Housing affordability - Capital Growth vs Cash flow?

[YPG]

Just after any thoughts on the following, I might be rambling but I am trying to get my head around it and draw on some of the knowledge of those here with a bit more experience.

Many of the "experts" are claiming that we are about to see another boom in property prices in the coming years for properties that are located within the inner and middle rings of Australia's capital cities.

I know that in the past capital growth has been where investors have made the big gains and that real wealth is obtained through capital growth rather than cash flow. But I am trying to understand what direction I want to go in - capital growth vs cash flow.

As I see Australia's property market to already be "unaffordable" to most. It is something like the average Australian property are 7.5 times the family income which is among the highest in the world. It makes me question how high will prices continue to increase? Sure past statistics show that well located property has doubled in value every 7-10 years but surely the average home cannot cost more than 12-15 times the family income? There must be a peak - or maybe I am wrong, is it truly an indefinite cycle of boom and bust? In theory a property valued at 500k in 2011 will be 1 mill in 2021 - 2 mill in 2031 - 4 mill in 2041. Does anyone else have doubts with these figures? As I know I do.

Although these are some things that I see help housing affordability in the future are:
- Properties will become medium density. Houses will be on 300-400m blocks rather than the 600+ seen in the past.
- There will be a greater demand for townhouses/units/apartments (smaller properties will cost less)
- Properties with 1-2 bedrooms will be in higher demand due to changing demographics; aging population, significant increase in 1-2 person households.
- Australia's economy is one of the strongest in the world
- Salaries and employment will continue to increase
- Rents are increasing - so I would expect prices to eventually follow

The reason I am considering this is to decide which direction I want to go as I build my portfolio.

Should we expect more moderate increases in capital growth in years to come - unlike the high gains we have seen in the past?
Should we value cash flow higher than in the past? Eg. Minimum 6% yield compared to 4%?
Do higher yields in fact increase serviceability or is manufacturing capital growth the way to go?
If you go done the cash flow path you can produce a steady income to live/retire/reinvest off but I don't see it as the way to become wealthy.

Or does the road to wealth still lie with capital growth as many say that you don't become wealthy from cash flow. And I guess that I am lucky as I am still very young and hopefully I have many years to see some growth and growth wealth and become financially independent. A somersofter once told me about 6 months ago when I started looking at property investment that residential real estate is one of the most forgiving investments in the long term. So surely over such a long period capital growth can continue to increase.

Currently my strategy will be to buy properties with 10km of major cities - but like I said I thought I would just share a few of my thoughts/doubts to draw on some knowledge of those here with more knowledge and experience of capital growth vs cash flow in regards to affordability.


Thanks for your time.
Cheers,
YPG

 

[Aaron_C]

The only ones complaining about housing affordability are the ones who would never buy a property anyway. Just focus on your own investments.

 

[HomePage]

I too ponder about how much longer prices can outgrow wages before they at best fall into step with each other. When that does happen, yield will be become much more important for overall investment performance than it currently is. And since rent affordability is pegged to that same wage growth, the only way yields can improve is for prices to go down. How much longer we here in Australia have on this ride is anyones guess, but if the rest of the world is anything to go by it can't be that much longer.

 

[Deltaberry]

The decision is very simple.

If you think it is unaffordable and that there's no capital growth around the corner, you just wouldn't bother to invest even if it's for cashflow. Not saying cashflow investments are bad, but they're small in a relative sense and they're not going to help you make 5x your money... Besides why wouldn't I invest in Telstra franked 10% dividends (equivalent to a 13% yield) if there's no capital growth? Or find a Telstra equivalent overseas and when the currency retraces, I turn 13% yield in to 26% yield.

