Given the sorry state of the share market, Australians may want to revisit property as the go-to asset class for potentially getting rich faster.
What’s attracting investors away from highly volatile shares to property is the lure of solid price gains and steady investment yields. So much so, that annual investment lending growth in residential property is already moving at its fastest pace since 2022.
One silver lining embedded within global tariff woes is the expectation that interest rate cuts could now be accelerated.
Nationwide residential property prices are up 3.4% over the last 12 months.
Consensus forecasts for the residential market at the start of 2025 were for prices to increase 4% with yields (before expenses) running between 3% and 6%.
Buying on spec
Lured in by the expectation of lower rates, a faltering share market and get-rich-quick do-it yourself renovation shows, growing numbers of investors are making highly leveraged one-way bets on property.
Residential property bubbles typically occur when participants who typically dwell at the margins are pulled into the market as prices spiral higher.
They’re typically less experienced, have shorter time horizons and are more highly geared.
These three characteristics can typically create a buffer for the property owner, reducing the likelihood that they could be thrown out by the slightest shudder in the [property] market, a shudder that is bound to materialise sooner or later.
The danger of throwing the fundamentals out the window and betting on price appreciation to generate return, says Shane Oliver chief economist at AMP is that at some point the music has to stop.
Meantime however, despite a decade of mounting concerns over escalating property prices, Australians continue to pay more to each other to buy their homes.
With Australians now the most leveraged people on the planet - with a household debt to-income ratio of 188% - the downside now outweighs the upside for investors' hell bent on flipping.
Admittedly, prices could take a dramatic tumble.
However, given Australia’s chronic house shortage, most experts can’t foresee prices dropping any time soon.
"The best time to invest would have been in 2012 while the country was still fixated on cooking shows, and before home renovation shows made 'flipping a property for profit' look so easy," Oliver says.
"The fact that property investing is being romanticised is a pretty good sign it's going over the top."
Clipping the ticket
With average wages only going up by around 3.2%% annually, Oliver suggests property investors seriously question some of the 'rules of thumb' that best serve those who make a living clipping the ticket.
Oliver reminds investors that they're now buying a lot closer to the top of the cycle than the bottom.
While property price appreciation has been a key driver of wealth creation for generations of Australians, Oliver's concerned that soaring house prices are exhibiting the same characteristics as a Ponzi scheme, with the last ones into the market bearing most of the risk.
Unlike 20 years ago when investors could have bought almost anything and done well, Matt Sherwood head of investment strategy at Perpetual Investments questions whether buying a property to manufacture instant equity through renovating and quickly reselling is still as bankable a proposition.
Invest 10 to get 10
Underscoring the 'classic Australian renovation' dream is the expectation that by investing 10% of the purchase price in renovation improvements, you'll unleash sufficient value to increase the resale price sufficiently to make a minimum 10% profit after costs.
Even renovation expert Cherie Barber concedes that due to growing competition between owner-occupiers and property flippers in overheated markets like Sydney, opportunities to 'buy, renovate and sell' for profit are becoming trickier to pull off.
Unsurprisingly, with the 'multiplier effect' from renovations alone being progressively squeezed, she says more property investors recognise that buying, renovating and renting is a safer and potentially more profitable strategy.
Not every 'reno' project is a goldmine, but Barber says property investors can typically make more money when the market is bad, and there's more stock, fewer buyers and greater competition amongst tradies.
That's why she says investors' may find better opportunities within declining markets.
"There's a fine art to flipping for profit, and while Australia is full of unrenovated houses, the big question is whether the numbers stack up."
Property typically underperforms
Despite the national love affair with bricks and mortar, Perpetual's Sherwood, author of the book Intelligent Investing, reminds investors that when it comes to assessing residential property as an asset class, it repeatedly underperforms everything but cash and (typically) gold.
Given this, it's hard to fathom the attachment to property in raw numbers.
However, one theory is that many property investors have trouble removing the impact of gearing from the end result.
While a property is typically geared anywhere between five and 20 times and thus creating some genuinely outsized profits, few share market investors would consider gearing any more than 50%.
Maintenance costs
Perpetual's Sherwood, however, says that investors need to remember the power of income from shares that are either unencumbered or with the additional benefit of franking credits while rental income from property is usually spent on upkeep.
"The share market outperformance simply reflects the power of reinvesting income," Sherwood says.
"Since 1974 there have been seven periods where share market prices have fallen by 20 per cent-plus, yet it still managed to deliver a four-fold rate of return over property."
While they never want to invest in assets that lose money, one reality check investors must also understand, adds Sherwood is that $2 in every $3 of income from residential property on average will be lost in associated costs.
With property being expensive to maintain and insure, on top of strata levies, real estate fees, renovation work, and repairs all eating into income, he says property has to get a strong rate of return just to break even.
That’s even before you factor in costs like stamp duty.
Before investing in residential property, Sherwood says investors really need to understand how it behaves as an asset class.
Properties are unique and the prices paid for them can depend on any number of seemingly inconsequential factors.
Cash flow
It's equally important, adds Sherwood for property investors not to fall into the trap of believing the rental yield represents the income they will receive or the mirage of thinking they're wealthier than they really are.
"Income is a cash flow and yield is a ratio, they are completely different concepts; one does not represent the other, and they need to consider income after expenses," Sherwood advises.
"Investors should be making decisions based on total rates of return after all costs, which is where professional advice helps."
The better approach, says Chris Selby, vice-chairman at Escala Partners is to incorporate property investing within a diversified plan that takes into consideration an investor's work situation, current investment experience, lifestyle and family considerations, including assets, liabilities and expenses.
"Before buying anything, it's important to understand a client's needs and skills," Selby says.
"There are investors with a history of buying and selling properties, but to inherit a lump sum and put it all into a property without any experience could be disastrous."
Due in part to the tax advantages, he says property belongs within every investor's portfolio, but due to poor liquidity, it suggests it is limited to between 10 to 20%.
"Unlike shares, which are marked-to-market daily, the value of property is only marked at purchase price, and the transaction costs are difficult to measure," Selby says.
It never ceases to amaze Selby at the number of Australians who invest in property without independent professional advice.
He reminds investors that unlike the professional advice community – including financial planners and accountants – self-promoters charging big money to attend courses or unlicensed property spruikers offering free seminars, typically aren't accountable for their underlying advice.
Flip check list
• Check how much cash flow you'll need to allocate weekly/monthly on a before-tax basis to hold the property.
• Assess how much income protection you'll need to avoid selling the property in the event of illness/accident, especially if negatively geared.
• Run a line-by-line spreadsheet on all costs, factoring in the purchase price, the expected sell price, plus all the associated costs.
• Become an expert on the small cluster of suburbs you're thinking of buying in, and understand council plans, future infrastructure developments and long-term growth drivers.
• Find out how much recently renovated properties have sold for in the area.
• Ask up to 10 agents what people want in the area.
• Pressure-test up to five agents before engaging one.
• Acquire the right renovation knowledge and tap into experts who've done it before.
• Decide what material changes will deliver the best uplift in value.
• Scrutinise tradies, and check they're licensed and insured.
• Assess potential changes in personal circumstances that could expose you to excessive debt.
• Establish a plan for monitoring quality control. Conservatively project future rental yields and interest rates.
