Why property investors should not be worried about values falling: Michael Yardney
With flat or falling property markets around Australia for the last few years, many property investors are worried and wondering: "What will my property be worth next year?"
Every Monday they look at the auction clearance results, and each month they check on median property values. While it's not as bad as watching your shares fluctuate in value on a minute-by-minute basis, this short-term focus is unhealthy for investors, who are generally in it for the long-term.
I think a better question to ask would be: "What will my property be worth in 10 years’ time?"
The scary thing for some is that there are still commentators out there suggesting property values won't rise for another decade. “Just look at the financial mess the world has got itself into,” they say.
Then there are those overseas gurus who predict the world is about to go through an economic tsunami that will finally swamp Australian property, taking prices all the way back to where they were a decade ago.
Of course there's nothing new about these property pessimists – they've always been around, and they've always been wrong.
Look what happened over the last 10 years
The value of well located capital city properties have more than doubled over the last 10 years despite the introduction of the GST in 2001, the dotcom share market crash, going to war in Iraq, a change in government, periods of high interest rates, periods of low interest rates and the world's worst economic downturn since the Great Depression.
I'm sure more Australians would have bought properties 10 years ago if they knew what would happen to values over the next decade.
Of course I don't know what's ahead in the next 10 years, but I do know that there will be just as many hurdles to jump over.
Australia is well-positioned for the future
While many parts of the world are in economic turmoil, Australia's economic fundamentals suggest the next 10 years are going to be just as good, if not better, for property than the last 10 years were.
Our economy is the envy of most other developed nations, unemployment is low, our banking system is sound, our population is growing and on average we are the wealthiest people in the world.
Putting all this together means that property values are once again likely to rise significantly over the next decade.
But if history repeats itself, and it will, during that time we will have another property boom, a further property slump and most likely another economic downturn.
To safely steer through the next decade to the point where their property values will have once again double, strategic investors will need to stop worrying about the "market noise" and not be intimidated by the small stuff, like interest rate increases, tax issues and the negative news in the media.
Instead, they will need to focus on the big picture.
So what will Australia look like in the future?
Our population will keep growing as skilled immigrants come to Australia to take up the jobs that will be created as well as replacing the retiring baby boomers.
According to a report from research firm IBISWorld, the average Aussie in 2025 will be greener, live in a city apartment with a balcony and shop on the internet.
The research shows that increased urban sprawl, gentrification and multi-occupancy housing will continue to be the big housing trends in the coming 10 years.
The population of all our capital cities will increase significantly, but looking towards 2025 Western Australia is expected to exhibit the strongest population growth, adding an additional 1 million people to its population over the next decade.
In terms of types of residences, the report suggested that property price increases, combined with family and lifestyle factors, will drive a trend towards apartment and high-density living. More Australians will be trading in quarter-acre blocks for balconies in the future.
The increasing average age of marriage (now 29 for females, 32 for males) and the trend to wait longer to have children is another factor fuelling the shift towards apartment living – with young people opting to live in close proximity to work, entertainment, dining and public transport.
It becomes fascinating when you consider that Melbourne and Sydney may each require around 30,000 new apartments over the next 10 years. This is equivalent to 150 high-rise buildings, each accommodating 200 apartments. Things will get interesting because while Australians request less urban sprawl, they also want less high-rise living, so the idealistic preferences will have to give way to reality.
It is likely that we will have more decentralised development in the future with the emergence of medium- to high-rise residential buildings in the suburbs rather than just in the inner-suburban areas. These will occur around public transport terminals, railway stations and possibly conjunction with large shopping centres. We will also see the continuation of the trend of integrating medium-density residential development with existing strip shopping centres.
What should a property investor look for?
What this boils down to it that over the next 10 years conditions in our capital cities are likely to be even better than we experienced over the last 10 years and overall properties will increase in value by billions of dollars a year.
If you want to develop financial independence through real estate it will be important to own the type of property that will be in continuous strong demand in the future, and particularly the type of property that will be in demand by owner-occupiers (who are the ones that push up property values) rather than what tenants will want. I’ve found there are always tenants for all levels of property, and this is likely to continue in the future as affordability of well-located apartments will become an issue for more young buyers.
It will be interesting to look back in 10 years’ time and see how things pan out.
In the meantime, strategic investors will take a big picture view, buy more located properties and see the value of their portfolio steadily increase.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is best-selling author, one of Australia's leading experts in wealth creation through property and writes the Property Investment Update blog. Subscribe today and you'll receive a free video, The Golden Rules of Property Investment.