For every action there is an equal and opposite reaction. What goes up must come down. Newton’s third law. We all know this to be true and evidenced in many forms in our current world. We were already heading into a downturn in the property market and had experts telling us about the potential losses to be endured. Then came the Coronavirus.
The very premise of investing carries risk and your returns will be relative to the risk you take on. Property prices fluctuate based on several factors, so you may not always experience years where your property goes up in value. Of course, we want to see growth every year. 2020 is unlikely to be one of those years.
Your property experiencing negative growth for a period isn’t catastrophic if you have a long-term strategy and sound financial planning in place.
What’s the average growth of the property market going to look like for 2020?
Properties can sometimes go down in value; however, history has proven that over a term of 10 years, the property will increase in value when the purchase is made in an area with sustained capital growth. As they say the 3 rules of purchasing property: location, location, location.
While you may find a cheaper property and get into the market faster by buying a property in a less sought-after location, it’s a riskier decision than being patient and buying in a reliable, blue-chip area.
What influences property values?
There a several key factors that influence property values, macro factors such as interest rates and the broader economy to localised factors. One such localised factor is demand. If your property is in a low-demand area, you’re naturally going to experience slower capital growth and be exposed to a higher risk that the value will decline.
The population and demographics of an area will also have a significant impact on property values. For example, if your investment property is a multi-bedroom home in an area that’s popular with young families, you can expect it to outperform compared to apartments in the area. The opposite may apply if your property is in an area that’s popular amongst younger people who prefer the convenience of apartment living.
Local employment and access to employment
If your property is in an area with easy access to the CBD or sustainable long-term employment opportunities, the area will naturally be in higher demand than less connected areas with fewer employment opportunities. In contrast, regions with seasonal work or volatile cycles of boom and bust expose investors to a higher risk of declining property values. The rapid declines in property values following the 2011/12 mining boom is a good example of what happens to property values when a key regional industry slows.
How do I minimise my risk?
There is no one size fits all when it comes to risk. Everyone has a different level of risk that they can live with. To minimise your risk when it comes to property investing, make sure your property ticks the essential boxes in terms of factors that affect property value.
These things include location, infrastructure, population and demographics and the specific features of the property. These features include size, aesthetics and amenity such as air conditioning and an entertaining outdoor area.
While there are factors across the market that all investors need to be aware of, each investor will still have their unique strategy and goals. Make sure you consult your accountant, financial adviser and other professionals before you make any big property decisions.
Weather the storm
When we are in a storm in the real world, we prepare with supplies; raincoats, umbrellas. No, I’m not talking about hoarding toilet paper here but there are some ways you can weather the storm and come out the other side.
Look at the bigger picture. I know it’s a bit cloudy right now but thinking about making big changes in the middle of a challenging time might not be the best way to sail through. If you can, stay the course. It might get rough, but some of the most exciting times can be had when you are having to think creatively about how to navigate a difficult situation.
Cycles in the real estate market are not new. The media does love to report on the cycles at the macro level. While it’s useful to look at what’s in front of you for the next 10 minutes in tough times, the longer-term look will help to weather the storm.