What is Going to Happen To Property Prices?
As a financial adviser, probably the most common question I get asked is, “What is going to happen to property prices?” To be honest, I don’t know (and no one does).
What I do know, however, is that throughout history property prices have rarely been this expensive on a price to income ratio, and that likely doesn’t bode well for future prices.
Much of the movement in property prices is dependent on interest rates. While the RBA has stated that they don’t expect to raise rates this year, it is quite likely that rates will rise over the coming years. This will almost certainly have a dampening effect on prices and could cause a significant correction.
Many are asking the question whether or not they should be buying property. The answer depends on whether you are intending to live in it or rent it out as an investment property.
As a primary residence, we believe that buying a property that is not outside of your budget is generally not a financial decision, but rather more of an emotional decision. You need somewhere to live, and the cost of renting and buying is not enormously different. If you spend more than you can afford it does become a financial decision, and many do spend more than they can afford.
What few people factor in though is the likelihood of higher interest rates. The natural level of rates (the interest rate that supports the economy at full employment/maximum output while keeping inflation constant) is likely lower because so many have borrowed too much, although this doesn’t preclude continued rate rises.
As an investment, we do not think that net rental yields of most properties make rational sense with future rate rises on the cards. There are a number of wonderful companies that offer free cash flow yields that are multiples of what you can buy on the property market, with far higher cash flow growth potential. We think these opportunities are likely to do far better over time than buying a property with a low rental yield during a period of rising rates.
We generally recommend a cautious approach to debt and hope that Australia’s addiction to debt doesn’t become a problem in the coming years as it has in so many countries before it.
Rob Shears is an Authorised Representative of Valor Financial Group (AFSL 405452). This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances.