Is it time for a new school of thought behind property investment?

Property investment, for the past 3 decades or so that it has been taken seriously by the middle-class (rather than just the rich elite landlords), as a form of business to make money has followed a simplistic school of thought.

Basically watch for cycles and interest rates, have a strategy of either rental investment or long-term capital growth, watch for places that offer high employment and/or infrastructure and invest. Obviously we can add some more bells and whistles to the above but more or less it all boils down to that. Thats why many people regardless of their education background and level of intelligence have made money and some of those have become a guru as well.

I believe, while some aspects of the old school is going to apply, we need a new school of thought in investing. Partly because if it was that simple that everyone would just go around Australia in circles and cycles and buy property became rich then no one would ever be working. But more importantly because the world is changing pretty rapidly.

We are dealing with issues such as mass-migration that is unprecedented in some areas of the world alongside terrorism and climate change which has made many parts of the world unsafe to live in. Right now just the prospect of US going into war with NTH Korea alone can cause mass migration and rapid changes in the economy.

More importantly we live in a new and highly-disruptive economy. People's jobs are fast changing, the loyalty is out the door and your job today can easily be shipped overseas for a fraction of the cost or even be performed by robots or AI. Internet and social media have had a huge impact. Take this forum for example, how many people can put their hand up and say 10 years ago information was available to this degree to them (not to say that everything that is posted here is good ). We are only short of flying around with jet-packs.

Based on the above, I believe many rules of the old school of thought wont apply in the new economy. For example Australian property in general, and Sydney and Melbourne in particular, is unlikely to go backwards in terms of value, unless something extreme was to happen.

Australia has just been discovered by Asia and the Middle East as a safe destination to live, invest and even source food from. They are not going to suddenly stop investing, in fact if anything they are more likely to come here based on whats happening in their countries and around them. Europe isnt safe, US is definitely not safe with Trump in charge but Australia seems to be tracking along just ok and is remote from whatever dangers they are trying to get away from.

For interest rates to go up in here we need higher inflation and lower unemployment, two things that are unlikely to happen any time soon. Because people are so invested in property, less and less people are going to buy things and therefore inflation will be in control for a very long time (a self-feeding loop). Unemployment is likely to go up rather than down as we are losing manufacturing plants and mining without any prospect of other forms of employment replacing them.

Sure, APRA and the like are trying to tighten lending but they are only going to hurt the first home buyers if anything. Almost the entire foreign investors are cashed up and so are the main investors here in Australia. Its only a matter of time before APRA ask themselves how much is enough and who are they hurting.

In any case, it will be good to hear from others who are genuinely willing to discuss this topic and see what may be some of the new strategies that may work in the current state of play.

For sure we must change our way of thinking but how........

 

I don't see why there needs to be a "new school of thought". Seems like the usual things will still work, slightly modified for the current economic and social environment.

Pretty much the status quo really.

 

Yep - whole new ball game now.

 

The new school of thought is that "property does not double in value every 10 years". Otherwise its all pretty standard economics.

 

It depends on what your strategy is an how adaptable and flexible it is. Personally, I don't see any need to change my thinking or my strategy because for the last 10 years I have been buying properties with the potential to add value and I have been then adding value to those properties (renovations and building). By the end of the year all properties in my portfolio will be positive cashflow. I will continue buying properties that have the potential to add value through renovations, building (or both) that are cashflow positive after adding value.

I understand some strategies will need to be refined, adapted and restructured in the new economy. Just don't assume that all investors will need to adapt.

 

Just a clarification, I am not suggesting we have to scrap everything and start from scratch. I am suggesting we need to start evolving in the way we think about property.

If its buy and hold, will it continue to work in the same way as it has before?

If its buy and manufacture equity / turn into positive cashflow, maybe 10 years ago only a handful of people were doing it but now thanks to availability of information, everyone including the foreign investors have found this out.

So will it continue working in the same way, or will it be disrupted and/or changed?

I believe it will change, it cant be sustainable but this post is more so to predict the change, be one step ahead of that change or in a way be the force behind the change.

 

I don't think so.

I have not found this.

Seems to me like it will keep working the way it has always worked. If you want to build, you hire a builder to build for you. The entire legislative framework around building would have to change for this process to be disrupted. That won't happen quickly. Legislative frameworks take a long time to change.

 

The thing is though that in every human time period we can point to reasons for change yet history simply continues to repeat itself.

