Episode Details

They are some of the questions we answer in today's Q&A podcast with Brett Warren.

Question:

Can real estate prices really keep rising considering where they are today? In the past, property values rose because interest rates dropped and prior to that one-income households became 2 income households, and we know financing became easier to obtain, but what will be the driver for future capital growth?

That's a great question and the simple answer is yes property values can keep rising, but not everywhere and not to the same extent as they have over the last year.

Now that I've given the spoiler alert let's dig into this more deeply so that you can understand my rationale behind those answers.

Bank Predictions

The Australian banks don't have a good track record in housing market forecasts.

But if house prices fall by the amounts predicted this time around, that will make it the biggest housing downturn in modern history.

The last time property took a downward turn was in 2018, when Australian house prices plunged by about 5 percent overall.

Prices also fell 4.8 percent in 2011 after a period of post-global financial crisis rate rises from the Reserve Bank.

Those falls pale in comparison to what banks now predict. They are quite remarkable forecasts.

Why would house prices fall?

Currently, Reserve Bank interest rates are low to bolster the economy and stimulate inflation and wages growth.

Once the Reserve Bank believes inflation is comfortably and consistently within its desired band of 2 -3% and unemployment is low enough to cause significant wages growth, then the RBA will slowly raise its interest rates from stimulatory levels to neutral levels.

Of course, there is some conjecture as to how high a neutral interest rate is, but considering the general level of Australian household debt, it is unlikely to require a big rise in rates.

There is no reason for the Reserve Bank to raise rates sufficiently high to create a recession or a housing market crash.

Moving forward some areas will strongly outperform others

If social distancing and the Covid-19 environment have taught us anything, it has taught us the importance of the neighbourhood we live in.

If you can leave your home and be within walking distance of, or a short trip to, a great shopping strip, your favourite coffee shop, amenities, the beach, a great park, the recently implemented coronavirus restrictions might seem a little more palatable than if you had none of that on your doorstep.

That's why choosing the right neighbourhood is important for property investors.

Question:

Thanks for your podcast, I now understand the importance of selecting the right location to do the heavy lifting as you frequently mention, but I can't really afford a home in investment-grade suburbs of our capital cities. Rather than apartments, what do you think of townhouses as an investment?

It's important to understand why we recommend buying investment-grade properties rather than affordable properties, and as you've hinted in your question a lot of this has to do with buying in the right location.

The more affluent locations are likely to be less affected by external influences than the non-blue chip areas.

So, one question you need to ask when buying an investment property is will there be ongoing demand from both owner-occupiers and tenants to live in this area despite what might happen to the world economy, the local economy, or local market conditions?

You should also ask yourself the question are people living in this location going to be earning more income than average, having higher increases in their income than average, and will they be able to pay more to buy or rent in these locations?