Are you Investing in Residential Property?


With so much media on the much-flaunted rise of Australian Residential Property prices, we thought it prudent to put together this article which is anticipated to provide our view on Capital Growth figures over the longer term.

Whilst we appreciate there are many persons capitalising on low interest rates and other government initiatives to purchase their own dream home, this article is more intended for those persons considering to purchase an investment property.

Importantly, with so much noise going on:

  • Soaring property values encouraging “get on the band wagon”
  • Cash rates and hence mortgage rates being likely to be lower for longer
  • Huge dollar values being quoted as examples of “look what I did”.
  • TV shows showing auctions
  • The whole promulgated property renovation revolution
  • Stories highlighting property entrepreneurs’

We would encourage people to take a back step from all that noise and carefully consider any entry into the investment property market with some cautious optimism as you would with any great expenditure. After all, this decision outside your own home purchase and superannuation, being your two biggest investments, this is right up there in significance in dollar decisions. Further, you are going into the property market in one big hit with big dollars, not gradually.

Moreover, we would first stress that we are certainly advocates for residential investment property purchases for the wealth creator type investor, but not so strong on these strategies for retiree types. Again, it’s a horses for courses and will largely depend on how this fits in with a person’s overall investment portfolio, surplus cash flow, liquidity of other investments and exactly what is trying to be achieved and in what timeframe.

For the purposes of this illustration, we have attached a table of the median Residential Property Prices values in the 3 main capital cities (Melbourne, Sydney and Brisbane) for the period of 17.5 years from 30 September 2003 to 31 March 2021.

We have captured these specific dates to provide a reasonable long-term view in modern times.

For ease of illustration (see the last 3 columns on the right side) we have put the starting point (September 2003) as house capital values being $100,000 for the 3 main capital cities. In other words, for every $100,000 of “investment property” you purchased, then this is what would have transpired over the period to 31 March 2021 (based on the median capital growth percentages shown).

As you will see, the capital growth and fluctuations are very evident from the table. The compound rate of return is approximately 4% to 5% per annum. This is consistent with capital growth (mainly) over the very long term is generally a couple of percent above inflation each year. Some properties would have done better or worse – this table is the median. This long-term percentage capital growth per annum, which we consider to be very good.

Of course, for any total return there would be rental income less expenses and interest payments depending on exactly how the investment property purchase was funded. The main rental income used to be about 4% per annum (being 5% actual rent less say 1% property expenses) – this excludes any borrowing interest expenses. At the top end of the market, rental yields will generally be lower relative to the current market values.

At the time of writing the rental yields in Melbourne, for instance, are approximately 2.90% the value of properties (before expenses and any funding costs). The range can vary from as low as 1.60% to high 5.00% depending on the suburb and property value. What this tells us is that rents have not kept pace with growth in property values. Will there be a pull back or will the rises continue – the answer is who knows – any prediction is just an opinion at best.

Referring to the Melbourne example in the below table, some of the percentage returns can be negative over various periods. In fact, over the 17.5 years there was 4 negative years. The percentages confirm there will be negative years, flat years and years where the growth is substantially above the long-term averages.

We believe the percentage capital growth return on our monies invested is more reflective of what to look at rather than big dollar values being spruiked around. Of course, the likely rental yield added thereon would then give the full picture.

Our financial planning team here at Plus 1 Group are always available to discuss issues of this nature with due regard to your investments or financial planning generally.

Matt – Financial Planner

03 5833 3000

Rod – Financial Planner

03 5833 3000

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