I’ve been an investor for more than 50 years now and house prices at a particular time are something I’ve never been interested in or paid much attention to.
I’ve never thought “should I buy now?” because I just read a headline to say that prices in my area are soaring.
So many people ask me: “What do you think the market is going to do?”
My answer for the last 50 years has been fairly consistent: I don’t know. I don’t care. I always buy the best property I can afford whenever I have the money.
Why does it concern you? If you did know what was going to happen, what would you do and why?
The idea that you can predict what house prices will do at any point in the “cycle” is one of the myths that catches property investors out.
Here are a few others.
Myth Number One.
Generally, investors think that the big cities will be better to invest in because they falsely believe that prices rise faster there.
When I have been doing my research over the last 40 years or so, I have formulated a graph of average prices in all the main cities in Australia from 1981 onwards. The graph shows how much, on average, each area increased in value per year.
Over time, they all had a very similar increase in value. From 1981 to 2007 each of these 18 locations increased by an average of between 7.1 per cent and 9 per cent over that 26 year period. The average was 8.2 per cent average increase per year, which was somewhere in the middle.
When I redid all the numbers last year (ignoring the unusual increase for 2021 – 2022) it was all fairly similar.
While prices went up somewhere between 7 per cent and 9 per cent a year from 1981 to 2007; in the last 14 years, all locations went up a lot less but the sudden increase last year will have evened it out.
Sometimes, one area will increase more for a few years, then stagnate and even drop. But eventually any reasonable size city (I’ve often said – invest in any location with at least 100,000 population, so long as it is not one industry reliant) will be very closely in line with any other city.
It’s really about where is still affordable and where can I achieve the better ROI.
Myth Number Two.
Some people will tell you to only buy property in the best location in each city, not the cheaper areas and suburbs, because you won’t get the same capital gain. Again, simply not true.
If you look at Brisbane, the more expensive suburbs like St Lucia, Hamilton, Ascot, Bulimba and New Farm compared to the Logan area, the ratio between the cheaper areas and the expensive areas is the same as it’s always been. However, the ROI (return on your invested capital) will often be better in the lower socio economic areas.
Everywhere is the same; the outer suburbs will stay in-line with the inner city prices over time.
If you look at any big city in Australia, you will have the better, more expensive, areas and also the cheaper areas where more people rent than own. But, over time, the prices move at the same rate with any market price changes, up or down. Often, the cheaper areas provide better cash flow with more stable long term tenants as many can’t afford to purchase their own home.
Myth Number Three
The third myth held by a large number of investors is that you need capital gains to become financially free. They think that you need gains to increase your equity in order to borrow more. While that obviously does help, it is not necessary at all.
The purpose (to me) of investing is to put up a deposit and then have the tenants pay off the mortgage for you, over time. That’s it. How many you buy is determined by how quickly you can get the next deposit together and what your overall borrowing capacity is. This is where rental income and cash flow from your job or business is essential. The higher the cash flow, the quicker you can save more deposit.
For me in early 2000, I bought and sold (traded) many properties, which should have created deposits for long-term buy and holds.
Looking back, the income created by doing this didn’t even add one dollar to my retirement fund because it was mostly spent on lifestyle, tax and expenses.
You may also save money from a high-paying job, a business you own, working extra hours, a secondary job etc, all sorts of things.
It’s a matter of how many rental properties you want to own. In reality, 4 debt free properties should provide adequate income for a comfortable retirement but it is not necessary to stop there. The first one is the hardest. After that it is an ever reducing buying cycle provided your funding is aligned with your strategy.
Also understand the more debt you have, the lower your loan-to-value ratio should be. Remember to leverage existing equity in your portfolio to speed up the process.
When I started investing around 23, I was borrowing at 95{830d1043633127e1fb46cc80e8e725429e813d4a1f208e7acb534f94035a1f28} LVR. In my 60’s, I was down to around 45{830d1043633127e1fb46cc80e8e725429e813d4a1f208e7acb534f94035a1f28} LVR and now, being semi-retired my debt level is under 10{830d1043633127e1fb46cc80e8e725429e813d4a1f208e7acb534f94035a1f28}.
How you get wealthy over time is by first of all leveraging using the banks money, then paying the loans off and building equity as fast as possible.
The tenants pay the mortgages off for you over time. How many properties you own and the value of the mortgages being paid down, will determine a lot of your net worth. However what the prices of the properties may or may not be at the end when the loans are all paid off should be irrelevant. The cashflow is what’s important, because that will provide your retirement income, not so much the overall value of the portfolio.
You have no control of what the values will be, so there is no point in being concerned about it.
Myth Number Four
Just because your city had a big increase in prices over the last 12 months, two years, five years or however long does not mean it will continue.
In many people’s minds – what has already happened in the past equals what will also happen next year, the year after and the year after that!
Up until mid-March 2020, in my more than 50 years of investing in Australia, there had never been a pandemic or a lockdown which prevented people leaving their homes for anything but the bare essentials. So, based on that it would be okay to assume that it will never happen. However, it did happen and sometimes unexpected things do happen to all of us.
Property is not about timing the market, it’s about time in the market.
It’s not about trying to work out what you or anyone else thinks will happen to market prices in your area.
It’s also not about trying to work out which suburbs in your area will increase in value more than any other suburb.
And it’s not about trying to pick various locations in Australia that you think will go up more than any other area.
There are still people today that haven’t bought anything, waiting for a big crash that may or may never happen. Even if prices were to drop 10{830d1043633127e1fb46cc80e8e725429e813d4a1f208e7acb534f94035a1f28} or even 15{830d1043633127e1fb46cc80e8e725429e813d4a1f208e7acb534f94035a1f28}, provided the property is rented (in the current market, it would only need to be slightly better than a tent) and it is paying for itself, what is the challenge. All they focus on is the doom and gloom articles that are written by journalists attempting to get more exposure with negative headlines which generally have very little supporting facts.
It is so simple; buy a property as soon as you are able to fund it. Financially, it must make sense based on where things are at today. Do the numbers work for you. Does it make sense now or doesn’t it? Forget the emotion and other peoples negativity and opinions. Nothing else matters.
