Date published: 02/07/2012
Property investment and the current worldwide economic woes
Let’s face it, we’re living through a period of great economic volatility and a lot of what we hear from the media lately is scary stuff.
Each day seems to bring more potential doom and gloom – another report of a company failure, more jobs lost, a schizophrenic global economy and concern about an impending recession around the world.
This continuing conveyer belt of bad news has a way of instilling fear into us, causing many of us to withdraw from the markets and become obsessed with the worst case scenario.
Some doomsayers are suggesting we should sell up all our properties before the almighty crash arrives here, just like it has in the USA and in parts of Europe, while other commentators suggest our current markets present some great opportunities.
So is it a good time to buy properties or is it time to sell up?
I wouldn’t blame you for feeling confused -it’s difficult to sort through all the information and statistics bombarding us every day.
Sure, the real estate markets have slowed down and property values have fallen over the last year or two.
But while the doomsday speculators would like us to believe this is the end of the world as we know it, the truth is there are always peaks and troughs in property. It’s just the way the market works.
Since I started investing almost 40 years ago, I’ve lived through 9 property cycles and in every decade there has been a 3 or 4 year period when the property markets have been flat or falling. Yet at the end of each decade the value of well located properties have doubled.
Why property values in Australia will increase in the long term
And there is no reason that this won’t continue to be the case for capital city properties around Australia.
The long term value of property markets will be buoyed by:
• A growing population as we import more people to provide the required skilled labourers as well as replacing the retiring baby boomers and ...
• Our nation becomes wealthier driven by the mother of all property booms.
Why we won’t have a property crash
We won’t have a property crash here like has happened in overseas markets because a number of factors are underpinning our property markets including:
• A healthy economy that has bucked the global trend as it grows strongly and which has become the envy of most developed nations. But there is still room for the government to stimulate growth further if required. (Hopefully they’ve learned from last time and will think of something more sensible than pink bats!)
• Even though our interest rates are relatively low in the hope of stimulating the economy, the RBA has the ability to drop them further if required to further stimulate the economy.
Compare this to overseas, where interest rates in the USA, Britain, Japan and Europe have been so close to zero that there is no scope to stimulate the economy with low rates.
• Our low unemployment rate means that the average Australian’s job is secure.
While job security fears appear to be playing on consumer confidence, data released by the Australian Bureau of Statistics showed the number of people in work rose by 39,800 in May, blowing some commentators expectations of rising unemployment out of the water.
Of course the job losses in sectors undergoing structural change are a concern, but we do need to focus on the big picture and remember that unemployment is close to historical lows.
• We have a sound banking system and relatively few people in mortgage distress.
• Our balance sheets are in good shape. Our government, our banks, many companies and most Australians have taken a conservative view since the GFC and paid down debt, including company debt, home mortgages and credit card debt. In fact, much of the outstanding household debt is in the hands of the wealthier people, those who can afford it.
• We’re in the early stages of the mother of all resources booms.
Sure China has slowed down a little recently, but there’s hundreds of billions of dollars worth of infrastructure spending already committed to Australia over the next few years and over the next 2 decades, the growth in China, India and to a lesser extent other developing Asian countries will underpin our resources sector.
Is the cup half empty or half full?
It’s important not to trivialize the possible consequences of the world’s problems, but equally it’s important to remember that every cycle brings downturns and times of opportunity.
In my experience, difficult economic times offer outstanding opportunities for those who are prepared.
You see… wealth is not necessarily lost during times of financial crisis. It is transferred from the financially uneducated to the financially fluent.
We have had global financial downturns before and we’ll have them again, because economic markets move in cycles. While the specifics may change, the patterns are similar.
The losers in financial crises will tend to be those who are over leveraged and don’t have cash flow buffers, those who speculate and investors who overreact and make long term investment decisions based on short term emotional factors.
On the other hand, the winners will be those cashed up investors who have the long term perspective to spot opportunities.
The big lesson is: “This too shall pass.”
Unfortunately the current world economic problems will not go away quickly, and we are entering a new era in the financial markets. But this is not a time to panic or make rash emotional decisions. It is a time to learn from history.
Generally property sales data indicates an upward growth of property values over the long term. But there are also long periods when the market has been flat before but the general trend in property prices is an upward one.
In all capital cities growth has averaged around 8 per cent, compounding each year over the last 25 years.
But these are just averages – the better your property selection – where you buy, what you buy, how well you negotiate and how you finance your property investment – the better your returns could be.
Look what happened over the last decade.
Fact is about 10 years ago we were paying around $390,000 for the average house in Sydney, the median house price in Melbourne was just over $300,000 and in Brisbane the median house price was $171,000. It was $172,000 in Perth; $213,000 in Canberra,$189,000 in Darwin; $156,000 in Adelaide and $195,000 in Hobart
Go back another 10 years to 1992 and we were paying around $182,000 for the average house in Sydney, the median house price in Melbourne was just over $138,000 and in Brisbane the median house price was $116,000. It was $172,000 in Perth; $96,000 in Canberra, $117,000 in Darwin; $108,000 in Adelaide and $91,000 in Hobart.
Fast forward 10 years
If history repeats itself, as it surely will, while the majority of Australians will sit on the sidelines waiting for things to work themselves out, a group of successful investors will be looking for and buying investment opportunities created by the changes.
Then, when we look back in ten years time we’ll probably remember a decade of economic turmoil, but as always, we’ll wish we had bought more properties when they cost about 50% less when they were “on sale” 10 years earlier.
Of course…you need to buy the right type of property.
One that has a level of scarcity, meaning they will be in continuous strong demand by owner occupiers (to keep pushing up the value) and tenants (to help subsidise your mortgage); in the right location (one that has outperformed the long term averages), at the right time in the property cycle (that would be now in many states) and for the right price.
For more information, or to discuss your specific situation, please contact me directly.
Metropole Property Strategists
Michael Yardney is the director of Metropole Property Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. You may subscribe to his e-magazine at www.propertyupdate.com.au. For more information about Michael visit www.metropole.com.au.
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