We all understand the
importance of doing something to secure our financial future. The
financial consequences of inaction, or not doing something about our
future financial independence, is reported in the media every day of the
week. Our Government reminds us constantly that we will have to look
after ourselves, as the social cost of pensions and or welfare moves out
of fiscal reach. The inability of superannuation to improve our
lifestyles, or to completely take care of us in retirement, is now well
accepted. There seems to be widespread agreement that it just will not
be enough.
It has been estimated
that a forty year old today would need to invest around 20% of gross
income into a superannuation fund to have an income equal to 75% of
their last years salary on retirement. It seems to be an impossibility
in these times. Superannuation does nothing for us during our working
lives, it all comes as a later benefit. If we accept these assumptions
then it is not a question of whether or not we should invest, it is more
a matter of how we should invest, and where we should invest our
available funds.
THE PROPERTY
ALTERNATIVE
Residential property
has a long and successful history of investment performance with minimal
risk. One of its outstanding features is capital growth, or the
potential of increasing property value. It is this factor that allows us
to build growth into our net worth over time.
The income, or rental
derived from property, allows us to service the investment and, provides
the means to buy more. Historically, we can learn a great deal. Look at
Sydney house prices, and Sydney home unit prices on the schedule below.
In 1966 the median house price in Sydney was $12,600. In 1996 it was
around $210,000, a thirty year time span.
It is interesting to
observe that through that entire thirty year period, there has always
been somebody, or publication that has had an opinion, that property was
not good investment. They always have a reason why we should not invest
in property. Back in the early to mid 60's we had just emerged from a
major credit squeeze, the "Menzies' credit squeeze". Credit
dried up. It was a difficult time. Then through the late 60's came the
nickel share boom. By the mid 70's, we had political turmoil and another
recession. In the late 70's we had rising inflation and then the OPEC
Oil crisis. 1983 saw another severe recession.
Through these times,
there was always someone prepared to say, "inflation is high do not
invest in property". "People can't afford to service
properties, or pay the rents". When inflation was low, they were
saying, "values cannot rise when inflation is low". "When
money is tight, people cannot afford to buy". There was always some
reason why we should not invest in property.
In the late 80's we had
a major boom in values in Sydney from 1987 through to 1989. Prices
literally doubled over that two and a half year period. What did they
say then? "Our children will never be able to afford to enter the
property market again". "Prices will never go any higher. Do
not invest in property". The early 90's we had another recession
and, low inflation. Now out of recession, we are still in a low
inflation environment as we were back in the 60's.
Through that entire
thirty year period some would always find a reason not to invest in
property, but values increased from $12,600 in 1966 to $210,000 in 1996,
a rise of 1667%, or 9.83% per annum compound during that same thirty
years.
It is not coincidental
that growth has been 9.83% compound per annum. How often have we heard
that house prices increase at around 10% per annum? We have been hearing
that for many years. And certainly, during that thirty year period, it
has been true. If we isolate the 70's or the 80's, in the schedule
provided, it is not that difficult to see that it has been true in each
of those ten year periods as well, being 13.87% per annum compound and
10.81% per annum compound respectively.
HISTORICAL GROWTH
REPEATED
It is that compounding
effect of property value increases which is so powerful. As each year
passes growth occurs on top of growth. If a property is worth $100,000
today, and next year it increases in value to $110,000, then the year
after that it increase at 10% again, that is $110,000 plus 10% or
$11,000, taking its new value to $121,000, and on goes the escalation.
It's exponential growth accelerating at a faster rate each year that
passes.
To use a well worn
gardening analogy, it is a little like planting a tree. Early growth is
slow, but as it establishes it grows faster, and starts to bare fruit.
The fruit drops, and more trees grow and start bearing fruit. Before we
know it, we have an orchard. It is a similar kind of compounding effect
with property. Property wealth comes ever so slowly at first, but
eventually it descends in over abundance. But you have to make a start
no matter how small. With prudent property investment all you need is
time, the right information, and patience.
