Australia’s housing market has experienced a turbulent few years, haven’t they?
The COVID-19 pandemic, extended lockdowns, ultra-low borrowing rates and uptick in supply made many Australians re-evaluate what they wanted in a home… and sell up or buy.
Suddenly first-time buyers were able to borrow more than before and the number of houses on the market surged… and so did the prices.
Fast forward to 2022 and inflation concerns saw the Reserve Bank begin to raise interest rates in order to return inflation to some level of stability.
And 10 interest rate hikes later the market has turned on its head.
Which begs the question - are periods of instability just the fine we pay for getting into the property market or the fee for getting a worthwhile return?
What type of investor are you?
Uncertainty, downturns and volatility can be terrifying…. or, depending on what type of investor you are, it can also present itself as an opportunity.
You see, many investors don’t have the staying power they need to survive, and thrive, through turbulent times.
They get scared, sell up and they lose money.
The current property market is a great example of volatility.
As of February 2023, national house prices have dropped 7.2% year-on-year to $702,705.
In Sydney prices have fallen a much larger 13.8% and in Melbourne prices have fallen 9.3%.
Combine these numbers with the media scaremongering about prices plummeting further, rates and inflation continuing to soar and homeowners and investors increasingly defaulting on their mortgage repayments and it's enough to ignite fear into anyone.
Unless you’re an experienced and strategic investor of course… because this type of investor can see the smoke through the clouds.
Is volatility a fine?
In short, no… and thinking of it this way will negatively affect any investment sense you have.
We’ve seen that property investors are pulling out of the market at a time when a rental shortage is looming.
Annual credit growth thus dropped sharply in the last year, in other words fewer home buyers and investors are taking out new loans, and we can expect the annual figure to drop much further from here.
Property investors tend to become despondent at this stage in the cycle, with borrowing capacity still severely curtailed for many borrowers, even in spite of rocketing rents and rising household incomes.
On the other hand, I can't ever remember a time when we were headed for such a chronic shortage of rental properties, with many instances of rents rising by 25-30% over the past year in Sydney and other capital cities.
So why are investors fleeing?
They’re scared.
Maybe these investors are inexperienced, have no plan, were overconfident or even just simply made bad investment decisions.
And now they're being side tracked by the media.
Many of these investors are looking at volatility as a fine, and this is a natural response for anyone watching their wealth decline.
And the instinct reaction to avoid a further ‘fine’ is to drop investment altogether.
Wrong move.
Suggesting that volatility is a fine for long-term rewards makes no sense - it isn’t a slap on the wrist for doing something wrong.
Yes, volatility is a fee - a worthwhile one
Strategic investors with their head in the right game understand that market volatility is fee for getting long-term results.
Returns are not free.
Nor are they linear.
Investment returns demand that you pay a price (like you would for any other product) and since the returns can be high the risk and volatility can be also.
Volatility is an inherent part of investing and it's how you respond to the volatility as an investor which sets apart those who are successful ones with a multi million dollar property portfolio to those who aren’t successful, or even to those who exit property investing altogether.
You can think of volatility as a bill.
A bill for having the opportunity to get great investment returns.
This is why it's so important to buy an investment grade property
Not all properties make good investments.
And at the moment there is an investment grade property shortage - I consider less than 4% of properties on the market today as ‘investment grade’.
Of course, any property can become an investment property.
Just move the owner out, put in a tenant and it’s an investment, but that doesn't make it “investment grade”.
For a property to be considered as investment grade it needs to tick the following boxes:
The things I look for in any investment (including property) are:
- strong, stable rates of capital appreciation;
- steady cash flow;
- liquidity - the ability to take my money out by either selling or borrowing against my investment;
- easy management;
- a hedge against inflation; and
- good tax benefits.
When it comes to making money off your investment grade property, you have 4 options.
- Capital growth – as the property appreciates in value over time
- Rental returns – the cash flow you get from your tenant
- Accelerated or forced growth – this is capital growth you “manufacture” by adding value through renovations or development, and
- Tax benefits – things like negative gearing or depreciation allowances
But it's important to remember that not all returns are created equal - capital growth is not taxed while rental returns are, and as your property increases in value, the rent increase also generates more cash flow.
So capital growth is a much more important driver of your wealth creation than cash flow.
Above all else, have a plan
Property investments can create significant wealth, but statistics show that 50% of those who buy an investment property sell up in the first five years.
And of those who stay in the investment game, 92% never get past their first or second property.
That's because attaining wealth doesn’t just happen, it’s the result of a well executed plan.
Planning is bringing the future into the present so you can do something about it now!
Just to make things clear...buying an investment property is NOT a strategy.
It's important to start with the end game in mind and understand what you need and what you want to achieve.
And then you have to build a plan, a strategy to get there.
The property you eventually buy will be the physical manifestation of a whole lot of decisions that you will make, and they must be made in the right order.
That's because property investment is a process, not an event.
If you’re a beginner looking for a time tested property investment strategy or an established investor who’s stuck or maybe you just want an objective second opinion about your situation, I suggest you allow the team at Metropole to build you a personalised, customised Strategic Property Plan.
When you have a Strategic Property Plan you’re more likely to achieve the financial freedom you want and you’ll be able to grow your wealth through your property portfolio faster and more safely than the average investor.
And you won’t be put off by the market volatility understanding it’s just one of the costs involved in building a substantial property portfolio.
-
Header Photo by RobinHiggins from Pixabay.