As you pointed out, capital growth is where most of the money is made. If you can't see any, it's probably time to look at other asset classes or other jurisdictions. And with a high A$, why would you not look in to jurisdictions where you think there's higher possibility of capital growth, comparable yields, and a low cost of borrowing? Unfortunately lack of market knowledge, inconvenience, inability to equip yourself with the essential knowledge of another jurisdiction, lack of time etc are all factors cited by many on this forum as impediments.

And I just wanted to point out - never take your economy for granted. Japan was the strongest the world had ever seen since the USA, until the next year when it busted.

 

[Aaron Sice]

As you pointed out, capital growth is where most of the money is made. If you can't see any, it's probably time to look at other asset classes or other jurisdictions. And with a high A$, why would you not look in to jurisdictions where you think there's higher possibility of capital growth, comparable yields, and a low cost of borrowing?

And I just wanted to point out - never take your economy for granted. Japan was the strongest the world had ever seen since the USA, until the next year when it busted.

.....but if CG is nothing but fairytale values, being that the "value" is different one buyer to the next, then growth and the money gained is also subject to that law.

in much the same that debt tied to an asset moves with its inflation and deflation of its "value".

 

[Deltaberry]

Not talking about any philosophical idea of value. I'll take bank valuation or general market consensus (ie your neighbour's opinion) as prevailing value.

 

[mrmonopoly]

Many of the "experts" are claiming that we are about to see another boom in property prices in the coming years for properties that are located within the inner and middle rings of Australia's capital cities.

Who are these supposed experts? I think you'll find a lot of both experienced investors on SS would seriously question the likely hood of any short term boom at least on a macro level. This is coming from someone who is in aggressive acquisition mode and very pro property as a long term asset class.

I am trying to understand what direction I want to go in - capital growth vs cash flow.

The two are not mutually exclusive. I'd recommend a balanced approach. Unless you have unlimited income from other streams, you'll need the yield to keep buying. But I agree to a certain extent that the CG is where the long term money is.

In theory a property valued at 500k in 2011 will be 1 mill in 2021 - 2 mill in 2031 - 4 mill in 2041. Does anyone else have doubts with these figures? As I know I do.

Yes. I personally believe 1-2% above inflation is far more likely. But banks are incredibly innovative when it comes to making more money, so who knows. Everything seems cheap in hindsight.

 

[Sticky Fingers]

As I see Australia's property market to already be "unaffordable" to most.

Food for thought.

Everything is affordable if someone wants it - within sensible reach of course. Look at those on welfare who can afford smokes, drugs, alcohol, coffee - but can't afford their rent. Those who have a job and can afford a new car or two, OS holidays, wining and dining, the latest gadgets, new clothes every week, dogs, all the latest toys for their kids,etc - but can't afford a nice new home in their favourite location. This "housing is unaffordable" argument is so boring. It has become a mantra for the ignorant masses who have surrenderred to circumstance. I know people who have come here with a few scanty belongings and have created wealth beyond most. Yes, everything was unaffordable at that point in time but they were grateful to have come to a country where they have the opportunity to create a good life for themselves and others. They couldn't even speak the language.
I am not criticizing these folk who have complaining mindsets about unaffordability but hope they can take control of their lives and attitude for their own self esteem and welfare.

The irony is that if we were all more productive and cast off this attitude of entitlement and lack, if we were all more accepting of financial realities and embracing of opportunity rather than complaining about how expensive everything is, then we would all be wealthier and house prices would even be much higher!

 

[Break'n Out]

nice work Sticky fingers.. Totally agree with affordability Vs Priorities..

personally we gave up a lot to build a base for our property portfolio to grow.. and no doubt in 10 years time, people will say how 'lucky' we are..

There's no luck in setting yourself goals and prioritising your lifestyle to achieve those goals..

YPG - the most important thing is to not over commit on your first purchase. make sure that it is affordable and sit on it for a year so that you can learn by the experience.. understand the hidden costs and effort to maintain an IP. And then in a year, re-assess your position and re-align your expectations. you'll be all the more wiser and confident in which direction you will want to take.

Good luck