I can't believe it.
I was having a coffee this morning and I overheard a conversation about how the recent interest rate rise and the one likely to happen next month will… as the gentleman in his corporate suit spouted out, “Well, I suppose that will knock the property market for six.”
Now, I don't know whether the guy is an investor or not, but that's his view and it seems to be the view of many people who unfortunately don't understand how the real estate markets work.
I'm going to tell you what I think is going to happen in the next 12-24 months.
But hey, why should you listen to me? What gives me the right to talk about property?
Well, let me just put you at ease, since 2000, I have transacted over $15,000,000 worth of property. Unfortunately I've done the stupid thing and sold as well. Today I sit on a portfolio of roughly $7,000,000.
So considering all the damn stamp-duty I've paid, in 8 years it must qualify me for something.
Here's an interesting story I heard ages ago. It made me sit up and take notice.
It's a story of a young man sitting on a park bench in Sydney 30 years ago.
People would see him sitting there year after year and with each year passing he got older and older.
30 years later, a young boy asked him why he was sitting there.
The now old and grey man said he was waiting.
“Waiting for what?” said the young boy.
“Waiting for real estate prices to come down so I can buy.”
Unfortunately the old man will be waiting for some time.
The story is a cute one, and I'm not suggesting that real estate prices never go down, because the reality is that they do.
…But certainly they don't go down like our recent stock market. The way the markets crashed… now that was spectacular, wasn't it?
Let's look at the recent interest rate rise… Here's my view of what is going to happen.
It's going to make it a lot harder for families to buy their own home. In fact, from 2002 until today on an average $300,000 loan, the increase of rates has added an extra $536 per month to mortgage payments.
To the average family, that's huge.
So if they can't buy, what will they do? They still have to live somewhere, so they will rent.
You see, there are two crisis.
The affordability crises, which is great for the investor, not so great for young families.
…And the housing-shortage crisis. Which again, is great for the investor, not so good for young families.
If families can't buy and they have to rent, and there's not an abundance of houses available, then what do you think will happen?
Simple supply and demand. The cost of renting will go higher. We've seen this already happen in the last 12 – 24 months and it's only going to get worse.
Worse for them, unbelievably good for you. If of course you don't sit on the sidelines and watch, but actually participate.
But let's take a step back and look at the young family… A $300,000 mortgage today would cost a family about $24,000 a year. That's $2,000 a month, $500 a week.
So, in the areas that these $300,000 mortgages exist, which is usually in the outer-suburb areas, what would $500 a week in rent get you?
Let me tell you, it would get you a lot of accommodation.
But of course, they wouldn't pay $500 a week, would they? Because if they could, they would buy their own home. If… and here's the big IF, they had a deposit.
Now, I would say that the reason why most people can't afford a home is not because of the monthly repayments, it's because they can't save up the deposit.
So what does that mean for you as an investor?
It means two things. There's going to be a huge number of customers (tenants) out on the market and a small number of product (houses) available.
Rents are going to explode… Again.
…Which is going to fuel an investor-lead property boom and then down the track, this will probably be a bust.
But hey, don't concern yourself with the bust just yet. Insulate yourself now by getting onto this trend. You'll have plenty of capital growth to protect you in 3 years
Here's something else for you to consider… There's an incredible shortage of credit available at the wholesale level… Which is where the banks and other mainstream lenders get their money.
So, the big developers who do the 300 – 500 subdivision lots are treating this current environment very cautiously.
They're saying to themselves, “Should we build? Should we not build?” Some of these big projects take 3-5 years to come to market.
So the funds available in the market are starting to dry up and the developer's appetite for risk is starting to wane as well.
Considering that the other means of raising funds for the big-boys is through the likes of Westpoint, Fincorp and Bridgcorp, the money has literally dried up.
So what do you think is going to happen?
Less stock on the market.
Which means greater capital growth and higher yields. Oh my friends, it doesn't stop there. It's going to get even more exciting.
Here's something else that will add to this investor-lead boom…
In all the major capital cities, such as Melbourne, Brisbane and Adelaide in particular, the recent property boom has not been investor-driven, but owner-occupier driven.
That's why the boom has been limited to inner-city.
Think about it, if you're an investor, you wouldn't buy property for $850,000 and get a tenant in there for $400 a week. The numbers don't stack up.
But if you're an owner, as long as you can afford the monthly payments, you'll pay $100,000 more if you feel that you must be in that area.
So here's what has happened. The owner-occupier driven inner-city boom has created a huge amount of individuals cashed up on capital profits.
SO imagine this…
There you are, sitting on a $400,000 capital gain that you've been able to achieve in 3 years and the stock market craps itself… What do you think an owner-occupier is likely to do if he's looking to create wealth going forward?
Here's what he's going to do…
He's going to go to the bank, get a line of credit and start buying property because he knows from his own experience that it's far more secure than the stock market and he's also got the reference of his own home going up 30-40% in a 3 year timeframe.
Would you like me to give you evidence just to make sure you get this?
Perth in 2003 went on a massive capital growth spurt, fueled of course by commodities. Perth folks sitting on 70% – 100% capital gains in a 4 year period started to leverage their assets and flying across the Nullabore to the east coast to buy up whatever they could.
The same thing is going to happen shortly in Melbourne, Adelaide and Brisbane.
But not every single property in these areas is going to experience capital growth… Some areas will still be flat.
So you have to be able to know how to pick and choose if you're looking in to those areas.
…But if you had to press me for which area i thought was going to experience the greatest capital growth, as well as what type of investment, I would have to say it's not in Melbourne, Adelaide or Brisbane.
I'm going to let you think about that for a moment and we'll talk again tomorrow where I'll let you know what I think is the best capital growth-play in the Australian property market