What Are We Thinking About Property?

All over Australia, we are talking about property. If the conversation is in Sydney or Melbourne, it’s all about how much prices have gone up and can they keep going, in Brisbane, Hobart or Adelaide, it’s about how much they think it will go up, and in Perth & Darwin it’s about will prices ever go up again?

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Over the last few weeks I have been doing a lot of research in to what is happening in our real estate markets. You know what? It can be pretty much summed up in the first paragraph.

We are a nation in love with property. A huge part of the Great Australian Dream lies inside owning your own home. Yet this dream is becoming something that may never be realized for an increasing percentage of Australians. Statistically over the last 30 years the rate of home ownership has dropped by about 10% – now more than 30% of us must rent or choose to rent. I expect that the home ownership rate to continue to drop.

Our governments seem clueless about what to do to stem the massive price rises in Sydney & Melbourne. There are so many ways they could force prices down, however they could solve the issue overnight – just drop all property taxes. But they will never do this. For one, they rely on the revenue, for two, they actually don’t want prices to drop. That is because the voters would never forgive them for being responsible for the value of their house dropping. And with about 65% of the voters being property owners, you know who is going to get the nod – there are more voting owners than there are voting tenants.

Not to mention the nation’s banks who would have a fit if prices dropped as it could put the security for their loans in jeopardy. And councils and state governments would suffer revenue drops in rates and taxes from lower values.

So give up on the idea that prices are going to come down. Excepting for the property market cycles when property can ease back in value (like what is happening in Perth) we aren’t going to see prices coming down anytime soon.

So if you want to buy property what do you do?

I’ve just read about a surgeon who paid $2.3M for a 50 year old 90sqm apartment in Sydney, that was touted for between $1.7-$1.8M. His opening bid of $2M had six registered bidders throw down their paddles in disgust. The surgeon is expecting a rental return of about $1,200 per week, which is a gross yield of about 2.5%. In my view that’s approaching bubble like territory.

Do you want to know why he paid that much?

He was buying a property for his 3 year old son.

Wow.

That line of thinking is very much what is on the mind of many parents around the country. Which is – how can I help my kids get in to home ownership? Many are buying outright or lending or gifting deposits so the kids can get in now – advancing inheritances instead of blowing it on overseas travel. I feel sure we will see a lot more of this going forward.

So what does this mean for us?

There will be so many people who will not be able to buy where they chose to live – particularly in they live in Sydney or Melbourne. Yet they still need to build wealth and property is still a great way to do it. So we will see many more people buying in less expensive cities like Adelaide, Brisbane and Perth.

Many of the Sydney investors I know are thinking exactly this. A 2.5% return for a multi-million dollar asset just doesn’t look appealing any more.

And do you know which city they are thinking about?

Yes, they are thinking about Perth. Which looks incredibly cheap by comparison to Sydney. While $2.3M buys you a 2 bed Coogee apartment, in Perth it can buy you a 4 bed 3 bath mansion right near the beach in one of the premier suburbs – in Cottesloe.

I’ve seen and heard this thinking before. Perth always moves after the east coast has jumped.

It’s simply a matter of when.

What do you think about that?

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