Is Investing in Australian Property Risky?

We discuss the common misconceptions surrounding the Australian property market, emphasizing its long-term stability and lowered risk profile based on historical data. Evidence reveals how this asset class outperforms others and the strong demand for housing, making it a reliable investment for the future.

• Debunking the myth of Australian property as a high-risk asset class
• Analyzing CoreLogic's 30-year growth data for capital cities
• Homely’s long-term review highlighting consistent metro performance
• The impact of the RBA and financial regulations on market stability
• Understanding the lending trends of the Big Four banks
• Loan to value ratios and risk assessments of residential real estate
• The tangibility of property and its effect on volatility
• Factors driving ongoing demand for residential properties
• Leveraging properties for wealth creation through compounding
• Strategies for building a successful diversified property portfolio

Transcript

Speaker 1: 0:00

Welcome back to another episode of the Taylor Property Wealth Podcast. My name is Casey Taylor, I'm the host of the podcast and in today's episode we're talking about is the Australian property market a high-risk asset class? There's some people out there that think that Australian residential real estate is high-risk, but the reality is that it is a consistent long-term performer. And it is a consistent long-term performer and it is low risk and today we're going to break that down based on CoreLogic's last 30-year data on how property has performed. We're going to be talking about homely review on data from the last 50 years and then we're going to really just break down some of, I guess, the bank's attitudes towards residential real estate and what they're willing to lend to borrowers when they are going out there and purchasing compared to some other asset classes, and that gives us confidence as what their risk profile is to what our risk profile is as a borrower, and just discuss the volatility of property versus some other asset classes and the power of leverage and that compound effect over time. So we'll get straight into it and let's talk about that 30-year data that CoreLogic released in 2022. Now, across all asset classes, it performed extremely well. Now, the top performer across those asset classes were houses in the capital cities. That grew by 453%. If you've listened to other episodes, I quote that one a lot. It is powerful, okay. Now, on the flip side of that, units grew by 306 percent over that 30-year period in the capital cities and then, if we're looking at the regional markets, 313 percent growth for houses in regional locations and units in regional locations 212 percent. So surface value. Looking at that, the capitals do perform more consistently long term above average. But then also houses out of those two are the better performers based on this data. So if you're looking at a 30-year period, that's really it's taking into account some of the corrections, it's taking into account multiple growth years et cetera, where some of those marketplaces performing above others. So that's a really good indication that if you purchase today and just think about what your age is today are you 25, are you 30, are you 35, in 30 years time, what that property price is going to look like. And yes, it might not do the same growth as it has over this 30 year period, but we know that consistently long term it is going to perform and get some, some crazy results.

Speaker 1: 3:12

Now looking at some more data, homely did a review from 1970 to 2016 and we're just going to go through a couple of the metro locations. But Brisbane, over that period of time, did, on average, 9.6%, and then Sydney, melbourne did 9.5%. So some solid, consistent growth there. Long term. If we're looking at those metro locations, we've got a really good understanding that they're going to consistently do well and that that's why we like metros. It's not only just the performance of them, but there's many other things that, as an investor, allows us to go and make a decision with low risk, which is what we're talking about today. It has the more diversified economy, more diversified industries with employment, so if one area is affected, there's still many other areas there that can support the demand, the borrowing capacity, which ultimately helps push those property prices higher. The population growth is consistently going there, so that demand just stays strong in those areas. It keeps our vacancy rates low. So many other factors.

Speaker 1: 4:27

Okay, now one of the most crucial points and I don't think people really understand this is how reliant the Australian property market is on residential real estate, and that means if something is going wrong here, they're always going to intervene. There has never been a crash of 40%, despite I think it was a current affair in 2018, was predicting a 40% decrease. They did multiple things on it. You can still find some of these on YouTube. I looked at them not too long ago. It actually makes you sick to see what they are putting on there and projecting because that just simply did not happen. They are just fear mongers and that's what they are trying to do.

Speaker 1: 5:15

But we've got swings and levers. The RBA is there for if, if prices are correcting or there's so many different elements that can take place, they can pull levers to be able to positively or negatively impact and speed things up, slow things down. One of the simple ones is obviously the Reserve Bank of Australia just either increasing the cash rate or reducing the cash rate. Over the last couple of years, we've seen that obviously increase and now we're in a position in February 2025, rba is meeting next week and it is looking like there's going to be a rate reduction. Time will tell. However, there's some of those levers. There's also policy changes that can come into effect. What's APRA going to put in place? The restrictions on investors in the past, so many different little elements that they can pull and lever to influence the property market. But because we're so reliant on it. If they think it's going to go back as 20%, they're going to pull some levers to allow that to take place.

