RBA: Predicting a 30% House Price Increase?
The Reserve Bank of Australia has forecast that house prices could jump by 30% over the next 3 years if the current low interest rates remain.
This prediction comes for an RBA report released under the Freedom of Information request putting the effect of ongoing low interest rates under the microscope.
What is the basis for this? It’s pretty simple economics.
Low interest rates equals low cost of debt, meaning that it’s cheaper to hold assets, causing an increased demand in assets, which in turn causes prices increases.
That’s the basics of it, although it gets more complicated than that. Many forces need to combine to create the perfect storm including market sentiment, which tops my list of why assets climb in value.
Have a look at Bitcoin. When people trust the market and believe that prices will rise, the prices sky rocket having a self fulfilling effect. When people lose trust in the market, the bottom falls out and values crash by up to 90% historically.
This is an extreme case to demonstrate the point but the same effect happens with real estate although to much less of an extreme. One of the main reasons being is that It’s difficult and costly to liquidate property, people tend to hold through the flat spots if they can afford it, which creates stability in the market.
You hear these boom/bust predictions all the time - boom suburb, hotspot, prices doubling in 5 years, prices crashing, housing collapse. To me it’s just noise to distract you from your ultimate goal.
According to the RBA using 30 years of data house prices increase over time at an average rate of 7.25% P.A. (although this trend is decreasing). If I can capitalise on a 30% price increase, then great, that will help me when my portfolio stagnates after the growth period but over a long period of time it all averages out.
You need to be in it for the long game.
If you gamble on short term games you are playing in the high risk arena and you could get burnt. Buy with a 15-20+ year outlook and the the odds will move with you.
If you play by the rules and take the correct steps, it’s difficult to fail.
Educate, work out your ‘why’, master your finances, formulate a strategy, build a team of professionals, research and accumulate the right properties, consolidate your portfolio and retire with freedom.
‘Book a Chat’ on my website or DM me if you need help with any of these steps or formulating a strategy. Hapy to answer any questions, I am here to help you achieve your goals.
One word. Leverage.
The reason I believe real estate can be the quickest way to generate wealth, is because the banks are willing to lend us up to 80-90% of the total asset value.
That's how confident they are in the safety of this asset class.
They don’t do that with shares or gold. This is because they see property as a secure long term investment.
If I want to buy a $1,000,000 house, the bank is willing to lend me $800,000 of the cost. This is tax free money!
If I had to work for $800,000 I’d need to earn around $1.3 million to pay for the taxes and this would take me years.
Instead, I only need to stump up $200k of my own money or better still, use the equity from another property.
This is why 3 out of the top 10 richest Australian’s have made their money from property.
Because they use leverage.
The same tools that created wealth for these guys are available to every Australian.
It’s not rocket science but it does take careful thought and skill.
These are the key points to being a successful investor:
- Educate yourself
- Create a clear goal
- Form a strategy
- Build a team to help you achieve your goals
88% of Australian property investors get stuck on their first investment property, mainly due to not taking the correct steps.
Remember that property is a get rich slowly game.
Historically, real estate has been a stable and safe investment class.
Since 1974 Perth has seen steady growth over the years with only a couple of periods of retractions in price. These events are part of a normal market cycle and as you can see in the graph above supplied by REIWA, our last significant price correction was in 1989.
Following that event we saw steady to strong growth until 2008. We all know the story of flat to negative growth from that point.
Using history as a guide we know that after recessions we enter a period of strong growth.
I believe we are now entering that period which will be magnified by our extended period of price retraction since 2014/15.
Prices are now severely depressed and we are now entering a new cycle of growth with strong fundamentals including record low interest rates, high government spending and an improving economy.
All indicators are pointing towards a strong recovery during 2021 and beyond.