"I'm a great believer in luck, and I find the harder I work the more I have of it."
Thomas Jefferson (3rd President of USA. 1743 – 1826)
Over the last three decades Australian house prices have recorded periods of extreme growth contrasted with periods of weakness. With the benefit of time, the peaks and troughs of house price growth tend to even out, with Australian house prices recording an average annual rate of growth of 8.4% (since 1980).
The Australian property market moves in cycles which are influenced by a wide range of factors including unemployment, interest rates, consumer confidence and of course previous rates of growth that impact on rental yields and levels of affordability on the consumer and particularly business investment.
Over the last three decades Australian house prices have increased at the average annual rate of 8.4%. That’s a pretty decent rate of growth when you consider that prices double every ten years based on an annual compounding rate of 7.2%. In comparison, the rate of inflation has averaged about 4.6% over the last 30 years and 3.2% over the last decade.
Of course, there have been some periods where growth rates have well and truly eclipsed this average rate of growth and periods where prices have underperformed.
As an example of one of the weakest periods for Australian house prices, over the five years from 1990 to 1995 the median house price across Australia increased by just 2.8% per annum. The soft market conditions came at a time when Australia was entering the “the recession we had to have” and unemployment raced upwards from 5.8% in January 1990 to peak at 10.9% in December 1992. Mortgage rates during this five year period averaged 11.75% and peaked at 17%. (And we think interest rates are high now!)
At the other end of the spectrum, the most spectacular five year run was recorded during the ‘boom’ which ran from 2001-03 around most areas of Australia. Despite a slowing in growth rates between 2004/05, the five year period ending July 2005 saw average house price growth of 13.9% per annum. In Rainbow Beach itself, house prices went up in the order of 30% within two years – this growth was unsustainable and has since seen a correction with prices receding approximately 10-15% since the peak of late 2007.
Currently the residential housing market is transitioning out of a strong growth phase, whilst economically the country is just starting to ramp up. Gross domestic product figures show the economy is once again growing at about 3.2%, unemployment is trending downwards, consumer confidence remains high and rental yields are showing the first signs of improvement after being eroded by value growth and lower rental rates during 2009. The Reserve Bank is signaling that they may be forced to increase interest rates as a result of strong inflation figures mostly due to the mining resources boom.
In contrast to the broad market drivers outlined above, we can expect there also to be factors that will dampen market demand. Interest rates are likely to increase at least once over the coming six months after increasing by 150 basis points since October last year. Population growth appears to have peaked and will most likely fall further as the proposed cuts to immigration are implemented and housing affordability is likely to become more of an issue in the larger metropolitan markets around Australia.
For prospective buyers it is worthwhile considering the long term trends in the market. The average length of tenure for Australian home owners is about 7.3 years; a time frame that is likely to smooth out the peaks and troughs of price growth encountered through the cycles. The economic and demographic foundations of the market remain solid which suggests that we are likely to see ongoing improvements in Australian house prices, albeit at a much more modest rate than we have seen in the past five years.
The key to success in investing in the residential property market is having a long term approach. Buying and selling property with a quick turn over approach limits the amount of capital growth the investment will realise and also incurs more costs such as sales commission, legal fees and stamp duty etc.
Purchasing an investment property in a coastal or regional area, as opposed to metropolitan areas, requires research and an ability to withstand the volatility of supply and demand cycles. The yield (rental return) is generally lower compared to properties in metropolitan areas due to demographic constraints. Ie. people living in coastal and regional areas are generally on lower incomes than people living in the city or more built up areas.
Advantages of purchasing a ‘lifestyle investment’ include the ability to utilise the property yourself whilst still having the ability to negative gear the asset and claim associated costs as a tax deduction. For example, you may plan your annual family holiday to include a week’s stay at your own beach side house or unit, whilst holiday letting the property for the remainder of the financial year. You could then claim interest expenses, maintenance and upkeep costs etc associated with the property as it is actually a rental property.
The great Australian dream of home ownership extends to a beach house and many families have invested in a coastal property, some as part of a syndicate or combined family purchase in order to reduce the individual cost of the acquisition. This option may work for many investors and allows individuals the opportunity to ‘get into the market’ with a view to potentially moving to the property permanently in the future or buying out the other parties to own the investment property outright.
There are no guarantees in life and that includes the potential gains to be made from investing in property but the statistics from the past three decades certainly point towards the positive when it comes to capital growth – across Australia and in coastal regions such as Rainbow Beach.
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