In the current economic climate, it’s natural for residential property buyers and investors to have fears. They worry about the length and depth of the economic decline. They worry about job stability. They worry that property isn’t affordable or, that if they buy, prices may fall further. They worry about interest rates.
So, how can we get around this and look at things with a different mindset? Some people say that it’s simply a
matter of thinking positively. However, while positive thinking is very important, it isn’t always enough on its own. It should be supported by rational evidence. It’s this rationale that will give you confidence and positivity in the current property climate.
Confidence comes from knowing An important starting point for entering a positive mindset is to lift your vision and know why you’re buying property. Like driving a car, you have to look further down the road, not just at the ground in front of the bonnet. Confidence and a change of mindset will come when you look at four questions:
1. Why should I buy property?
2. When to buy it?
3. What property should I buy?
4. How to buy?
1. Why should I buy property?
The answer to this question is very important. If you’re buying a property because you want to find your dream
home, you may not find it necessary to take the risk to buy at this moment.
Similarly, if you want to buy only one property as a means to make capital gains, you may also be wary as you don’t know the exact timing of future upturns.
As an alternative to both of these, I buy property because I have long-term concern for my financial freedom. For me, this is an obligation.
So the question to ask yourself is: ‘Have I found any solution to make my family and myself financially secure forever?’
I believe that to become financially secure forever property is the unavoidable choice. It’s the one way that the ordinary wage earner can accumulate enough
assets to properly fund retirement. Share portfolios can fluctuate dramatically, and superannuation and cash in the bank may be devalued through inflation.
But if you develop a property portfolio over 20 years – especially for residential property in Sydney – you can retire and know that you’ll receive 5% of the
property as the rental income. This means that if you have a portfolio of properties
worth $2m, you’re likely to get around $100,000 per year in rental income. This presents your future in a positive light.
To do this, you must have positivity and take action to reach your goals. I believe it isn’t the fear of the ups and downs in the current market that are your biggest
challenge; it’s the fear of taking action which makes us reluctant to secure our long-term goals.
2. When to buy?
By setting an obligation to buy, we have already begun to change some of your homebuyer mindset. The next question to ask yourself is: ‘When to buy?’
If you wait for the ‘right’ time to buy you may never buy at all, as it isn’t often that all the comfort zone parameters such as your earnings, affordability capacity, low interest rates and low house prices will
fall into line.
Equally – and quite justifiably – you may well be nervous about forecasts of when, and at what rate, housing prices will climb. Will the forecasts be correct? Will their timing be correct? If I wait too long,
will I miss the bandwagon? The secret of having confidence when purchasing or investing in housing is
very simple. Don’t base your decisions on forecasts, base them on history. Historical long-term trends show two fundamentals:
• over 10-year periods, housing prices always ends up higher at the end than at the point you buy – no matter when that period is. They may go down for a while,
but they’ll always come back up and go to higher peaks
• over the long term, there are always times with high interest rates – but they come back down, so don’t panic. Also know that at every point in Sydney’s history, in particular, housing has seemed expensive in relation to the level of personal income at the time.
So don’t wait for the comfort zone train to arrive – it will never come.
In the 1960s and 1970s, people found fear in the credit squeezes and used the state of the general economy as a reason not to buy.
Before the 2000 Olympics, however, some said you should buy as the economy because after the Olympics, there’d be an oversupply. However, after the Games, the market adjusted and some said the bubble had burst. Others said it was a good time to buy as prices were now cheaper.
However, combined with a decrease in interest rates at the time, property prices rose. Then the interest rate increased and in 2003 the market slowed down.
Until late 2008, people chose not to buy because interest rates kept increasing. Now, the decrease in interest rates means a recession of the economy.
Factors driving property prices
We may never have a time where we’ll be completely comfortable with the prevailing conditions in order to buy property. The important thing to remember is that all these elements should be external to your long-term vision. The key factors which drive the property price remain constant.
Supply and demand
The key driver of increased property prices is the balance between supply and demand.
Australia is in the unique position where – even with a constant growing supply of residential properties – the increase in demand is larger than supply because of the continuous pressure from migration influx, rising birth rates and – in Sydney – the limited confines of available land in the belt from the coast to the Blue Mountains.
These factors ensure that, in the long term, the price of residential property will rise despite the market fluctuations.
Changes in interest rates should only be viewed as short-term factors – and remember that interest rates were in fact much higher 20 years ago.
Construction costs can virtually never come down, so there’s also a firm base on property prices. Unlike shares, etc, they can never become zero.
The national average for investor rental return now sits at 5.0% pa. So if you borrow 80% of the value on your residential property at an interest rate of 7% the difference between what you’re earning on a medium-priced property and what you’re paying out – without a tax benefit – is around $100 a week. But with a tax benefit, it would be much less.is affordable for most. Those selling between $400,000 to $500,000 are the best choice for a strong investment rental return. If you buy too expensive, you may not get a matching rental return.
I’m happy to buy somewhere with very limited land component but with significant construction cost, because in those areas, it’s unlikely that further new projects can be built cheaper.
3. What to buy?
When you’re looking to buy a property – and an investment property in particular – don’t look to buy something fancy.
Buy somewhere with a likely dramatic change of infrastructure, employment opportunities and shopping facilities. Those areas attract people. In addition, buy property with a medium price which is affordable for most. Those selling between $400,000 to $500,000 are the best choice for a strong investment rental return. If you buy too expensive, you may not get a matching rental return. I’m happy to buy somewhere with very limited land component but with significant construction cost, because in those areas, it’s unlikely that further new projects can be built cheaper.
4. How to buy?
Firstly, look to buy with long-term vision. Think about the destination instead of the immediate path in front of you. In the current climate, it’s best to not look for something you might sell next year but something you might hold onto for 10 to 20 years – or even your whole life.
Secondly, buy with a very careful cash-flow prediction. This is very important because property is all about cash flow. If you get a sustained strong cash flow and hold the property for long enough, you’ll always win. You’ll enjoy either capital gains or the rental increase at different periods of time.
Cash flow is the key to success. You need to understand all the variables which include interest, rental and your income.
With tight rental vacancies, a good quality and affordable property should only be vacant for two weeks a year or less between tenants.
To reduce your worry about interest rates, lock it in – and you may be able to get up to 10 years’ fixed interest rates.
Also, if you really fear the market, buy apartments. In a poor economy, houses will decrease in value more than units.
The rationale which can engender confidence is that the fundamentals for buying residential property as investment and the best means of securing your future are as constant now as ever.
The rent and capital gains over the long term from your investment property will enable you to purchase a second property and so on in a continually growing portfolio which will act as your superannuation, providing both a strong capital accumulation and an income stream in retirement. YM