Episode Details

It is generally an accepted investment principal that diversification can reduce your risk and improve investment returns. The common vernacular is, spread your eggs amongst various baskets. I would agree with this principle, so long as it doesn't result in deterioration of investment asset quality.

Sometimes property investors should not diversify. That's because the quality of your investments, will determine your future investment returns. You cannot expect to invest in average quality assets and expect to generate above average quality returns. If you're going to invest in property, you are much better off to buy one very high-quality property, than two average quality properties.

To be a successful investor, you must invest in the highest quality property that your budget allows.

It is also imperative to recognise that the dollar value appreciation of your property is an important metric which indicates whether you will enjoy a comfortable retirement.

In retirement, we pay for living expenses in dollars, not percentages

The value appreciation of property in dollar terms is an important metric. Whilst we can’t use capital growth to pay for living expenses, unless we sell the property, it still impacts our overall wealth. For example, if a retiree had $1,000,000 of super and wanted to spend $100,000 per year, they risk running out of super within 10 years (ignoring future investment earnings for simplicity). However, if at the same time, their property portfolio was appreciating by $200,000 per year, they are actually in a relatively strong financial position.

In 1991, 30 years ago, the median house price appreciated by around $10,000 per year – which is equivalent to $20,000 in today’s dollars (i.e., after adjusting for inflation). Since the average self-funded retiree spends circa $100,000 per year, this property appreciation ($20,000) is equivalent to 2.5 months of living expenses.

At the moment, the average median house price across Melbourne and Sydney is around $1,000,000. Assuming the median property appreciates by approximately 6% per annum (on average, over the long run), that equates to a dollar value rise of $60,000 (i.e., 6% of $1 million). That is equivalent to over 7 months of living expenses.

Annual property price appreciation in real dollar terms over the past 30 years

The chart below illustrates the historic change in median property price between 1991 and 2021, adjusted for inflation, that is, in today's dollars. The chart also includes a projection of how the median property price might appreciate over the next 30 years, assuming a growth rate of 6.50% p.a. and an inflation rate of 1.50% p.a.

This chart suggests that the median property value might be appreciating at a rate of over a $100,000 per year by around year 2030-2033 in today's dollars. And by 2045, the median property price may be appreciating by circa $200,000 in today's dollars – equivalent to two years of living expenses.

Putting aside liquidity considerations, this suggests that if you're at least 15 to 20 years away from retirement, that investing in one investment grade property could be sufficient to assist in funding your retirement.

What does this mean for investors?

When it comes to investing in property, quality matters a lot more than quantity. The above chart suggests that owning one investment property (worth $1m or more) might be sufficient.

Some investors are obsessed with acquiring a multi-property portfolio. They express their investment goals in terms of the number of properties, rather than their financial performance. Having such a goal does not encourage you to focus