Investing in property isn’t the easy money-maker most people think

Ever feel you’ve missed out by not investing more in the property market? After all, home ownership is the Great Australian Dream and after the series of recent booms in property prices, you may well be convinced that investing in real estate is the fast track to a wealthy future.

At very least, you wouldn’t be the only person to have met someone who’s made a killing in the property market and maybe wondered – did they just get lucky, or am I missing out?

Myth busted: House prices go up evenly, all the time

Frank Allen, the director of property markets at Westpac, says Sydney property prices tend to support the argument that house prices always go up – but not necessary in a neat and even fashion.

“Since 1980, Sydney prices have gone up at 7 per cent per annum, and that’s the equivalent of doubling your price every ten years,” he says. “But it’s not a straight line. You get periods where growth absolutely surges for whatever reason and the market gets into some form of frenzy.”

This growth track record creates a strong fear of missing out, or FOMO. “You get these big jumps in prices because people think ‘I can’t afford to miss out’,” Allen says.

The FOMO effect was in full force in 2015 and 2016, according to Allen, but that likely left some investors disappointed and even out of pocket because even the Sydney market doesn’t boom all the time. Prices have dropped some 15-20 per cent from their high and are only now staging a recovery.

The experience of many investors who bought into mining towns during the peak of the resources boom illustrates even more clearly the danger of assuming that prices will always continue to go up. Homes that sold for near $1 million as miners clamoured for housing a decade ago ended up being worth closer to $100,000 as the boom petered out – leaving a lot of pained investors.

The value of some of those properties is now rising again, but that is likely to be of little comfort to people who needed to sell their property to fund their retirement just as the boom went bust.

Myth busted: All housing markets behave the same way

Phillip Lowe, the governor of the Reserve Bank of Australia, said earlier this year that he reckoned Aussies probably watched the housing market more closely than the people in any other country. But he also pointed out that there wasn’t really an Australian housing market. Instead, we’ve got lots of separate but interconnected markets, some of which have done much better than others.

In fact, if you live outside the country’s two biggest cities, you might even be wondering why people are talking about a property boom. In 2006, Perth was the most expensive capital city to buy a house. Now, it’s the cheapest (even Hobart’s median price is higher).

Allen says Perth prices have actually been falling for the past five years, but he warns against trying to pick the bottom of the market.

“Perth looked like it was hitting a trough from mid-late last year, when you started to see the rate of fall slowing,” he says. “And then prices started going down again, and now prices are back at 2006 levels.”

Myth busted: Interest rates will always support the property market

Remember the days when mortgage rates peaked at 17 per cent? You might, but youngsters could be forgiven for thinking that Australia will always have a low-interest rate environment that’s a boon to mortgagees.

Rates have fallen a lot since the 17 per cent days of 1989 and house prices have gone in the other direction. As such, it’s no surprise some commentators point the finger at today’s ultra-low interest rates for record-high property prices.

Allen agrees that the market has been helped by lower interest rates, as well as Australia’s economy, which has been recession-free for 28 years.

“The late ‘80s was helped by the freeing up of financial markets – it became easier to get a loan,” he says of the series of events that helped create an unusually high level of confidence in the property market. “You then got lower interest rates in the early 2000s, and even lower interest rates in the current environment.”

Myth busted: Historical property price comparisons don’t lie

There’s another point to consider. Your family home probably had three bedrooms and a single bathroom. The chances are your adult kids live in a place with four or more bedrooms, a couple of bathrooms and a double garage.

Houses have gotten bigger as well as more expensive over the years, making it hard to draw accurate comparisons with prices 20, 30 or 40 years ago, which puts the potential gains or losses cited for the property market on shakier ground.

Plus, Allen says people often underestimate the total cost of property ownership when calculating the ‘gains’ made on real estate, missing out costs including maintenance, repayments, council rates and insurance. There’s also the cost of professional property management (often 6-9 per cent of rent) if you don’t want the hassle of managing your own rental property.

“If you think you can rent it out for 10 years without having to spend anything on it, you’re wrong … property isn’t a set-and-forget investment,” he says.

Myth: You can time the property market

If you’re looking at property as an investment to bump up your standard of living in retirement, you probably want prices to rise, hitting their peak just as you need to cash in your investment. And like most investments, you’ll get the best results if you buy low and sell high.

So, with low interest rates and property prices going in different directions across the country, when’s the best time to get into the market or to exit? According to Allen, it’s not that easy.

“The hardest thing about residential property is, when do you get in and when do you get out?” he notes. “You can never pick that cycle.”

Allen’s advice? If you’re looking at buying, don’t take too much notice of the stories about how a 22-year-old bought six properties that all pay for themselves. Instead, research your local area carefully and judge for yourself.

“If you get caught up with what the media says about what’s probably one of the biggest investments or acquisitions, you’ll ever make, then it’s got to be buyer beware,” he cautions.

Things to know: The information in this publication is general information and factual only. It does not constitute any recommendation or advice. It is an overview only and it should not be considered a comprehensive statement on any matter or relied upon as such. You should consider obtaining your own independent professional advice.

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.