Learn from history

The conflicting messages in the media lately have left many investors wondering where Australia’s property markets are heading. Even the different research organisations seem to be coming out with conflicting reports about what’s happening to property prices.

 Then there has been increasing concern about economic problems overseas, plus reports of further interest rate rises on the horizon. 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.

Today I will delve into my memory and see what we can learn from previous cycles to help you understand where our markets are heading.

 But before I do I’d like to remind you that 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.

I remember reading a research report from Massey University suggesting that Australian residential property has been the best-performing asset class over the long haul. The study dated back to 1920 and showed that property produced an average return of around 15% per annum (combining rental income and price gains) since that time.These figures don't really reflect how good property is as an investment, as they don'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 far outperforms all other asset classes over the long term.

 But while there's little doubt that property is a potent wealth-builder in the long term, it goes through the same kinds of cycles as other investment classes, which means that the 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.

Think of the ’80s

 Back in the early 1980s house prices across most of the capital cities were stagnant. Melbourne's median house price languished at about $50,000 from 1980 to 1983, then grew steadily but unspectacularly before really taking off in 1987.

 In Sydney, the median house price reached about $80,000 in 1981 and stayed there for the next four years. Perth prices were falling in 1983, and Brisbane house prices were going nowhere after a year or two of 25% returns in the early 80s. It took until 1987 before these property markets all began to boom again.

 After crashing in 1990, property prices in Sydney and Melbourne stayed flat until 1995 and then they started moving slowly upwards. And it wasn't until 2000 that prices in Brisbane finally took off after a decade of growing at 5% or less per year. Interestingly, this was despite a huge influx of immigrants from other states coming to the sunshine state.

 In Perth, a short recovery followed the boom and bust of the late 1980s and early 1990s. The market there ambled along, with annual returns at about 6% until its boom in the middle of last decade, where Perth's median property price overtook all capital cities other than Sydney.

 In the last year or two some of our property markets performed strongly while others languished. Melbourne and Sydney were of course the shining stars, with a couple of years of strong growth.

The lesson to learn from all of this is that as a property investor you must be aware of and prepared for these cycles.

Sure, it's hard when you are in the middle of the flat period of the property cycle, as Brisbane and Perth have been for a few years. But look at the property prices that prevailed 10 and 20 years ago and Look at Property prices today. Property investment is a long-term play – you need to be patient, as values in our major capital cities have doubled every seven to 10 years.

 What causes the cycles?

 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 marketplace is nervous about wealth and the future.

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

 One more thing: there are local, as well as national, property cycles. Each state is at a different stage of its property cycle, and within each state there are cycles within the various suburbs.

What’s ahead for property?

 Eventually the cycle will move on – it always has. 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 sharemarket pick up, more affluent Australians will be back in the market upgrading their homes. Many will be many chasing similar types of property, which will push up values in our more “upmarket” suburbs. As values increase in these innerring suburbs, the price differential between these and their neighbouring suburbs will increase. Soon buyers will start looking 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 beginning 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 the savvy investors who get in early and buy counter-cyclically will enjoy.

 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 1980s and then again in the late ’80s, when people said house prices just couldn’t go up any more. "They are so high our children will never be able to afford a house" was the catch-cry, but prices doubled over the next decade.

 Of course, many are saying the same again now. However, while most of us are sympathetic to the plight of the average first-home buyers struggling to get into their first properties, 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, our castles, are quietly but 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 socio-economic brackets are more likely to be affected by rising interest rates than those with more disposable income.

 What this means is that some areas – particularly new suburbs and the lower-priced suburbs – will perform worse than the more affluent suburbs as the cycle moves on.

 Business as usual

 In summary, our property markets are behaving normally, working their way through their individual property cycles. Within each state the property markets are fragmented, with some suburbs holding their values well and sometimes slowly increasing in value while other suburbs, particularly the outer "mortgage belt" suburbs, languish.

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?

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia's leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.