You could sit here and write why in the 90's we need a new way of thinking! The technological advancements, the social age, the big data age, surely all these are reasons for a new way of thinking yet property continues to do what it has always done, cycle in booms and busts.

I don't think their needs to be a new way of thinking, I just think the same basic principles will continue to work and as long as you stick to the guidelines you will win.

For those that want to be active investors. Their is money to be made by rolling up your sleeves! I think those that fail here simply get greedy and bite of more than they can chew.

For those that want capital growth, then just understand the basic principles of long term buy and holds. The word you want is in that saying LONG TERM. Those that fail here buy for capital growth and complain when they have not seen results in 3 years (believe me I have had plenty of friends tell me property is a terrible investment after 3 years....)

For those chasing cashflow, the game here has become much harder thanks to APRA but the same principles apply. You may need to be more creative in this front and perhaps look at options such as dual occ but you can still get good cashflow. A colleague of mine just bought a 1 bedder in Hawthorn and from the get go it's positive by $3,500 per annum and thats before any depreciation.
The people that fail here I think largely get the numbers wrong!

 

Many people will hit a wall at 2 or perhaps 3 investment properties. IO loans are now harder to get. There will also be increasing competition for good cashflow positive properties. Pure buy and hold strategies are now much harder so manufacturing equity and cashflow is becoming more and more important.

On the planning front Australia is moving away from the large quarter acre blocks and we will see much more infill and medium-high density development taking place in older suburbs close to existing transport routes. This is necessary to help cope with population growth. A lot of work is still needed to improve public transport routes and connections.

I also think decentralisation of growth is important, provided their are effective transport routes to support it.

 

Some things change, some things stay the same but I think it is always good to periodically step back and assess if you are going in the right direction.

Agree that just because something has worked in the past doesn't mean it will work into the future.

 

Has significant foreign investment always been a significant factor in the property cycle???

I don't recall too much mention of it in past cycles

 

"The more things change, the more they stay the same"

 

We live in more of a "global" property market than we did 10 years ago.
With all the instability around the globe as the OP mentions, I think this will only add to the demand for 4 walls and a roof on some dirt in this little underpopulated island paradise we call Oz.
If finance regs tighten even more for investors, then we may definitely see less capital growth, but less investors means less available rentals, potentially pushing rents up in an already tight rental market.
Long term boring buy and hold will still give you a return....but how much of a return compared to the last 10 years? Who knows, I don't....ill still do the same though....I'm boring

 

I love "new schools of thoughts".

As an example, I clearly remember about 13 years ago with people stating that the 4/2/2 house would become a dinosaur because the average size of Australian households was continuing to shrink.

At that time, the new school of thought (NSOT) was to buy smaller property, especially Apartments/Units. We all know how successful that was.

That NSOT didn't make sense to me. My strategy was to buy 3/4 bed houses on min of 600sqm of land. I bought two such IPs in the next 12 months. Still own them today as they are now cashflow positive.

To me, re-arrange the four letters in the abbreviation and you know what I think of NSOT.

 

Well... I'd say diversity of housing is important. Smaller one bedroom apartments for a single person right up to 4br and beyond properties. People have different budgets and needs so the smart person caters and considers those needs. There's no point building stuff nobody wants.

The problem is when there's too much of a certain type and there's little demand for it.

Im going to mention, in Sydney 3br apartments are rare as hens teeth. Developers build them but they rarely come on the market for resale. They are very tightly held and generally well located so really command a high premium when selling. They also tend to attract really strong rents too.

There's also a solid share house market too....
Run well, they can work....

 

Totally agree. That is why our portfolio contains multiple property types including 4 bed houses, 3 bed houses, 2 bed apartments, etc.

These were purchased as part of our strategy. Not because they were NSOT.

That's the problem with NSOT and people jumping on the bandwagon. Lots of people all doing the same thing at the same time.

I am a big believer in mapping one's own journey (having one's own strategy), heading down your own road (implementing your own strategy) and ignoring all the noise/distractions (like NSOT).

 

Plus 1... yes, don't do something just because everybody else is doing it.
And different styles of housing works better in different areas.

As @Ace in the Hole is alluding too.... you have to understand there are heaps of opportunities these days... you have to action/capitalise them...

Nothing remains static....

 

Yeah, the NSOT in lots of posts on this forum are to buy yield properties instead of growth properties to increase serviceability. Lots of sheeple agreeing because they can not do year 5 maths.

 

Can you refute the Math for us? There has been some pretty good posts with lots of numbers proving that cashflow vs growth works depending on what your strategy is. Especially in the current rising rates environment.