Yahoo Finance 15 property investment lessons I learned from COVID
The naysayers and property pessimists were proven wrong.
Despite prolonged lockdowns, no immigration, no international students, the threat of high unemployment and all the negative forecasting for Australian housing markets, the value of many homes around the country grew by more than 20 per cent – as much as 30 per cent in some locations – in the past year alone.
The past two years have been among the most tumultuous in living memory, and yet Australia looks set to emerge better placed than almost any other country and our property markets have surprised just about every commentator.
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Obviously, these have been unprecedented times, therefore we can’t blame some of those forecasters who made predictions early on in the pandemic for getting it so wrong.
So, let’s put some context to what has actually happened since the pandemic began.
Although our two largest capital cities experienced numerous lockdowns, our property markets experienced incredible growth from the cities to some of our smallest regional towns.
Now that it seems we’re slowly coming out the other side – across that bridge Scott Morrison said he would build for us - I wanted to take a look at what home truths can be taken from COVID to make us better property investors.
Here is what I learned about property thanks to the pandemic.
1. Our property market is too big to fail
The government and banks have a vested interest in keeping the housing market propped up.
They are invested with us and when things got tough in the thick of the pandemic, they stepped in to help those in need.
Given the incredible circumstances the past couple of years has thrown our way, the resilience of our banking system is also clear – it is also too big and too strong to fail.
2. The supply of money is important
Property investment is a game of finance, with houses thrown onto centre stage.
When cash is plentiful (and cheap like it’s been in recent years) property values rise.
Now, however, the financial landscape is beginning to change as lenders start to slowly move up their fixed rates and APRA steps in to ensure sound lending practices.
3. The wealth effect is key to consumer confidence
The government knows the best way to guide a population out of a recession is for people to spend their way out.
When we feel wealthy, we are more likely to spend money, which in turn makes the wheels of industry go around.
Those who held assets and particularly property, be it their homes or investments, have benefited from government stimulus and therefore have been keen to reinvest in the market.
4. Knowledge-based workers have job security
Anyone who could do their work remotely was at an advantage during the pandemic.
These Australians were able to “sell” their knowledge, rather than rely on their hands to make money, which meant not only could they work from anywhere, but they were less impacted by lockdowns.
One takeaway lesson, if you are looking to future-proof your career, is to consider pivoting to a knowledge-based job if you’re not in one already.
It means your skills are likely to be in strong demand moving forward, you’ll attract higher wages and won't be disrupted in the event of another pandemic, meaning you'll have the money to invest in assets.
5. You can't rely on one income stream
Whether it’s one job or one business, you need multiple sources of income for financial security - but the rich have always known this.
Next time it may not be another pandemic, it could be a personal health issue or other unique circumstance.
If you have an additional passive income from an investment property then you could live off the rent or even sell a property if needed.
The pandemic was a wake-up call for many Australians to save and invest as they realised they were really only a few weeks of lost income away from being broke.
6. Cashflow buffers are important
Having plenty of cash savings provides a safety net in case your income unexpectedly falls, or a large expense crops up.
This doesn’t necessarily need to be in cash – it could be in an offset account. Ideally, you would want to hold between six and 12 months of living expenses in cash savings but, depending on your financial position and risk appetite, it might make sense to hold more.
That cash buffer just reduces unnecessary stress and anxiety plus ensures you have sufficient time to make whatever adjustments are prudent, including selling assets.
And clearly, this is a lesson many Australians learned. It’s estimated we have amassed a war chest of more than $200 billion in pandemic saving and an estimated 80 per cent of homeowners overpaying on their monthly mortgage payments.
7. Financial security lets you a sleep at night
Many people have been working hard for years (or decades) and have very little to show for it other than their own home and compulsory super.
So, building a nest egg outside of these main assets provides greater financial strength to weather any storms – pandemic or not.
For example, if you lose your job and have liquid investments such as shares, then you know you have a fallback position that doesn’t involve selling the roof over your head.
If you haven’t been regularly investing, perhaps COVID is your reason to start.
8. Markets will always correct
Property market corrections are not uncommon, in fact they seem to occur every 8-12 years.
But I don’t try to time them, and neither should you.
I expect there will be another recession in the next decade, but I don’t know when.
I expect the property market will boom over the next few years followed by falling prices, but I don’t know when.
I expect some investments I make won’t do well, but I can’t be sure which ones.
I expect interest rates will rise, but when that will happen, I’m not sure.
And I also expect there will be another global financial crisis, but I don’t have a crystal ball to know when that will occur.
There is a big difference between expectations and a forecast.
An expectation is the anticipation of how things are likely to play out in the future based on how I see things have unfolded in the past. A forecast is putting a timeframe on that expectation.
In an ideal world, we would be able to forecast what’s ahead for our property markets with a level of accuracy, but we can’t because there are just too many moving parts.
