How to invest in a booming property market

·12-min read
Property investing in the current market may not be as straightforward as you think. Source: Getty/Yahoo Finance
Property investing in the current market may not be as straightforward as you think. Source: Getty/Yahoo Finance

Australia’s property markets are booming, yet it’s more important than ever to make sure you’re making the right investment decisions.

Maybe that’s why I’m continually being asked questions like:

  • What’s the right property for this stage of the property cycle?

  • Is this the right or wrong time to invest in property?

  • Is it too late to invest this time round – prices have grown so much?

  • Where’s the best place to invest in 2021?

While a rising tide lifts all ships, investing in the current market may not be as straightforward as you think.

In fact, I’m currently seeing a lot of home buyers and investors make some very poor choices.

And as the saying goes, only when the tide goes out do you discover who has been swimming naked.

In other words… while there is little doubt most markets, suburbs and properties will excel over the next couple of years, what about when this property cycle comes to an end?

Will you be one of those people caught out?

Or are you one of those investors who thought ahead to what type of investment would carry you through not only the peaks but also the troughs to reach calm waters on the other side?

First, let's take a look at what is happening.

Read more from Michael Yardney:

- Why being wealthy is different – and better – than being 'rich'

- 3 essential property investment phases you need to know

- It’s cheaper to buy than rent over half the properties in Australia

What’s driving Australia’s property boom?

Simply put, we are experiencing a "perfect storm" of economic factors that are driving prices up at the fastest rate in almost two decades.

Buyers are out in droves keen to get into our rising housing markets, banks are welcoming a raft of new customers through the doors and sellers are being swamped with offers.

Here’s why:

1. Low interest rates

Low interest rates are facilitating change from all types of prospective property buyers, many who are starting to experience FOMO (fear of missing out) and are pushing prices higher and higher.

Australians are upgrading their living situation and it's creating a surge in demand.

Whether its established homeowners moving to better or bigger accommodation, other homeowners upgrading their lifestyle to a 20-minute neighbourhood or regional location further away from the city, baby boomers moving to family friendly townhouses or apartments or even tenants upgrading to become owner occupiers.

2. Rising consumer confidence

The combination of improving economic conditions, increased jobs security plus the sense that we’re getting COVID-19 under control is lifting consumer confidence, which in turn has created continued strong demand for housing.

And as we already know, high demand leads to high prices.

3. Supply versus demand

Buyers are snapping up properties faster than vendors can list them for sale at present which puts further pressure on prices.

This fast ‘rate of absorption’ is keeping advertised housing supply at extremely low levels: CoreLogic’s stats show that despite the rush of new listings, the total number of homes advertised for sale remains roughly 24 per cent below the five-year average.

“Advertised supply remains well below average. This imbalance between demand and supply is continuing to create urgency amongst buyers, contributing to the upwards pressure on housing prices,” according to CoreLogic’s research director, Tim Lawless.

4. Pent-up demand

And it’s not just general supply versus demand issues which are causing the property market boom.

Buyer demand is particularly strong at the moment because it has been pent up for a number of years.

In 2020, COVID-19 held back home buyers who sat on the sidelines waiting to see what would transpire, in 2019 the upcoming Federal election scared off many buyers and in 2018 the Haynes Royal Commission and worries about finance distracted home buyers and investors.

This means there are plenty of buyers who have been sitting on the fence waiting for a reason to either enter the market or take the plunge and upgrade and the current markets as well as the media hype have given them the excuse they’ve been waiting for.

At the same the surprising surge in property values is creating FOMO (fear of missing out) which is driving those buyers to make a move all at once.

5. Demographic changes

Changes in demographics, structure of family life and what we want out of our home also shifted during the height of pandemic lockdowns.

The desire to live in a 20-minute neighbourhood shone through.

This means gone are the days where our ‘home’ was simply the place we rest our heads and enjoy some down time between work and our social lives – the coronavirus social distancing has put an end to life as we once knew it.

If social distancing and the COVID-19 environment has taught us anything, it has taught us the importance of the neighbourhood we live in.

If you can leave your home and be in 20-minute walking distance of, or a short trip to, a great shopping strip, your favourite coffee shop, amenities, the beach, a great park, the recently implemented coronavirus restrictions might seem a little more palatable than if you had none of that on your doorstep.

These days, living, or investing in a 20-minute neighbourhood is vital and the trend is reshaping Australia’s property market as we once knew it, driving price increase in areas which otherwise weren’t in demand.

Fast forward 3 years - what can we expect next?

If we fast forward another 3 years or so, I expect we’ll find that property values have risen significantly - as much as 25-30 per cent higher than at the beginning of this current property cycle.

By then our economy will have rebounded even further, wages will have increased, and inflation will be starting to rise.

This means the RBA will most likely have stepped in and raised interest rates, but only a little.

While the RBA would be thrilled if we experience wages growth of 3-4 per cent per annum, it’s unlikely to be that high.

Most Australian’s take home salary will grow less than that - it’s really been years since we’ve seen that level of wages growth.

However, over the same period, property values will increase at double digit rates of growth each year.

This means that property will become unaffordable, or even more unaffordable, for many Australians.

At the same time, the gap between rich and the average Australian will keep widening as people with skill level 1 and 2 jobs (the higher income earners) will experience much larger wages increases and generally they will have multiple streams of income meaning affordability will not be as big an issue for them.

