Don't let short term choices risk long term gains

Residential property in Australia is an ongoing hot topic in the media – if it’s not setting new price records it’s predictions of bursting bubbles. At present we have multiple factors looming on the horizon – including inflation and interest rate hikes – right before an election.

And that’s why now is the perfect time to talk about the benefits of property for the long term.

While we don’t claim that every single property in Australia is only ever going to go up in value year on year, it does have some unique qualities that differentiate it from other asset classes and guarantees it a special place in the hearts and minds of Australians.

If we break investing down into its basic elements, any investment could be categorised as being largely for growth or income.

Growth assets are those that will appreciate in value over time and include property, shares, rare metals, art and collectables.

Income based investments typically include term investments, government bonds, corporate bonds and other investments focused on cash on cash returns.

However, some investments can be used to target both growth and income based objectives. Investment property falls into this attractive category.

So here are four key reasons we use Australian residential property as one of the cornerstones to wealth creation.

1 House price stability

Getting right back to basics, shelter is one of the key essentials we need for survival, and so there is an intrinsic, underlying and unrelenting demand for property for people to both buy and rent. There will always be a demand for it, regardless of external factors.

In addition, property is generally more resilient to sharp price corrections than other more liquid asset classes – for example, shares, gold and bonds. This is simply because in the face of significant economic headwinds these easily disposable assets don’t have the same barriers to exit and entry and can be sold off quickly and easily, whereas it can take up to ninety days for a property transaction to finalise. And that’s without going through a sales campaign first! It literally pays to buy and hold property over the long term.

2 Population growth

The second reason we invest in property comes down to population growth. Population increase can be organic (more Australians having children), or it can be fuelled by immigration.

However, population growth isn’t spread evenly across all of Australia. In fact, as the supply-demand balance is impacted, specific locations do benefit more than others when it comes to growth (and therefore subsequent property price rises). Clearly, this presents massive opportunities for educated investors who’ve completed their research and know where to look!

3 Bank and government sector support

The Australian residential property market is the biggest asset class in Australia, and banks lend investors large chunks of money to help them invest in Australian residential property. That means that for up to 20% of your own money (plus stamp duty and legal fees) it’s possible for you to secure a property asset that has the potential to grow in value over time, and provide a rental return for the period you control that property.

So why are the banks so generous?

Australia’s big four banks make up around one quarter of the entire Australian Securities Exchange by market capitalisation, and account for around 85% of the residential loans written in Australia at the time of writing…and they make much of their profits by lending to borrowers, who in turn purchase residential property!

And so it follows that the banks would prefer to see steady and consistent growth in property values, as opposed to booms and busts. And they have both the will and the means to help influence that outcome by stimulating or dampening investment via lending policies and/or interest rate policy settings. They can also impact supply-side drivers via commercial lending to property developers.

This lends a layer of protection, stability and self-regulation into the demand for investment property as a whole.

Government policy affects property markets too

Banks are not the only big players in town that want to see consistent growth in property values. Literally every level of government also has a vested interest in seeing property prices continue to grow steadily.

Why is that? Quite simply, because property accounts for a huge chunk of revenue at a federal, state and local government area (LGA) level, with revenue related back to taxes, stamp duty and council rates.

It is at the state and local levels of government that the planning of land use takes place, so they can influence both the supply and demand side drivers for property. For example, the provision of new or upgraded infrastructure (such as new roads, train stations, shopping centres, schools, parks and entertainment precincts), can fuel demand for certain areas.

The government provides generous concessions and grants for first home buyers, while also allowing investors to claim many deductions on investment property, including depreciation, interest expenses, allowances for repairs and maintenance, improvements and other related costs of ownership.

4 The ability to add value

The fourth, and perhaps the greatest drawcard for many investors, is the ability to add value to property assets – something not possible with many other investment classes.

This could be in the form of renovations and flipping, subdivisions, rezoning, change of use or property development, to name just a few. All of these strategies allow investors to exert some control over increasing the value of the property. In turn, this can help fast-track portfolio growth, provide protection from market downturns and add valuable cash flow to your overall wealth position.

So now you have an understanding of why Australian residential property can be such a stable and valuable cornerstone to any wealth creation strategy. Its enduring popularity as an asset class, and the high level of vested interest from a commercial and government perspective, highlights the opportunity that educated investors have to start creating substantial long-term wealth.

Property values will always be subject to market cycles, but if you’re willing to wait these out, you will outperform in the long term.

So if you’re interested in learning more about why property is one of the best ways to create wealth, book in a discovery call with one of our expert property mentors today.

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