Our property crystal ball

Australian property prices are high now. But the real question is where will Australian property prices be in 2046?

Clients have think long term. As we wrote last month that can as far out as 100 years: http://www.mcmasters.com.au/100-years/.

The Russell ASX Long Term Investment Report is mandatory reading for anyone really interested in investing. It says in the twenty years to 31 December 2015 Australian property was the highest earning asset class and averaged 10.5% a year, including rent and capital gains. That’s an Australian wide average: obviously capital cities did even better.

Australia faces a rising population, rising incomes and rising home aspirations.

Melbourne cities are the best places in the world to live: Melbourne has won the Economist magazine’s nod for the “world’s most livable city” eight years in a row, and the other capital cities are not far behind.

Australian incomes are amongst the highest in the world and, despite the doom and gloom merchants’ best efforts, Australians are getting richer while the rest of the world is getting poorer. The Australian economy is growing, and has just recorded an unprecedented 25 years of straight quarter on quarter economic growth, averaging about 3% a year.

So, what should you be doing on the property side of things?

First, appreciate low interest rates fuel property price growth. Conversely, higher interest rates curb growth and even cause losses. Expect some losses in the coming years. Interest rates will not be this low forever.

The key is to think long term. Think 30 years not 30 days.

Things become clearer and more certain in the long term. There will be a huge increase in population, but no increase in the amount of land. Prices will rise considerably across the board, and will rise even more considerably in the fashionable suburbs where doctors like to live.

You should be buying more property.

But don’t go near cooky-cutter apartments without locked in views. They have not worked as investments and probably never will. When we talk about buying property we mean property attached to land, and which is therefore scarce and will appreciate over time.

Your own home is a good starting point. Buy as much home as the bank will lend you. It’s CGT free and pension assets test free (this will not change anytime soon). Over thirty years your home will be a great investment.

You should negatively gear an investment property or two. The tax benefit is worth a lot to a high tax rate doctor, and makes a good thing even better. Over thirty years your investment properties will be great investments.

Think about buying a home for every child. If you have two kids negatively gear two properties, as a way of hedging your family against future home price increases. You buy the property at 2016 prices, not 2046 prices, and the tenant and the ATO pay the loan off for you. This is much better than having your child buy the property at 2046 prices and then pay off the loan out of their after tax income.

Think about helping your adult children buy a home. Gifts, soft loans and guarantees all have a place. Getting your children into a home say five years earlier than otherwise will save hundreds of thousands of dollars in loan repayments and non-deductible interest. It will be the best investment the family ever makes.

If you are middle aged or older and entering the property market for the first time, or have divorced and are re-entering the property market, think about an interest only loan, and salary sacrifice extra super contributions ear marked for tax free withdrawal and repayment off the home loan. This is effectively paying off the home loan via tax benefitted dollars, and means you get much more post-tax debt reduction bang for your pre-tax buck.

Think about buying your ideal “post children retirement home” now in 2016 prices, and renting it out as a negatively geared investment for ten or twenty years before you finally move in.

Property prices can and may fall some time soon. Don’t think they cannot. But effective investing looks past the short term and imagines what the world will be like in the long term, say thirty years down the track.

My crystal ball says buy more property now.