You can’t rely on your house to build wealth anymore, you need to invest

The power of hindsight is a beautiful thing. In investment markets, the path to immense wealth seems very obvious with hindsight. Want to get rich? I’ll tell you how.

Be born in the 1960’s. Invest in property all through the 1980’s and 1990’s in inner city areas and hold these investments.

Pretty simple right? Well with the benefit of hindsight, it can be. The future however is far less certain.

I hear from a lot of people recommendations to buy a lot of residential property. This is because this strategy has worked in the past. But as they always say, past performance is not an indicator of future performance. There are reasons why this strategy worked which were specific to the time that don’t apply now. What are these? Well below is 3 reasons which have contributed to the growth of residential property prices in Australia. There are obviously others but these, in my view, are the more obvious ones.

Financial deregulation

During the 1960’s and beyond, Australia has gone through a transformation of deregulation. This has meant that banks have had more control of their practices and as such, have been able to lend increasing amounts of money to the Australian public. Debt to household income ratio in Australia is some of the highest in the world and this reflects in our property market. As more people could get access to more money, they attempted to outbid each other for a limited resource (inner city residential property) which in turn drove the market up.

The two income family

Another element in the perfect storm of rising residential property prices was the increasing popularity of the two income household. In the 1960’s and 1970’s, it was common for one partner to stay at home or engage in relatively low hour, low pay work limiting how much money a household could have. During the 1980’s and beyond, this has turned on its head with the increasing reliance on both partners of the household to engage in long hour, high pay work. This in turn increased the amount of money available (and borrowing capacity) which again was reflected in families outbidding each other for the limited resource of inner city residential property.

Australian immigration policy

Like all prominent western nations, the problem of declining birth rates in Australia has been an issue in modern times. Australia’s solution to the problem? Increasing immigration. Australia’s liberal immigration policy has driven Australia’s economy and has helped us to avoid the worst of the GFC. With more people choosing to call Australia home over the last couple of decades and with many of them being highly skilled and obtaining high paying jobs, this has driven up the cost of housing.

So where to from here?

We are seeing a lot of clients with well meaning baby boomer parents encouraging them to get into the property market at any cost. For many baby boomers, they’ve lived their whole lives with exponentially rising property prices and can’t imagine a world where this wouldn’t occur. But here is where we are at:

The banks are loaning LESS, not more money

Regulation on Australian banks is increasing and this is showing in the bank’s willingness to lend money. We have all seen the news stories about banks cracking down on loans and demanding to see your bank accounts so that they can judge your spending habits. This will likely slow down the growth of the property market and we are already starting to see the effects of this.

We are reaching capacity of the two household income

Unless you are looking to send your kids into full-time work, we have already played this card. Most families I meet now have both partners working either full-time or near full-time. The old days where you could have one partner stay at home seems to have disappeared when you need both incomes just to afford to pay your mortgage. This element of the escalating price war is over.

Australia’s immigration policy

This one is a bit of an unknown. There is a rising sentiment among Australian politicians around slowing immigration. The problem with increased immigration is it puts a strain on resources such as housing and transport. Whilst Australia has been enjoying the wealth that comes from this strategy, it hasn’t been investing in the future growth of our cities like it should have, instead choosing to pocket the wealth.

In any event, the idea that Australia is going to substantially increase immigration and therefore drive house prices up significantly is probably unlikely.

So what should you do?

Nobody can predict the future but I think it’s fair to say, the strategy of simply buying a house at any cost and watching it rise in value astronomically is probably dead. Now is the time to think a bit more strategically about growing your wealth. Now is the time to diversify, identify areas of opportunity and apply discipline to your investments.

As always if you have any questions, please feel free to reach out.

This post is from our resident Financial Planner Ben Brett, check out his details in the About Us section.

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Posted in: Ben Brett, Financial Planning, Investments