'You've got to think generationally': Why dips in the property market shouldn’t discourage long-term investors

Residential property prices in Sydney and Melbourne have fallen in the past 12 months. Domain Group data shows a 6.5 per cent drop in Sydney and a 3.2 per cent drop in Melbourne in the year to September 2018,  and economists and market commentators predict further falls.

But as Domain economist Trent Wiltshire points out, you need to put these falls into context.

“In Sydney between 2012 and 2017, house prices went up by 85 per cent,” Wiltshire said. “People who bought at least five years ago will see gains regardless.”

Time in the market, rather than timing the market, remains a critical factor for successful property investing, and a look at long-terms trends of the Australian property market provides some perspective.

A long term view pays off

Terry Ryder, the managing director of Ryder Property Research, and AMP Capital chief economist Dr Shane Oliver believe ”20 years to a lifetime” is a good definition of long-term and they urge investors to “get in when they’re young” and hold on.

“People often say 10 years, but you’ve really got to think generationally,” Oliver said. “History has shown that if you want to get the power of compounding, you’ve got to think beyond 10 to 15 years.”

Ryder says investors should build a portfolio rather than buying and selling, and Wiltshire concurs.

“Property is not something people should be dipping into and out of to make a quick profit,” Wiltshire said. “House prices go in cycles, and prices do fall sometimes, it happens.

“People who are buying property as an investment should be looking to hold that property for a number of years. The transaction costs make it difficult to make a profit in a short timeframe.”

Ryder notes that while past performance is not an indicator of future outcomes, there is compelling evidence for investing in property over the long term.

Different markets move at different rates

Analysis of property prices in Australian capital cities since the early 1990s shows that while cities don’t all move in the same direction all the time, in 18 of the past 25 years at least one city had double-digit price growth.

“For those feeling a bit despondent about the negative headlines and the fact that Sydney and Melbourne are not booming, it’s all about looking elsewhere,” Ryder said. “History and analysis shows us that somewhere will be showing growth.”

Ryder says it’s important for investors to understand there isn’t a single property market in Australia.

“There’s a lot of generalised commentary about the market in terms of a downtrend. and there has certainly been a downturn in Sydney and Melbourne. But there are other areas with growth, including some of our smaller cities and particular regional areas.

”You only need to turn your attention away from the two biggest cities and look at attractive options elsewhere.”

Oliver agrees. “It’s dangerous to talk about the market as one market,” he said. “You often hear reports that seem to focus on Sydney and Melbourne alone, whereas Perth and Darwin have already been in decline and are getting close to the bottom.

”Other cities haven’t had anything like the boom Sydney and Melbourne have seen, particularly Adelaide and Brisbane, which have only had modest capital growth. Hobart and Canberra have seen some strength, but that was relatively short-lived.”

Oliver says the Sydney and Melbourne markets warrant a degree of caution because they’ve had a big run-up and are now in decline.

“There are much more attractive rental yields in other cities, there’s still plenty of choice out there.”

According to Domain Group data, year on year falls have been recorded for house prices in Darwin (12.0 per cent) and Perth (2.2 per cent).

But there have been modest gains in Brisbane, Adelaide and Canberra, and in Hobart prices have soared 19.3 per cent.

So rather than asking, “Is now a good time to buy?” Ryder suggests asking, “Where is a good place to buy for growth?”

He said: “If you bought into Sydney or Melbourne five years ago, you’d now have quite a bit of equity, so you hold that property and use the equity to buy elsewhere.”

Oliver reminds investors the market has been through “rough patches” in the past.

“There were rough patches in the 1930s into WWII, also around the mid-1970s and 1980s when inflation was a lot higher and weighed on property,” he said. “But over a long period, like the share market, property helps to grow wealth.

“I would expect shares and property will continue to have similar long-term returns notwithstanding this current volatility.”