B Invested

HISTORICAL LOOK AT PROPERTY PRICES.

 

While the Australian property market operates in short-term cycles, it also shows a trend of growth over the long term.

 

According to an October 2017 report by BIS, Australian property prices have gone up by 6,556 per cent since the early 1960s. This works out to be an average increase of 8.1 per cent each year.

 

Although the market went through “upswings” and “downswings” during the 55 years studied, property proved to be a good investment over the long-term.

 

According to the authors of the report, Gregory Sutton, Dubravko Mihaljek and Agne Subelyte, property price growth showed a remarkable level of “persistence”.

 

Property Prices in Sydney

Image of Cobbity and how the suburb has grown in the last few years.

THE UPSWINGS WON OVER THE DOWNSWINGS.

 

In the report, property price data from 47 emerging and advanced economies was analysed in order to research the impact of short-term interest rates on house prices.

 

The findings showed that upswings, where prices rose for a period of three years or more, were much more common than downswings.

 

Upswings made up almost 80 per cent of the periods analysed.

 

Downswings, where prices dropped for a period of three or more years, only made up about 8 per cent of the periods studied within the advanced economy group.

 

 

INTEREST RATES AND THE PROPERTY MARKET.

 

They found that interest rates were a “surprisingly important” driver of property values.

 

Lower interest rates make property more affordable to buy. This tends to create more competition in the market, which drives up prices.

 

As rates increase, less people are able to afford loan repayments which makes them less credit worthy. Fewer people can obtain finance, so there is less competition in the market. This slows down price growth.

 

 

LONG TERM GROWTH.

 

Despite the fluctuations of interest rates and other factors, such as supply, income growth, unemployment rates and global economic trends, Australian property has gone up in value.

 

Philip Soos, Masters research student at the School of Humanities and Social Sciences, Deakin University, has compiled a chart that shows property price trends in Australia over 150 years up to 2013.

 

From about 1960 onwards, property prices have undergone a trend of growth. There have been periods of price growth that have led to downturns – but overall, values have risen.

 

 

HISTORICAL LOOK AT INTEREST RATES.

 

RBA data shows that interest rates have gone down in trend terms from 1990 to 2017.

 

In January 1990, the cash rate was at a record high of 17.5 per cent.

 

In August 2016, the cash rate was at a record low of 1.5 per cent.

 

While rates have fallen and risen several times throughout this period, the general trend has been that of decline.

 

 

WHAT DOES THE FUTURE HOLD?

 

This is all good news for buy and hold investors. While those who buy to sell within a few years should be wary of timing, those who are in it for the long run are much better off.

 

It is unlikely that the property you buy today will be worth less in 30 years’ time.

 

While rates can fluctuate, they have been on a downward trajectory for almost 30 years.

 

Thanks to tighter lending standards, if you have purchased a property over the past two years, you should be able to afford repayments if rates rise to 7.5 per cent.

 

As inflation does its thing, it will be easier to repay debt over time.

 

 

WHAT ABOUT INTEREST RATES?

 

In general terms, after each period of price correction, property prices have ended up being higher than before.

 

Interest rates seem to be doing the opposite. Now at a record low, there is not much space for them to drop.

 

APRA regulations are now doing the job that higher rates would normally do – keeping the competition down. This means prices should slow without existing borrowers feeling the pinch of higher repayments.

 

With so much change in the last 60 years, and with so much more change to come, it has never been more important to have a clear idea of your goals and the strategy you need to achieve them.  Click on the link below to book a Free Discovery Session to find out your investment potential.

 

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