Property myths busted – Part 1: property prices, capital growth, housing affordability and land size (Ep.71)

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In this week’s episode, Dave, Cate and Pete take you through:

Market update – rate cuts and consumer sentiment. The trio share their thoughts on the whispers of upcoming RBA rate cuts tipped to occur over the Melbourne Cup weekend, the downward pressure on the 3 year bond rate and how long into the future low rates will stay in place. Plus, the recent surge in consumer sentiment, despite being in the thick of a global pandemic.
Myth 1: Property prices always go up. What goes up, must always come down and property markets are no exception, (but they rarely bottom out at the same level that they started). Like any market, property prices will fluctuate on the basis of supply and demand and the institutional intervention that influences these factors. Beware of one trick ponies and cities that are heavily reliant on the success of only one particular industry.
Myth 2: Property values double every 7 to 10 years. This may have been true once upon a time, in a land of high interest rates and strong inflation. But the property landscape is vastly different now. For property to double every 7 years, you’d need annual capital growth of 10.28%. So, how long will it really take for values to double? The trio share their insights.
Myth 3: Picking a good suburb is the key to property success. There is much more to selecting a great asset than simply picking a good suburb and buying whatever you can get your hands on. There are markets within markets, and compromising on quality to get into that blue-chip suburb can lead you astray. Not all property is created equal and that means that not all property in the same suburb increases at the same rate of capital growth.
Myth 4: Housing is unaffordable nowadays. Calling all millennials – put the avocado down and listen up! Housing affordability is more than just looking at current property prices and lamenting that the aspirational, forever-house of your dreams is out of reach. Affordability comes down to the percentage of your wage that goes towards your loan repayments, but what is the hardest part? Getting the money together for a deposit, in order to get your foot on the first rung of the property ladder. Choose wisely and you can leap frog into your ideal home.
Myth 5: All good property opportunities are taken. From capital cities, ‘huburbs’ and regional centres, there are hidden gems everywhere. The location may not be glamourous right now, but that’s the point, each swan started out as an ugly duckling. The Planner, Buyer and Professor share the signs to look out for on the hunt for gentrification.
Myth 6: Big land is more important than location of land. Unless you have a goal of subdividing, this belief is a furphy. Location is the most critical factor that influences capital growth, and a smaller block of land in a great location will often outstrip a full block of land on the fringes of the capital city. Land to asset ratio is key!
And of course, our ‘gold nuggets’

Resources:

Market update– the Property Planner, Buyer and Professor’s insights

Anticipated further rate cut, widely tipped to be over the cup weekend. Governor Lowe: financial stability concerns from ultra-low rates are overridden by low rates bolstering private sector balance sheets and reducing problem loans. What they’re saying is that this time low rates will be a positive for something they are normally concerned about.
Interest rates will not be increased for the next 3 years. So, people can be assured that they will be paying very low interest rates for a while.
Putting downward pressure on the bond rate, to match the cash rate, which is why fixed rates have been so low. When they dropped rates from 0.25 to 0.1 we’ll see the 3 year bond rate drop down to 0.1 most likely.
The Westpac-Melbourne Institute Index of Consumer Sentiment surged by 11.9% to 105.0 in October from 93.8 in September.

Show notes:

