In this month’s update, I will delve into the role of affordability in driving future property price growth and its impact on property portfolios. The primary reason for this focus is that property prices have increased by up to 60% compared to four years ago across major capital cities.
Astonishingly, over the past 12 months alone, property values in medium-sized and affordable cities with sound fundamentals have risen rapidly compared to expensive cities or regional areas, achieving growth rates of 22% in Perth, 16% in Brisbane, 15% in Adelaide, and 7.4% in Sydney, while Melbourne saw a growth of 1.8%, Canberra 2%, and Hobart -0.1%.
For investors, understanding and navigating affordability is essential for making sound investment decisions and achieving long-term financial goals in the current market conditions, which include higher interest rates, high inflation, and minimal wage growth.
Affordability is primarily influenced by property prices, income levels, and interest rates.
Australian property prices have experienced significant growth over the past decade, with an increase of approximately 60% in major cities compared to four years ago. This rapid surge in property values has outpaced wage growth, which has remained relatively stagnant. The Australian Bureau of Statistics (ABS) reported that average wage growth was only 4.1% per year in 2023-24, despite being higher than the long-term growth rate of 3%, it is significantly below the rate of property price increases.
Interest rates also play a crucial role in determining property affordability. The Reserve Bank of Australia (RBA) has raised the interest rate over the past 2 years to 4.35%, up from a historic low of 0.1% in 2021. Higher interest rates increase mortgage servicing costs and affect the overall affordability of property investments.
A higher interest rate means borrowing capacity has been significantly reduced. Investors may look for alternative markets with better affordability and higher yields. Regional areas, less expensive suburbs, and smaller cities often offer more attractive entry points and higher rental yields compared to high-priced major cities such as Sydney and Melbourne. For instance, rental yields in Adelaide, Perth, Brisbane, and Darwin are currently at 4% – 5%, which are significantly higher than in Sydney and Melbourne at around 3%, providing opportunities for investors to achieve better returns on investment.
In conclusion, identifying affordable markets with sound fundamentals is an important strategy in the high-interest and high-property-price environment that investors currently face.
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