Is it time to be fearful or greedy in property?

When master investor Warren Buffet said: “Be fearful when others are greedy and be greedy when others are fearful”, was he encouraging the strategy of countercyclical investing?

But with all the mixed messages out there today, some even suggesting we could be in for a recession, what should an investor do today – be fearful or greedy?

I’d like to give you my thoughts on this with a lesson from history…

Twenty years ago few would have thought of property as a good investment.

It was 1993 and interest rates had come down 3% over the last two years as the Reserve Bank tried to stimulate the economy and our faltering property markets.

By the way, this brought rates down to 10%, the lowest level they had been for 13 years.

Australia was just coming out of the “recession we had to have”, there were too many properties for sale, buyers were scarce and some properties, particularly in top-end suburbs, had plummeted in value.

A few years earlier on Black Monday of October 1987, a stock collapse of unprecedented size hit Wall Street.

However, while the stock market recovered, the lumbering savings and loans industry in the USA (which financed many American homes) was beginning to collapse, leading to a property funding crisis which put the financial wellbeing of millions of Americans in jeopardy.

The financial contagion spread to other financial sectors and led to a recession which hit other countries whose economies were previously healthy but were economically closely linked to the United States. This included Canada, the United Kingdom and Australia.

Is this beginning to sound a little familiar?

What was happening in Australia?

In mid-1993 you would have paid around $173,000 for a typical house in Sydney, $138,000 in Melbourne, $121,000 in Brisbane, $102,000 in Perth, $156,000 in Canberra, $110,000 in Adelaide, $96,000 in Hobart and $132,000 in Darwin.

But over the next two decades the value of many capital city properties around Australia tripled, underscoring the wealth of many of today’s Baby Boomers and creating significant property empires for those who took property investment seriously.

Interestingly, today’s property markets look surprisingly similar to those of 20 years ago.

And just like then, many of the same arguments are being floated by analysts explaining why property values can’t keep increasing as they did over the previous 20 years.

I accept that much of the gains over the last 20 years were related to structural changes that will not be repeated.

The Reserve Bank kept inflation within a narrow band, meaning interest rates could fall at a when time banks were deregulated and allowing new non-bank lenders like Aussie John Symond to make cheap finance available for borrowers.

At the same time wages grew and there were more two-income households. This allowed more Australian families to buy new homes or upgrade their existing homes as their families grew.

Why our property values are guaranteed to increase in the long term

Don’t get me wrong, I’m not suggesting we’ll have widespread double-digit growth in property values (even though some suburbs will enjoy it). But we don’t have 7-8% inflation like we had in the 1980s, which required those types of capital growth rates to produce a real (after inflation) rate of return.

With household incomes likely to grow between 4-5% per annum there’s no reason to think that property values won’t increase by at least that much and probably much more.

It’s important to understand that while many factors like interest rates, supply and demand and market confidence, affect a country’s property prices in the short term, in the long term prices are driven by two main factors:

• Population growth, and
• The wealth of the nation

In Australia, strong future population growth is a given and, as a matter of fact, so is our increasing wealth. This is positive news for the long-term growth of property prices.

The fact remains that as long as people keep having children and residents from other countries seek to settle on our shores, Australia’s population will keep growing at a rate faster than almost every other developed nation. In fact, we need these immigrants to take on the new jobs created by our growing economy.

On top of that we are going to need whole cities of new immigrants to replace the 5 million or so Baby Boomers who are going to leave the workforce over the next 15 years. They will boost our country’s economic wellbeing through revenue raised from income taxes and all the goods and services they will buy. And yes, that includes property.

Of course, this means with more and more of us wanting to live in the same four big capital cities, and even in the same suburbs of those capital cities, our old friend the supply and demand ratio will keep pushing up the value of well-located inner-suburban properties.

Inevitably this will make property unaffordable for some of who will remain tenants, however others will be able to afford these higher-priced properties.

It also means that apartments are likely to become the style of housing in strong demand as more people swap their backyards for balconies. They will do this partly because of cost but also because of lifestyle choices.

While nothing in life is guaranteed, if like me you are confident that Australia has a prosperous future, and you agree that our population is going to keep increasing and that most of us are going to want to live in much the same parts of our lucky country, then you can understand why I see a strong long-term future for our capital city property markets.

Sure there is a risk in buying property, but don’t forget there is also a different risk in not buying.

Michael Yardney is a director of Metropole Property Strategists, who create wealth for their clients through independent, unbiased property advice and advocacy. Subscribe to his Property Update blog.