prime piece of real estate for a song in 1985.
The family was given the opportunity to buy the apartment, perched on Sydney’s harbour – quite literally on the waterfront, overlooking the Harbour Bridge and Opera House – for around $180,000, but no one was interested.
So some lucky buyer picked up the two-bedroom apartment, which would currently be worth well over $2.5 million.
In these situations, investors can often become annoyed or frustrated over their ‘lost opportunities’, but not much can be gained from that mindset.
After all, it’s not exactly news that property prices increase significantly over time.
Most people are fairly clued up to the fact that the price and value of real estate generally grow as each decade ticks over.
That’s why it’s often said that time in the market, rather than timing the market, is the safest way to invest in property.
That’s one of the reasons I’ve always encouraged young home buyers and investors to get into the property market because I believe that the earlier you start, the better off you’ll be in the long run as compounding (of property price growth) and time work their magic.
The proof of this philosophy is pretty much in the pudding, as property values have grown exponentially over the years.
Let’s assume that you bought your first home or investment property just over 40 years ago, in 1976.
Across Australia’s capital cities in 1976, median house prices looked like this:
Sydney – $36,800
Canberra – $35,100
Melbourne – $32,900
Adelaide – $29,800
Hobart – $31,575
Perth – $33,000
Brisbane – $26,275
There are a few interesting things that come out of these figures.
How cheap property prices seem when you look back today (not that they seemed inexpensive at the time)
Brisbane was the cheapest capital city then, well behind Hobart and Adelaide.
It’s important to keep things in perspective, though.
The average wage in the mid-1970s was around $6,000, according to the Australian Bureau of Statistics, so the median Sydney house price was almost six times the value of the average annual income.
Forty years on, both wage and house prices are considering higher, although they haven’t grown at a consistent pace.
Sydney’s median is now 27 times higher than it was in 1975; if wages had matched that pace, the average wage would now be $162,000.
Of course two of the big reasons behind this are:
There are more 2 income families (both partners working) today than there were 40 years ago increasing disposable household income.
Interest rates are at historic lows substantially increasing affordability. The standard variable interest rate in 1976 was 9.88%, meaning you needed to pay up to three times as much interest to service the same dollar value of the loan.
House prices today:
According to CoreLogic, median capital city property values at the end of July 2021 were as follows:
Sydney – $1,017,692
Melbourne – $762,068
Perth – $532,392
Canberra – $793,872
Brisbane – $598,615
Darwin – $486,054
Adelaide – $516,454
Hobart – $621,102
And this is a great time to enter the property market.
Sure our property markets have been strong despite all the challenges thrown at them.
And yes, property prices seem expensive in some locations; but knowing what you know now, who wouldn’t have liked to buy their parent’s house for what your parents paid years ago?
Wouldn’t it be great to have a crystal ball and take a peek into property markets of the future and see where real estate prices will be in another 40 years?
In its absence, I think it’s a pretty safe bet to assume that in the long-term, property values will continue to grow, underpinned by our growing population and the general wealth of our nation.
It’s important to keep this in mind when you’re negotiating your next property deal, as squabbling over $5,000, $10,000 or even $20,000 in today’s dollars is unlikely to have a huge impact on your eventual wealth.
An opportunity like the present – a once in a generation property boom – doesn’t come around too often in your life.
That doesn’t mean you should buy any old property
Just like over the last 40 years, in the next 40 years, some properties are going to outperform others – that is why you need to buy “investment grade properties.”
And remember the location of your property is going to do around 80% of the heavy lifting with regards to its capital growth – so choose your location wisely.
When you invest there are 3 main variables:
Your budget – and that’s generally determined by the banks
Location – as I said, don’t compromise on this
The property you purchase in that location – as I said, an investment-grade property.
But to ensure you buy the right property let’s look at a few trends I see moving forward…
1. Property demand from home buyers is going to continue to be strong
Currently, home prices are surging around Australia, auction clearance rates remain high, and the media keeps reminding us we’re in a property boom.
The result is emotions are running high at the moment, with FOMO (fear of missing out) being a common theme around Australia’s property markets.
One of the leading indicators I watch carefully is finance housing approvals, and these are suggesting that more Aussies are looking at getting into the property and we will have strong ongoing demand from owner-occupiers and investors over the next 6 months.