The lesson is to be ready for times of very high uncertainty so you can stay the course.
9. The importance of investing in resilient large cities
My home town of Melbourne survived six lockdowns and a total of 260 days of locals confined to their homes.
Rather than collapse, Melbourne’s property market has shown its resilience and is already bouncing back.
And so has its economy.
The fact that the Victorian capital has a range of different industries is living proof that it makes great financial sense to invest in large cities.
The key is to invest in diverse economies that can easily rebound – one reason why I believe you shouldn’t invest in regional Australia.
No small country town could survive a lockdown the length that Melbourne did.
10. The importance of neighbourhood
One thing I know many of our Melbourne friends missed during the prolonged lockdowns is their “third place”.
If our first place is home and our second place is work or the office, then that third place – whether it is the homes of extended family and friends, a favourite café, gym, place of worship, the shops or the local pub – was temporarily taken away from millions of people.
They missed that connection to others and an outlet to take a break from family or colleagues for a short period to reset.
All these amenities will be in demand moving forward and have come to be what some refer to as the 20-minute neighbourhood.
Location does about 80 per cent of the heavy lifting when it comes to your property’s price performance and some locations will outperform others by 50-100 per cent over the next decade.
So, how do we identify these locations?
It’s well known that the wealthier people get, the less they want to be commuting or moving around their city in traffic so they are prepared to (and can afford to) pay for the privilege of living in lifestyle suburbs with a high walk score.
Therefore, lifestyle and destination suburbs where there are loads of amenities within a 20-minute walk or drive are likely to perform well in the future.
Many of these suburbs will be undergoing some form of gentrification and will see incomes growing, which will in turn increase people’s ability to afford higher prices.
11. The importance of owning the right assets
A-grade assets held their own during the downturn of 2020.
They either maintained their values or, if they did see falls, quickly clawed back any losses in both value and rents.
In a post-pandemic world, A-grade homes and investment-grade properties will continue to outperform inferior properties.
Owning top-shelf assets means you can harvest that wealth when the current cycle ends.
12. Houses tend to outperform apartments
While it’s nothing new, the price gap between houses and units has never been so large as space became a top commodity throughout lockdowns.
Many established apartments are now selling below their intrinsic value or replacement cost because units largely fell out of favour during COVID.
This upward cycle was led by home buyers, but they weren’t all driven by pandemic panic.
Millions of Millennials are moving into the family formation stage and are seeking to move out of their apartments and into houses.
This shift just shows that the Great Australian dream is still alive.
In addition, pre-downsizers are buying homes for future retirement but are not selling their current homes.
Although I have praised the power of houses over units, I still believe apartments can be a great choice for investors on a tight budget.
Well-considered, family-friendly apartments in medium- and low-density complexes in desirable lifestyle suburbs may still make good returns.
13. A two-speed property market is on the horizon
Unfortunately, the pandemic has left some members of society struggling financially.
There has been a fragmentation in society – those who have been adversely affected by COVID, and those who have not (or have even soared ahead financially).
Moving forward, many potential buyers will be priced out of the market as property values have grown by more than 20 per cent at a time when their wages have hardly grown at all.
This means homes in median- and lower-priced suburbs are likely to languish at a time when those Australians who are still doing well financially fight over the few properties available in the higher price bracket.
On the other hand, prices at the upper end of the market and in aspirational suburbs will keep growing this year.
14. Immigration is not as important as we thought
Despite our borders being shut for more than two years, property values not only kept rising but increased at their fastest pace in decades.
This was mainly due to the fact Australians upgraded en masse, made COVID-induced lifestyle changes and also took advantage of historically low interest rates.
Simultaneously, markets are undersupplied so, when borders open up completely, housing availability will be tight, therefore underpinning property price growth.
We have, however, discovered that immigration is very important for our CBD apartment markets. Without students and overseas tourists, these inner-city suburbs have taken an enormous hit.
15. Building costs will rise
The Cordell Construction Cost Index shows the costs of building and renovating a home have surged by 7.1 per cent nationwide over the past year – more than double the rate of inflation.
And this is likely to continue as the surge in new construction and renovation coincides with the disruptions to supply chains and a shortage of materials and labour.
This means the cost of new dwellings will have to rise as builders and developers pass on these costs and, in turn, this will pull up the price of established properties.
The bottom line
Strategic investors took advantage of our property markets while others sat on the sidelines over the past few years waiting for the picture to become clear.
It’s likely 2022 will be another year of uncertainty, so the first step towards your financial freedom is to gain knowledge to take control of your situation.
You’ll need to have the serenity to accept what you can’t control, the courage to control what you can and the wisdom to know the difference.
My suggestion is to get a good team around you and invest in your future – after all you’ll be spending a lot of time there.
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