Media headlines are rife with claims that the huge increase in property values we’re seeing is a “bubble”. In my opinion this claim is way off base. Not only are we NOT in a bubble as there are a number of substantial market drivers fuelling property value increases.
1. Shrinking Rental Pool
Right now rental yields are at 5.5% whereas the average variable interest rate is sitting at around 5%! As you can see it’s become cheaper to buy than to rent.
This is why more Australians are jumping out of the rental pool and into home ownership. This shift is putting pressure on existing supplies of property, especially in highly desirable locations such as Sydney and its surrounding suburbs, which is consequently driving prices even higher.
2. Baby boomer power
A majority of baby boomers are sitting on a lot of cash right now and that money is doing them no good sitting in accounts that are earning very low interest. In fact, the net return on cash interest right now is sitting at just 3.5%!
Spotting an opportunity that delivers better returns than they’re currently getting, many baby boomers are choosing real estate investing over other investment options. Naturally, this increased investor activity is impacting the markets, putting upward pressure on property values as the demand continues to outstrip supply.
3. SMSF Switch
More and more, individuals are saying goodbye to traditional fund managers and taking hold of their retirement future themselves. The GFC was, in my opinion, the catalyst for this shift.
Many of these same individuals are buying double the typical number of properties they would ordinarily. They’re purchasing one investment property as an individual and another through their SMSF! Yet another pressure on the markets.
4. Stock Market Blues
If you’ve ever heard the saying, “people that invest in stocks take the stairs up and the elevator down,” it was never better illustrated than by the GFC.
This catastrophic event destroyed the financials of many people. No wonder more and more individuals are choosing to take control of their own economic futures.
Part of this control involves investing in something that is tangible and safer, like real estate. Not only can you see it and touch it, it has a proven track record of delivering a great return over time.
I know the media is rife with dire, “gloom and doom” descriptions of the markets, but honestly, all their predictions do is sell papers.
The demands outlined above and a limited supply run counter to the idea that we’re experiencing a bubble that’s about to burst!
Sam Saggers is CEO of Positive Real Estate and Head of the buyers agency which annually negotiates $250 million-plus in property. Sam's advice is sought-after by thousands of investors including many on BRW’s Rich 200 list. Additionally Sam is a published author and has completed over 2000 property deals in the past 15 years plus helped mentor over 2200 Australian investors to real estate success!
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.