Did you know that almost every capital city in the country now has a median house price with a “five” in front of it?
The lowest city median house prices are now Adelaide and Darwin , with highest medians in Sydney and Melbourne , according to CoreLogic.
Even some regional areas have median house prices at or above this level, such as in part of New South Wales and Victoria. The thing is, these figures were for the month of May, so, with strong property price growth continuing, it might not be too long before the median house price in every capital city is more than $600,000.
So, what does this mean for property investors?
Well, it means that the days of strategically purchasing a solid investment property for $400,000 or so are numbered. In fact I’d say that they are probably pretty much gone already.
History shows us that the path of property prices is up, so, investors have always had to increase their budgets as what is deemed “affordable” becomes more expensive. Then we all have to adjust to a new “affordable” One of the potential problems when this happens is that buyers with more conservative risk profiles can struggle to make peace with the new price benchmark.
For them, perhaps, buying an investment property that was priced about $400,000 seemed like a low-risk proposition. That’s arguable of course.
What Is The Real Risk?
A more affordable buy-in price meant lower mortgage repayments that were likely to be mostly offset by the rent that could be charged. Lower price points also required a smaller deposit and/or equity drawdown to finance the property.
But it might also mean “inferior” area … and being lead primarily by price point rather than location is problematic in the long terms, and in my opinion way more risky.
These days, I can really only think of one or two good locations that investors may be able to purchase for $400,000 (and continue to sleep well at night) because of the sharp increase in property prices in most places. And by “good” I mean areas that have all those great investment area fundamentals that we look for.
No you may be restricted in purchase price by what the bank will lend you of course and that’s another matter, but unfortunately, some people have remained stubbornly fixated on purchasing at lower price points, even when there are very slim pickings indeed. They are so enamoured by their “affordable” investment philosophy that they will simply look for areas where property prices are still at that level. As you should understand by now, there are many reasons why a location may provide strategic property investment opportunities, with cheap property prices never being the only one of them. What’s concerning me at the moment is that the “fear of missing out” is causing bad decisions to be made by investors whose heads haven’t caught up with market reality.
The next minute, they have purchased in an inferior location, often in one-industry towns, where the only reason it was chosen was because property prices there fitted into their narrow bandwidth of supposed “affordability.”
$500,000 is the “new black” of property investment
More experienced investors, or those who choose to work with experts, recognise that to purchase a property with the best chance of superior capital growth in the future they probably need to increase their budgets.
Not only have they made peace with $500,000 being the “new black” of property investment, but they are not concerned about financing it. That’s because they have experienced a similar price uplift in their own home or portfolio, which provides more equity to use for the higher deposit. And also they know the rent returns and long term demand for the property is solid, because it’s a “good” area.
Plus, if they don’t have access to enough cash or equity, they are prepared to wait a little longer until they do, or until they have saved the required additional funds for the deposit. They understand that patience will always pay better dividends than buying something just because it seems cheap in market conditions that are strongly rising and they’ve got FOMO kicking around in their heads.