Learn from history

The conflicting messages in the media lately have left many investors wondering where Australia’s property markets are heading. Even the different research organisations seem to be coming out with conflicting reports about what’s happening to property prices.

 Then there has been increasing concern about economic problems overseas, plus reports of further interest rate rises on the horizon. No wonder so many investors are wondering: what comes next?

The problem is that many of these investors have not owned properties throughout a complete property cycle, and this makes them uncomfortable as we move through the various stages.

Today I will delve into my memory and see what we can learn from previous cycles to help you understand where our markets are heading.

 But before I do I’d like to remind you that while we’re currently in the slower stage of the property cycle, the bottom line is that as a long-term investment, property is hard to beat.

I remember reading a research report from Massey University suggesting that Australian residential property has been the best-performing asset class over the long haul. The study dated back to 1920 and showed that property produced an average return of around 15% per annum (combining rental income and price gains) since that time.These figures don't really reflect how good property is as an investment, as they don't take into account the power of leverage and the higher returns you can obtain on your own funds. When you factor this in, property far outperforms all other asset classes over the long term.

 But while there's little doubt that property is a potent wealth-builder in the long term, it goes through the same kinds of cycles as other investment classes, which means that the reported high long-term average returns take into account periods of very high growth and also periods when property went nowhere for a few years.