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This is why homebuyers need to think like investors in 2021
15 Sep 2020

Different times

Not only investors, but also homebuyers will need to think strategically when buying a property in 2021.

The economic landscape has changed again, with immigration grinding to a halt in 2020, and employment in many industries not likely to recover in full for several years. 

Indeed, since the introduction of inflation targeting in the early 1990s the economic environment has already changed a great deal.

The Baby Boomer generation often faced remarkably high interest rates and inflation, which meant that debt was feared and to be extinguished as soon as practicable, while it also meant that the price of goods and services often rose alarmingly.

It wasn't always bad news, though, because in nominal terms wages growth was high, and the price of housing tended to rise quickly, too, so mortgage debt was effectively inflated away over time.

Today this dynamic has been turned on its head, and attitudes have shifted accordingly. 

The introduction of inflation targeting

With interest rates falling sharply in 2020 we now have the lowest mortgage rates on record, which means that debt is less feared than it once was, and existing mortgages can often be serviced comfortably.

But we also have lower wages growth, and with the economy operating below its potential, for the past five years inflation has been running below 2 per cent on average too.  

 

In effect, what this means is that mortgage debt is not being inflated away as quickly, and in many locations around the country property price appreciation has been markedly slower. 

Workforce casualisation and other demographic shifts

There are some other structural trends to be aware of, including the casualisation of the workforce.

Not all employees or employees favour full-time roles these days, and approximately 4 million Australians are now employed on a part-time basis, compared to close to 9 million of those in full-time roles.

We're also, on average, doing most things later than we used to - buying a first place, getting married, and yes, even dying – and it's quite likely that most of us will have more than one de facto relationship which may involve co-habiting. 

While the Baby Boomer generation often sought careers (or even single jobs) for life, today it wouldn't be uncommon for new entrants to the workforce to experience multiple careers and many employment positions.

And yet against this backdrop the average period ownership for Australian homes has increased, perhaps in part due to the punitive level of stamp duty, with the average holding period for houses being more than a decade across most parts of the country. 

 

For units and apartments around Australia, more commonly bought by younger buyers and investors, the average holding period is typically somewhat shorter.

Here too, however, the average tenure of ownership is longer than it once was, with the average holding period for units in the two most mature capital cities, Greater Sydney and Greater Melbourne, now being close to a decade. 

Thinking strategically

Piecing these seemingly disparate trends together, we have a lower nominal price growth in housing prices and wages, a workforce which is likely to live in multiple locations through their working lifetimes, yet a dwelling stock which turns over less frequently.

Something had to give!

And indeed the old concept of the 'housing ladder' has already been rendered less relevant to many Australians than it once was, and perhaps it only ever existed due to the unique demographic and economic conditions which existed for a few decades after the war.

Today, it's become important for homebuyers to choose their property purchases more carefully than ever before.

You need to aim to buy a solid and consistently performing asset from a capital growth perspective, because you may not be able to rely on high levels of inflation and nominal housing price growth and to propel your next move, as and when you decide to trade up.

It's also entirely possible that a property you buy as a place of residence might later become a rental property for a period of time – for example, if you decide to work interstate or overseas - and you might even elect to hold on to such a property as a rental permanently.

It's also important to consider the role of stamp duty, since moving too frequently can see the transaction costs begin to build, which can set you back financially. 

Clearly there are many moving parts to consider, and you need to have a coherent strategy before committing to a purchase.

Buying a home is often one of the most critical decisions Australians ever make, so in these disrupted times it's more important than ever to get it right.

You can use our free WeIntelligence tools to begin your top-down market research, including looking at our exclusive state level and suburb insights.

If you'd like full-service assistance from one of our licensed and trusted buyer's agents, including market research and potentially sourcing 'off-market' deals or silent sales which most buyers never see, please see our WeFind service here

If you know where and what you want to buy, but your budget doesn't extend to paying for a full service buyer's agent fee, please see our more affordable WeBuy service here, which can help to negotiate thousands off your purchase price and de-risk the purchase exercise for you, reducing time, cost, and stress.