In other words, moving forward properties will become more unaffordable to some (in fact to most people), yet they’ll still remain affordable to wealthier Australians who will be able to, and be prepared to, pay a premium to live in the best locations.

But the good news is there is something you can do NOW to ensure you make the best investment decisions for the future and end up owning the right types of properties once this cycle is over.

Make way for a 2-tier property market

When this property cycle ends, I believe we’ll be left with a 2-tier property market.

This is because on one hand there will be the more affluent people who will be able to afford to live in the more expensive discretionary, established money suburbs or the up-and-coming gentrifying aspirational suburbs.

On the other hand, we’ll have the majority of Australians who will find property unaffordable as they’ve only experienced slow or stagnant wage increases.

This means moving forward we’re likely to see a larger percentage of Australians unable to enter the property markets as owner occupiers and those who can get a foot on the property ladder will be flung out further and further from the centre of our capital cities.

Of course this is a social issue and may lead to social unrest, but that’s something we have no control over.

Own the right property

The key takeaway is that if you want to ensure you end up owning the right type of property when this cycle comes to an end, you’ll have to make the right investment decisions today.

Unfortunately I’m finding that many investors are currently making poor investment decisions, sometimes because they don’t know any better, but often because they’re taking shortcuts because of Fear of Missing Out, which is likely to leave them burnt further down the track.

You see… buying the wrong property not only affects your investment purchase today, but it will affect your capacity to create wealth over the next 5, 10 or 15 years.

Your future financial freedom will depend upon the quality of the assets you own, and you can’t expect above average investment returns from a secondary property.

This is not only important for when this property cycle finishes, but it will be critical to own investment grade assets when you plan to retire in 10, 15 or 20 years’ time.

That’s when you’ll want the income from your properties to pay for the longest holiday of your life, your retirement, as well as support your future generations.

So where should you invest?

It will be important to invest in the type of locations where not only more affluent owner-occupiers live, but where more affluent tenants will want to live, because they’ll be able to pay increasing rent over time.

Remember, there are two types of tenants.

  1. Those that rent because I can’t afford to buy a home, and

  2. The more affluent tenants who rent for lifestyle reasons.

So I suggest investing in:

1. The “established money” suburbs

This is where many owner occupiers have been living for 20, 30 or even 40 years and have “old debt”, and in fact, minimal debt against their homes.

These suburbs are the opposite of the new money suburbs where many first home buyers typically have little equity in their home and are often only one or two weeks away from being broke.

  1. The aspirational suburbs

This is where higher income earning millennials are moving to, with new money and in turn are upgrading, improving and gentrifying these locations.

These are likely to be the next ripple of suburbs out from the established money suburbs – they’re the middle ring suburbs of our capital cities.

These will also be the suburbs where more affluent tenants choose to live.

Location, location, location. Some suburbs are more sought after than others. Source: Getty
Location, location, location. Some suburbs are more sought after than others. Source: Getty

And I would avoid investing in

The outer, cheaper, less affluent suburbs which are unlikely to gentrify in the medium term as that’s not really where the wealthier people want to move to, or live.

This means the homeowners in these areas will never develop the type of wealth that those who own properties in the inner and middle ring suburbs of our capital city will.

Similarly, investors buying in those areas are going to miss out on the strong capital growth they could have experienced by buying in “investment-grade” locations.

What type of property should I invest in?

It’s all very well knowing where to invest, but that’s only half the challenge.

If you want to take advantage of this current property market you must also buy the right type of property in those right locations.

This means that if you buy cheap properties, rather than the type of property that will be in continuous strong demand by skill level 1 and 2 workers (those with higher wages) you’re likely to have less capital growth.

In general, this will mean owning townhouses, houses, and family friendly apartments rather than cheap apartments in high-rise towers or Legoland look alike houses in the outer suburbs, or properties in regional Australia

The problem is during this current property boom almost all properties are increasing in value, which is disguising bad investment decisions.

This means at the moment people who have bought the wrong properties still think they’re doing well.

But their bubble will eventually burst when they realise their mistakes in 5-10 years’ time.

Now don’t get me wrong… I’m not suggesting we’re in property bubble that will burst.

What I’m saying is that those who invest in secondary properties will eventually realise they have paid a huge opportunity cost in lost capital growth.

My strategy is to invest for capital growth first, rather than for cash flow. That’s the only way you’ll ever build a substantial asset base.

While you need cash flow to keep you in the game, it’s really only capital growth that will get you out of the rat race.

Sure buying “cheap” properties in lower capital growth, less expensive suburbs or in regional Australia will deliver more cash flow to start with, but these so-called cheap properties will be more expensive in the long run because they won’t allow you to achieve your financial goals.

Fact is, you won’t be able to replace your income with the type of cash flow you get from cheap properties – the type where it will be harder to get rental increases.

Make sure you think to the future

If you don’t have a strategic plan around your investing your chances of building a substantial property portfolio will be much lower.

Yet, I’ve found that most investors only think about the next five or 10 years, rather than what type of property they want to own when they eventually retire in 20 years or so.

But think again.

Do you really want to own a property that will be 70 to 100 years old then and out of date?

Is this the type of property which is going to let you live off its income for the next 30 years or so of your retirement?

Is this the type of property you want to pass onto your children and grandchildren?

My guess is not.

But invest wisely now, you’ll thank yourself for it in the future.

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia's leading experts in wealth creation through property and writes the Property Update blog and hosts the popular Michael Yardney Podcast.

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