Yahoo Finance Why I never believe the property naysayers (and you shouldn't, either)
Remember a few months ago, when media headlines were awash with ‘doom and gloom’ predictions about Australian property prices?
A number of predictions, forecasts and financial modelling papers were released, and the information contained within them was not good news.
No matter which way you sliced it, property prices were set to crash – some predictions suggested they could fall by as much as 30 to 40 per cent.
So what happened next?
Well, the property market didn’t collapse – did it?
In some areas, property prices have actually increased throughout the pandemic.
This is partly because credit has never been cheaper, which has made the prospect of home ownership far more affordable than it has been in a long time.
With interest rates as low as 2.19 per cent, a mortgage today costs about one-third what it did a decade ago, when the average mortgage interest rate was 6.5 to 7 per cent.
If property prices didn’t crash, what were all of these predictions about, then?
First of all, it’s important to understand that some of these reports were not coming from “dodgy” sources.
No, in fact, it was the opposite: research reports and studies were being released by all sorts of reputable industry groups and organisations, from economists and major banks to the Reserve Bank of Australia.
But just because a prediction, forecast or economic modelling report is coming from a well known or trusted source, that doesn't mean they're always going to be right.
Many economists, research firms and experts are "wrong" every day.
What they are doing is taking a set of data and then they’re using their expertise and analysis to make a forecast, which is really nothing more than an exposition about what could happen.
Nothing is ever set in stone, especially not when it comes to real estate.
Here’s just a few “the sky is falling” property predictions that haven’t quite come to fruition…
32 per cent decline: One of the big four banks, CBA, warned back in May that Australia risked experiencing a 32 per cent fall in house prices, in a worst-case scenario of a prolonged economic downturn. They’ve since revised this to an average peak to trough fall of 10 percent.
40 per cent price crash: When the Reserve Bank of Australia did some financial modelling of what could happen under a worst-case economic scenario, they modelled the impact on households if prices fell 40%. The media went crazy with this headline, and for a few weeks people believed a big crash was coming.
Revised by half: After previously expecting a 10% fall in national house prices between April 2020 and June next year, Westpac chief economist Bill Evans has revised his forecast to just a 5 per cent fall, owing to several capital cities proving to be more resilient.
These are just some of the examples of predictions that haven’t come true.
What happened to the cliff?
Another example of financial “experts” getting it wrong relates to JobKeeper and all of the other financial boosts the government provided, which either ended or were wound back in September.
Many predicted we would fall off an economic cliff and the economy would be decimated come September 30.
Well, we didn’t fall off the cliff as we moved into October, just like we didn’t fall off the cliff that so many nervous Nelly’s suggested would happen when a number of investors’ interest only loans reverted to principal and interest.
All of this said, there’s no denying that 2020 has been a very confusing time – one that has tested the resolve of even the most experienced of investors.
When that feeling of uncertainty enters the picture, I think it’s really important to focus on the facts.
This way, you can work to remove the emotion from the equation and think critically about what you really want to achieve with your investments.
So what are the facts?
Since 2012, house prices have risen around 70 per cent in Sydney and 50 per cent in Melbourne.
Even though property price growth is likely to be lower moving forward, at least for the short to medium term, some areas are still going to grow strongly.
We also know that location will do 80 per cent of the heavy lifting in your property’s performance and that some locations outperform others by 50 per cent to 100 per cent over a decade with regard to capital growth and it's likely to be those liveable locations that will be highly desired moving forward.
The inner and middle ring suburbs of our capital cities are where wages growth will be above average, and these locations are where people are more likely to have multiple streams of income, and can therefore ride out economic uncertainty.
And if social distancing through coronavirus taught us anything, it is the importance of neighbourhood.
While some people will move to regional Australia to have more space, the majority of Australians will want to continue living in our capital cities, but in lifestyle, destination locations which have great amenity.
And it’s likely than in our new “Covid normal” world, people will love the thought that most of the things needed for a good life could be within a 20-minute public transport trip, bike ride or walk from home.
Things such as shopping, business services, education, community facilities, recreational and sporting resources, and some jobs.
And these locations will be high on the wish list of not just owner occupiers but also for tenants, meaning neighbourhoods that provide lifestyle amenity are going to outperform with regards to capital growth and rental growth moving forward.
The inner and middle ring suburbs of Australia’s capital city is already meet these criteria, you will find pure outer suburbs that are able to provide a mixture of lifestyle, amenity and proximity.
Wages growth has been very slow across the same period over the last decade, and moving forward, it is likely that we’re going to have very low, if any, wages growth for some time.
Right now, because of Covid-19, we’ll have low inflation and high unemployment, together with more spare capacity as many workers will be working fewer hours.
To get ahead financially, this means you’ll need a second job – but why get another one where you trade your time for money?
Instead, get a job as a property investor where your money works for you - even when you’re asleep.
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