Is It The Right Time To Buy An Investment Property?

There have been mixed messages in the media lately leaving many investors wondering where our property markets are heading. Even the different research organisations seem to be coming out with conflicting reports about what’s happening to property prices, so it’s no wonder so many investors are wondering what comes next?

The problem is that many of these investors have not owned properties throughout a complete property cycle and this makes them uncomfortable as we move through the various stages of the cycle. Today I thought I’d go back and see what we can learn from previous cycles to help you understand where our markets are heading.

While we’re currently in the slower stage of the property cycle, the bottom line is that as a long term investment, property is hard to beat. Over the past 80 years the average increase in property in Adelaide has been around 8%.

Now this figure doesn’t really reflect how good property is as an investment as it doesn’t take into account the power of leverage and the higher returns you can obtain on your own funds. When you factor this in, property looks pretty good compared to some of the other options over the long term.

Don’t get me wrong, while there’s little doubt that property is a potent wealth builder in the long term, it does go through the same kinds of cycles as other investments which means that those reported high long term average returns take into account periods of very high growth and also periods when property went nowhere for a few years.

Here’s a good example of that – People who invested in the Melbourne or Sydney property market at their peaks in 1989 would have seen the value of their properties stagnate, or even fall, over the next four or five years. I speak about Interstate properties as the margins varied greater in those states.

Now let’s go back in time here in Adelaide, there was a major rise in property prices between 1982 and 1984, and then growth slowed, before values only grew around 5% for most of the 90’s until 2000.

The lesson to learn from all of this is that as a property investor, you must be aware of these cycles as it’s hard when you are in the middle of the flat period of the property cycle.

Look at what the property prices have done for the past 10 and 20 years. Property investment is a long term play and you need to be patient, as values in our major capital cities have doubled every 7 to 10 years.

What were the factors behind those cycles?

It’s the old story of supply and demand. Property prices are pushed up by the demand created by a healthy economy, by high levels of employment, population movements caused by migration and immigration and positive market sentiment.

They are dragged down when the economy performs poorly, when interest rates rise, when employment and immigration figures fall, when supply exceeds demand and when the market place is nervous about their wealth and their future.

Cycles are an inevitable part of any investment market and our property markets are behaving normally at present.

Each state is at a different stage of its property cycle and within each state there are cycles within the various suburbs. You will need to know which suburbs are ripe for the pickings and which ones to stay away from for now.

What’s ahead for property?

Eventually the cycle will move on as it always has and traditionally the more affluent suburbs tend to perform well at the beginning of the property cycle and that’s what is likely to happen again this time around.

As our economy and the share market picks up, more affluent Australians will be back in the market upgrading their homes with many chasing similar types of property pushing up values in our more “up market” suburbs.

As values increase in these inner ring suburbs, the price differential between these and their neighbouring suburbs will increase. Soon buyers will start looked for ‘bargains” in these adjoining suburbs and the increase in property values will ripple out to the middle ring suburbs.

This increase in property values and higher rents will start to draw investors back into the market. However many beginner investors will hold back at this early stage of the property cycle, waiting for more signs of certainty.

Of course while they are waiting many will miss out on significant property price growth unlike the savvy investors who get in early.

What about affordability?

Every cycle I hear the cry, “Property prices are too high! They can’t keep going up like that.”

I remember it in the early 90’s and then again in the late 90’s when people said “house prices just can’t go up any more. They are so high our children will never be able to afford a house”!

But prices doubled over the next decade until they again said the same in 2003 as prices rose through the boom that started in 2001.

Of course many are saying the same again now however, while most of us feel bad for the average first home buyer struggling to get into their first property, I feel that even if they don’t admit it, secretly most home owners enjoy hearing how house prices keep rising.

Those of us already in the game, take comfort from the fact that our homes, are consistently increasing in value, and deep down we hope this continues because not only does it make us feel wealthier, it actually makes us wealthier.

There is no doubt that affordability will be an issue for many in the future and this will limit the growth of property prices in some areas more than others.

For example first home buyers and those in the lower purchasing brackets are more likely to be affected by rising interest rates than those with more disposable income.

In summary, our property markets are behaving normally working their way through their individual property cycles. These cycles mean there are great opportunities out there for property investors who are selective and think long term.

Are you ready to exploit the opportunities that will arise? If the answer is yes or if you want to discuss the point above further, let’s chat,

Thanks again for taking the time to read my article and just a reminder that if you know anyone that you think would like to talk to us, make sure you register both your names on the rewards programme page so we can thank you with a real reward – cash.

Till next time, take care

Cheers Fred