They are the main
ingredients. We will pursue in this book, how to use the inevitable
growth, and the qualities of time, information and patience, to our
short, medium and long term advantage, in the safest possible way to
improve our lifestyle, and to achieve independent financial wealth.
So why Residential
Property in preference to others? You may already be an investor in
residential property, or you may be a prospective residential property
investor looking at your options.
HOW SAFE IS RESIDENTIAL
PROPERTY ?
Let us analyse the
residential property market and see why we believe it is the safest, and
most profitable market in Australia.
The total value of all
residential dwellings in this country is around $700 billion. That is,
about three times the size of the share market, five times the size of
the commercial property market, and 25% larger again than all other
major investment markets combined, including funds in trading banks.
That is not to say it is special because it is big, but it does lead to
some interesting facts. And the facts will often be quite different to
the perceptions or conventional wisdoms people accept on property.
In Sydney the median
house price is currently $210,000. Around 23% of market sales are to
investors. Almost one in every four properties sold. Every week in
Sydney about two hundred and eighty people purchase an investment
property. 69% of the market is owner occupiers, that is people living
in, owning, or paying off their own homes. That 69% is very important.
If you are old enough, you will remember twenty years ago hearing that
70% of Australian's own their own home. When Sydney boomed back in the
late 80's it was professed that young people would not be able to enter
the market again. That has not held true. The level of home ownership in
Sydney and across Australia has remained very consistent at around 70%,
despite the cycles and despite booms and recessions.
OWNER OCCUPIERS - THE
SAFETY VALVE
That 70% home ownership
is the main reason for the security, reliability, and predicability of
residential property as an investment. Owners occupiers, people who own
their own homes, do not panic and rush to sell as investors do in some
other sectors such as industrial and commercial real estate, or company
shareholders, when times get tough. The residential property market is
not dominated by investors. This provides a built in safety net for the
residential property market. Residential property is the only investment
market that is not dominated by investors. It forms a barrier against
substantial down side in the market place.
That is a unique
feature of residential property as opposed to all other investment
vehicles. Everybody must be housed, whether they rent, or are owner
occupiers. No matter who the occupier is, the capital growth is still
generated for the owner. The safety of residential property is
underpinned by the 70% of owner occupiers who do not sell if a market
lacks strength. They need more compelling reasons, and are better placed
to hold through softer markets.
Maintaining good
occupancy is important to the successful outcome of a property
investment. Here again residential property offers the safest level of
exposure. We have already seen that 70% of Australians buy their own
home. Correspondingly almost 30% are renters providing a huge pool of
around 5.4 million Australians who are housed in rental accommodation.
It is never really difficult to find a residential tenant.
IS VACANCY A PROBLEM ?
Over the long term,
residential vacancy factors tend to fluctuate between 1% and 6%. The
larger being the worst case scenario. It would rarely be worse, but is a
risk that can, if necessary, be built into the investment feasibility.
Alternatively because
that large pool of tenants exists, a reduction in rent can negate the
vacancy factor. There may be times when that is necessary. Either way it
can be budgeted and managed.
Periods of prolonged
vacancy in residential investment are unlikely where good management and
property maintenance are provided.
This is not necessarily
the case with other types of property. Driven more by economic
considerations, factories, offices and retail property cannot promise
the same continuity of income. Their occupancy depends not on the need
for shelter, but the expansion of business and growth in the economy.
This can be critical
where borrowed funds need to be serviced out of income and a vacancy
persists.
Other growth investment
such as shares carry similar risks, as the continuity of dividends
depends on profitability and business expansion.
The two factors
outlined put residential property on the top shelf of safe investments.
The 70% of the population who are home owners set a base to values
ensuring the least prospect of loss of capital, and the remaining 30% as
renters ensure the best prospect for maintenance of income.
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