Speaker 1: 6:23

And that leads on to the big four. A lot of their business is lending to residential real estate commercial, whatever it is but they're heavily reliant on residential real estate and real estate. And because they're some of the biggest companies in australia, the australian government relies on them to perform as well, because that allows things to go around in the australian. So that's a massive, massive one to keep in mind that we're reliant on property. And when the big four and when other lenders and banks are going out there and they're borrowing money, some of them are prepared to go up to 95%, 80, 90, 95, but residential real estate they're happy to lend far more in comparison to shares or commercial property. And the banks aren't dumb. They have people that are going out and they're analyzing the marketplaces, analyzing different bits and pieces. They might actually put restrictions on areas internally as to where they're happy to lend money and not lend money. So they've got their built-in risk profile. So, as a borrower going out and borrowing money, if they're happy to lend us 90, 95% to go and purchase that property. Their risk profile's already calculated in and they don't believe that to be a high-risk asset class If we can leverage that high. Yes, we're paying lenders mortgage insurance, but they have the confidence there that property isn't going to go backwards 20% and there's going to be borrowers sitting there in a really big deficit. Some of those individual I guess concerns they have they might not lend to brand new builds or apartments and stuff where it's high risk, massive amounts of supply and there's a high risk that that property is going to go backwards or the valves are going to come in lower. So it's super crucial to understand that side of things Now, australian being heavily reliant on residential real estate.

Speaker 1: 8:34

In november 2024, as per core logic, residential real estate grew to a value of 11 trillion. 11 trillion big number. I can't fathom that in my old brain. Don't know if you can. But11 trillion Now on the flip side of that, $2.3 trillion of debt. So if we break that down into a loan to valuation ratio, 21% is the LVR on the Australian residential real estate what the value is versus what Australia holds as debt. That is extremely low. If you're going to the bank with 21% LVR, they're going to throw money at you because you're super low risk. Okay, you're borrowing pretty much 20% of the value of the property and that is a really, really good position to be in. So that's another important one to remember.

Speaker 1: 9:35

Now, residential real estate is tangible, and I say this to everyone all the time when we're doing strategy sessions and we're talking about why property, why are you motivated to invest in property, and a big one. That a lot of prospects say, and what we like about property is that it's tangible and that means that it's just going to simply be less volatile. Because if someone's starting to freak out and go, shit, I need to sell this property, they're going to have to call some agents, get some appraisals. They're going to have to decide to list with someone, go through the sales and marketing process. They're going to have to decide to list with someone, go through the sales and marketing process. Depending upon the area, that could be a couple of weeks to a couple of months potentially, and then we've got a six-week settlement on the end of that. So for you to be able to get your money in reality, it's probably going to take at least a couple of months, if not longer, for that money to hit your account. So because of that, it is less volatile than checking out a crypto or shares, where you can do that a lot quicker than you can in the property space. So that's just a reason we really like about the tangibility of property.

Speaker 1: 10:50

And another thing I say as long as human beings are on the planet 7 billion people currently there is going to be a massive demand for residential real estate because we all need somewhere to live. All right, that is as simple as it gets. And us as a country in Australia, we are very much in demand. We actually aren't very populated in comparison to the land that we have, so our population will continue to rise and that demand is going to continue to take place. So it's it's very positive for for australia and for property in aust.

Speaker 1: 11:32

And the last little thing I want to touch on is leverage and the compound effect. And going back to the banks are willing to go out there and throw 90% 95% at us in some circumstances, and that allows us to be able to go out and use $100,000, let's call it as a 20% deposit, not factoring in our purchasing costs but then go out and buy a $500,000 asset and instead of getting 10% on $100,000, we're now getting 10% on $500,000. And that's generating rental income over time. That's going to be positive cashflow. I'm paying this money in the pocket less to hold, and then we just have to hold and let that compound effect take place. And then as our property grows, we go out and we purchase another property and another property and all of a sudden we might have a couple million dollar portfolio and it's doing 10% per year and it's a lot more powerful than just on that cash we have and that cash sitting in a bank account is losing money every single day to inflation. So it's extremely powerful to utilise that leverage and that compound effect and that's another reason why we love property. Because of that. Okay, hope you like this one today, guys. It really is.

Speaker 1: 12:56

Just discussing is the Australian property market high risk, low risk and how you look at it. There's so many different avenues you can go down into property as well. Different marketplaces you can purchase in at different times. So once you diversify and have a bit of a portfolio built up, you're always going to have properties in the portfolio performing. You can always then go out and be sophisticated and know that and pull equity out of performing properties and go again into marketplaces earlier in their growth cycle and continue to build and build, and build and take advantage of that leverage. The banks are willing to go out there and lend you 90, 95% in some extreme cases. So it is positive. Property performs long term. We know that and the Australian economy is heavily reliant on it. We have strong population growth in this country and that's going to continue to make property perform. Thanks for listening. Hope you saw some value in this one and we'll see you on the next episode.