Property prices always go up
What happens to property prices after recessions or great economic shocks – even though in most years, property prices go up, what we found in 2011 is that property prices went down, when the stimulus finished.
In 2018 property prices dropped in every capital city except for Hobart.
In the long-term yes, but what we find quarter to quarter and year to year, is that property prices fluctuate, for many different reasons.
If you’re holding for 10 years plus, you’re an investor, if you’re holding for less than 5 years, you’re a speculator
Perth mining boom and property boom, every man and his dog wanted to get into the Perth market – in 2006. Now we’ve had a decade for negative prices. The jungle drums are beating for Perth again, but people have had to be very patient
Darwin is in a similar boat, property prices are much lower than they were years ago.
Perth and Darwin have something in common, and that is that they’re both heavily reliant on resources. If the resource market is not good, neither is their economy or property market.
Generally speaking, investing in property is a long-term game. You have to be really careful of cities and towns that are one trick ponies.
Markets have slightly varying cycles, check out employment opportunities and the growth drivers that move the economy. How long-lasting are they and how likely to fluctuate?
Property doubles every seven to 10 years
In the past it did, with high interest rates and high inflation. At the moment we have low interest rates and technically negative inflation.
Property professor research shows it takes 15 years for property prices to double.
The key difference is that we don’t have the same rate of growing household income, where women were just starting to get to work and add a second income to the household.
Where there is still movement is wage parity between women and men.
Labor reply to the federal budget suggested that families with incomes up to $530,000 would get childcare support. Those types of policies would help grow the wage parity.
Not every piece of land grows at the same capital growth rate – that’s just not true. There are markets within markets and every property is different. You need to pick the right property, in the right street, in the right suburb.
Use the rule of 72 for capital growth– if someone is telling you that your investment will double in x amount of time. Divide the number 72 by the number of years and that is the average growth you need each year to achieve doubling in value. Eg: 72 / 7 years = Ave capital growth of 10.28% p/a.
- To give you more of an idea let’s say 10 year – 72 / 10 years = Ave capital growth of 7.2% p/a. That is more achievable and more realistic.
- The average capital growth rate would be 6% – the property would double every 12 years or so.
Picking a good suburb is the key to property success
There is more to selecting a great asset than simply picking a good suburb
‘The market’ Australia is not one homogeneous market place, it is made up of many markets, each suburb can have submarkets for different pockets. Different assets are found within each sub-market. It is not just about selecting a winning suburb.
If you’re priced out of a blue-chip suburb, there are ways to get in there. But it’s a terrible idea. If you’re compromising to get in to a blue-chip suburb, you’ll often find that if you buy an A-grade property in the bridesmaid suburb, you’ll do better than buying a compromised asset in the bridal suburb. Buying on main roads, train lines, the wrong title type (that banks won’t touch). You’ll be buying a property that not many others want to buy, and the same thing will happen when you go to sell.
Is it for investment or a home, there are considerations for each pathway.
Housing is unaffordable nowadays
Home ownership can be the difference between a decent retirement and one where you need government assistance.
Affordability is more than just house prices – what we are really looking at is the percentage of wage which goes towards the loan repayments. That includes:
- Income
- Interest rates
- Access to credit/borrowing capacity
  - As mentioned, this will open up over the next few months as responsible lending will be revised by legislators
  - Assessment rates will be coming down (and have started already)
Ave loan size in 2020 is $500,000, standard variable rate of 3.5%, loan repayment of $27,000 p/a and ave wage is $68,000. The percentage of your wage which goes to the loan repayment is:
- 2020 – 39.7%
- 2018 – 40.9%
- 2013 – 41.6%
- 2012 – 47.5%
- 2011 – 48.7%
- 1990 – 48.1%
Housing is not as unaffordable as people think – housing attainability, is your ability to save a deposit to get into the market in the first place, that is the biggest stumbling block.
If you’re striving for the aspirational McMansion as your first home, that is where people fall down and think housing is unaffordable. You just need to get your foot on the first rung, wait to grow your equity and spring board into the next property.
Study from CoreLogic and Anu Centre for social research, affordability measures stay pretty consistent around a certain level – it fluctuates, but what we’ve seen is market interventions – Eg: from APRA on investment lending, that major institutions can put in place to slow down the market as needed. There are also first home owners’ grants – the deposit is the difficult part and people often use 20% as the figure for the deposit, but first home buyers can borrow up to 95-97% of the value of the property.
All good property opportunities are taken
Seddon – was a suburb that outperformed others, before it gentrified it was like Footscray, but now it’s like Yarraville. Someone said to me “I want you to find me the next Seddon” – it’s Footscray. People are looking for the next best thing, but when you put it in front of them, they don’t want it. Eg: Paddington and Balmain in Sydney, Richmond in Melbourne, Westend in Brisbane, Unley and Norwood and St Peters in Adelaide. There are many of these suburbs around the country.
Property is a long-term game, it may not look like the suburb you want to live in now. But what is the potential for the suburb – proximity to city, buildings, money spent in the area (public and private), are the owners fixing up their houses/extending them. Houses that need work but there are BMW and Audi in the driveway, that’s what gives you an indication of what sort of people are living in the suburb
You can search for gentrification – that’s potentially harder to find, there are always going to be some locations that are going through gentrification. Or you can lower your expectations of the property – buy in a quality location and street, but lower your sites somewhat.
Look for public transport connectivity, these sort of things can give you comfort that you’ve chosen somewhere that will continue to be in high demand. As the cities grow, it will have that ripple effect.
More and more secondary cities will pop up within the capital city – eg: Parramatta in Sydney. There’s going to be more of those secondary CBD areas, the real estate around these ‘huburbs’ will provide opportunities for gentrification.
Major regional centres – the Australian Financial review had their infrastructure summit, a lot of the talk circled around speeding up the train lines even further between the major regional centres. That’s been a bit of a trend happening during covid, they’re still further away than the outskirts of CBD.
Big land is more important than location of land
There is an idea out there that you need to get a full block of land. Unless you have a subdivision target, it’s a furphy. It’s all about the land value and not the land size.
If I could buy for $500,000 a 100 square metres in a great suburb with strong capital growth prospects of 700 square metres out on the fringe, I’d buy the 100 square metres every day.
Location is the most critical factor that influences capital growth.
Look at the value per square metre and work out the land to asset ratio from the land size.
There is a common understanding that the smaller the land becomes in the location, then the higher the value of land per square metre of that smaller block.

Cate Bakos – The Property Buyer’s Golden nugget: land to asset ratio – look it up, we’ve talked about it plenty, you have to be mindful of the dwelling component not being more valuable than the land component.

Peter Koulizos – The Property Professor’s Golden nugget: my advice is start saving as soon as you can, because housing is not unaffordable.

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