For the property investor predicting the market as we go into 2014 and beyond, it is worth looking both backwards and outwards to see where the growth and opportunities have existed and where the pitfalls have tightened the noose around the necks of Australian investors.
Looking backwards, Australian property has shown trends that have repeated themselves decade after decade, with perhaps one small anomaly in the nineties and noughties. This was Australia’s financial deregulation which gave us international clout and a lower interest rate environment.
Looking outwards we can see Australia has a robust international growth economy. We should take pointers from countries beyond our borders and stop looking inward for direction on where growth in property will reside.
Australia now has a few rules for property investors, and these rules shouldn’t be broken.
Buying in a great index will pay dividends
As a relatively young country, Australia is still finding its feet. As populations grow, we’re starting to see a trend in urban living, as more and more people migrate into the cities. Approximately 84% of Australians reside in an urban environment and this is on the increase. Looking into the future, there is absolutely no reason why this would change.
Investing in property is no different to investing in anything else. Invest in a good index. A great index for those trading in shares, for example, might be mining. In property investment vernacular, a great index might be Sydney, Melbourne or, more recently, Brisbane.
Australia will continue to struggle with a housing shortage
Australia currently carries the burden of a 228,000 (abs.gov.au) home shortfall. This won’t be corrected overnight, and Sydney and Brisbane carry the lion’s share. In fact, with NSW/Sydney there’s some 89,000 homes short and QLD/Brisbane 83,000; that equates to over 75% of the country’s shortfall.
We should expect Sydney to perform very strongly into 2014, with a ‘lag effect’ on the western suburbs which might even run into 2015. Unfortunately for Sydney it has an Achilles heel, which is its affordability. Whenever property prices increase, affordability issues never seem to be far behind. By my own calculations I see another 10-15% growth in Sydney’s more urban suburbs and perhaps 20-25% in more outer lying suburbs.
This might sound like a bullish statement and a reason to invest in the greater west, but for western Sydney residents this is simply long overdue capital growth. On the downside, I don’t see this level of growth persisting before affordability also becomes an issue, and a general stabilising of prices might create a small decrease into 2015.
One would be wise to see where organic capital growth is turning into speculative capital growth.
It’s key to keep an eye on interest rates. Keep in mind that interest rates aren’t at emergency lows because we are in normal times – so it will be with a heavy heart that they will lift rates, and trust that they will.
Any rate increases will be forecast well in advance to reduce the impact. This should give the market time to shift and consolidate debt, ensuring that there isn’t too much pain that might encourage panic selling. And it’s those investing in property at this late stage who will sadly feel the pain.
Read the RBA board minutes and take notes of the triggers ahead. These will probably not play out until 2015, although investors should be aware of the warning signs of a bull market, which we could already be seeing in inner Sydney and inner Melbourne.
This leads me to my biggest, and up until now, secret tip to Australia’s best buying in 2014.
Unfortunately, the smart money has already entered two of Australia’s worst performing property markets over the past five to six years: Brisbane and the Gold Coast. Brisbane’s woes can be easily explained – two devastating floods after our Global Financial Crises. As Australia’s fastest growing city with a bustling population of 2.2 million, it sits as Australia’s fifth most expensive city. I expect that to change in 2014, with an already creeping growth in the star performing suburbs such as New Farm, Tenerife, Hawthorne, Spring Hill and Hamilton. The growth in Brisbane is organic and simply catching up to what it is already due…
Excerpted from an article originally published in the Nov/Dec 2013 issue of Think & Grow Rich Inc. magazine. If you are a subscriber to Think & Grow Rich Inc. magazine, you will receive this article in your Nov/Dec 2013 issue of TGR. If you are not a subscriber, click here to subscribe.