Now, with borrowing costs lower than they ever have been, the reassurance that interest rates won’t rise for a number of years, it is likely that buyer demand will remain strong throughout the year.
In fact, this is a self-fulfilling prophecy…
As property values increase and the media reports more positively about our property markets, FOMO will mean more buyers will be keen to get in the market before it prices them out.
2. Investors will squeeze out first home buyers
While there were many first-time buyers (FHB’s) in the market in the first half of the year, buoyed by the many incentives being offered to them, now demand from FHB’s is fading and property investors re-enter the market and property values rise.
Of course over the last few years, investor lending has been low, but with historically low-interest rates and easing lending restrictions, investors are back with a vengeance.
3. Property Prices will continue to rise
While many factors affect property values, the main drivers of property price growth are consumer confidence, low-interest rates, economic growth and a favourable supply and demand ratio.
As always, there are multiple real estate markets around Australia, but in general property values should increase strongly throughout 2021.
However certain segments of the market will still continue to suffer, in particular in the city apartment towers and accommodation around universities.
It is unlikely these segments of the market will pick up for some time and the value of these apartments is likely to continue to fall as there just won’t be buyers for secondary properties.
At the same time, some rental markets will remain challenging. In particular, the inner-city apartment markets are reliant on students, tourists (AirBNB) and overseas arrivals.
But overall, Australia’s low mortgage rates continue to underpin very strong growth in property prices throughout the country.
House prices will rise further
Ongoing strength in housing finance, elevated auction clearance rates, and continued low stock levels suggest housing prices will continue to rise solidly through 2021.
4. People will pay a premium to be in the right neighbourhood
If Coronavirus taught us anything, it was the importance of living in the right type of property in the right neighbourhood.
In our new “Covid Normal” world, people will pay a premium for the ability to work, live and play within a 20-minute drive, bike ride or walk from home.
They will look for things such as shopping, business services, education, community facilities, recreational and sporting resources, and some jobs all within 20 minutes reach.
Residents of these neighbourhoods have now come to appreciate the ability to be out and about on the street socialising, supporting local businesses, being involved with local schools, enjoying local parks.
5. More expensive properties will outperform
The current property cycle was initially characterised by all segments of the market rising – other than inner-city high-rise apartments.
But now the high end of the market is leading the growth in property values
According to Corelogic, the high tier is the top 25% of property values in any given region.
As of February, this refers to dwelling values at around $960,000 or higher for the combined capitals, with a typical value in the high tier around $1.2 million.
Over February, the top 25% of values in the combined capital cities jumped 2.7% in value. This was up from an increase of 0.5% in January.
The middle 50% of dwelling values (the mid-tier) increased 1.5%, and the ‘low’ end of property values (the low tier) increased 1.2%.
6. This is a cycle dominated by upgraders
The current property and economic environment, plus the scars left on many of us after a year of Covid related lockdowns have meant that Aussies are looking to upgrade their lifestyle.
Many tenants are no longer happy to live in small dingy apartments and with an oversupply of rental units available in many areas, they are taking the opportunity to upgrade their accommodation.
Other tenants who have managed to save a deposit are taking advantage of many of the many incentives available and are becoming first home buyers.
With record low-interest rates and surging property markets, many existing homeowners or upgrading their accommodation to larger homes in better neighbourhoods. In fact, a recent survey suggested that one in three homeowners are looking to sell their homes in the next five years.
While small group homeowners are upgrading their lifestyle and moving out of the big smoke to regional Australia, more Aussies are looking to upgrade their lifestyle by moving to a better neighbourhood. As mentioned above, they love the thought that most of the things needed for a good life are just around the corner.
Many Baby Boomers are looking to upgrade their accommodation by moving out of their old, tired family home into large family-friendly apartments or townhouses. But they’re not looking for a sea change or tree change, they’re keen to live in “20-minute” neighbourhoods close to their family and friends.
Now is the time to take advantage of the opportunities the current property markets are offering
Sure the markets are moving on, but not all properties are going to increase in value. Now, more than ever, correct property selection will be critical.
You can trust the team at Metropole to provide you with direction, guidance, and results.
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