There is a lot of negativity in the property discussion at the moment. Affordability is stretched, interest rates have made borrowing more expensive, and property prices have been sluggish in recent months. For buyers who have watched prices move sideways while their mortgage repayments have risen, it can be easy to wonder whether investing in property is still a good path to wealth.
When looking at the facts, it’s hard to dismiss property as a vehicle for wealth building. Property remains one of the most reliable ways Australians can build substantial long-term wealth. This doesn't mean every property will make you rich, or that prices will continue rising at the rates we have seen during some of Australia's strongest property booms. But what it means is that when property is approached strategically, with a long-term mindset and the right asset selection, it can be an incredibly powerful wealth-building tool.
For buyers it is important to distinguish that buying property and investing in property are different mind-sets and they are NOT the same thing.
Buying a property simply because you can afford it doesn't necessarily create wealth. Investing in property means understanding location, supply and demand, rental returns, capital growth, finance, leverage and how the asset fits into a broader investment strategy, and while property prices may be sluggish in some markets right now, this can actually create opportunities for investors who are prepared to look beyond short-term headlines. The current market is great for buyers especially if you understand the principals of “buy low, sell high”.
Property is a long-term game
One of the biggest mistakes investors can make is judging property on what it has done over the past 12 months alone. Property is not designed to be a get-rich-quick scheme. It is a long-term wealth-building strategy. We have seen before in Australia what is happening with prices at the moment, we have seen property experience plenty of periods where prices have been sluggish and there have also been periods when prices have fallen. Sydney, Melbourne Brisbane along with regional markets have all experienced significant corrections or extended periods of relatively weak growth.
But over several decades, well-located residential property have demonstrated the ability to create significant wealth for Australian homeowners and investors in the long-term.
The current market is a good reminder of why investors need to take a long-term view. Higher borrowing costs, affordability constraints and increased construction and living costs have made some markets slower. That doesn't necessarily change the long-term fundamentals of property. In fact, periods of slower growth can be healthy. They can give buyers more time to conduct due diligence, negotiate and avoid the frantic competition that can occur during a property boom. The opportunity is not necessarily to buy property when everyone is excited about property and often the opportunity is to buy when sentiment is less enthusiastic.
The power of leverage
One of the greatest advantages property has over many other investments is leverage. This means as an investor, you are able to get exposure to a much larger asset than the amount of cash you are initially contributing. For example, for a $1million investment property, you are likely only putting down a 10%-20% deposit but you are receiving a $1million investment. This is the fundamental of leverage.
Of course, leverage also increases risk. If the property falls in value, the loss is magnified relative to the investor's equity. Borrowing costs can rise, rental income can change and unexpected expenses can occur. This is why successful property investing isn't about borrowing the absolute maximum amount a bank will lend. It is about using debt responsibly and ensuring there is enough financial capacity to hold the asset through different market conditions.
Property can provide both income and growth
Another major attraction is that property can potentially provide two different forms of return because there is the rental income, which provides an ongoing cash flow alongside capital growth, which can increase the value of the underlying asset.
Over the long term, it is often the combination of these two elements that makes property so powerful.
Consider an investor who buys a $700,000 property and holds it for 20 years. If, purely as an illustration, the property achieved an average annual capital growth rate of 6 per cent, it would be worth approximately $2.24 million after two decades. That isn't a prediction, and property growth is never consistent from one year to the next. Some years could produce significant growth, while others could produce no growth or a decline. The important point is the effect of compounding over time. The investor would have also received rental income throughout that period. An investor doesn't need to get rich from the property in year one. The objective is to own an asset that can potentially become significantly more valuable over 10, 20 or 30 years.
You can improve a property
Property also offers something that many other investments don't! The investor can potentially influence the performance of the asset, which is unlike investing in shares. This allows you to potentially create value through renovation, subdivision, or development. These strategies can potentially increase rental income and the property's value.
Property has scarcity on its side
There is another reason I remain bullish on well-selected property over the long term, always remember that land is finite.
Australia has plenty of land, but highly desirable land in established areas is limited. People want to live close to employment, schools, transport, beaches, shopping, entertainment and other amenities. As populations grow, competition for well-located property can increase. This doesn't mean every suburb will perform equally. A property in an oversupplied location can struggle, even during a strong national market. This is why successful property investing requires looking beyond the headline median price and understanding what is actually driving demand in a particular location.
Population growth, infrastructure investment, employment opportunities, transport improvements, housing supply and demographics can all influence the future performance of a market. The objective is to identify locations where there is a strong reason for people to want to live in the future, not simply locations that happen to be cheap today.
Shares are an excellent investment too
We are not saying ‘don’t invest in shares”, because shares should not be ignored.
Actually, shares are an excellent wealth-building asset and should form part of many investment strategies. For new and young investors, consider that one of their biggest advantages is accessibility.
An investor doesn't need $200,000 to start investing in shares. An investor can begin with a relatively small amount of money and gradually build a portfolio over time. This is what makes shares particularly useful for younger investors who are still saving for a property deposit or for anyone who doesn't yet have enough capital to enter the property market.
Exchange-traded funds can also provide exposure to a diversified collection of companies, including Australian and international businesses. Shares are liquid, relatively easy to buy and sell, and provide exposure to businesses across a wide range of industries. They can also generate dividends, providing an income component alongside potential capital growth.
For these reasons, I don't see property and shares as competing investments but rather complementary in a balanced portfolio.
A diversified wealth strategy might involve owning property while also building a share portfolio. The properties in a portfolio provide exposure to a physical asset and the potential benefits of leverage, rental income and capital growth, whereas shares in a portfolio provide liquidity and diversification.
The combination can therefore be considerably more resilient than relying exclusively on one asset class.
Why property still comes out on top for the long term
If shares are so accessible and have such strong long-term potential, why do I still favour property as one of the primary wealth-building assets?
The answer comes down to the unique combination of characteristics property offers. Leverage allows investors to control a large asset with a smaller amount of their own capital, rental income can contribute towards the cost of holding the asset. Capital growth can build significant equity over time, value adding gives investors the opportunity to improve the asset and potentially manufacture equity, and Scarcity means well-located land cannot simply be reproduced, and perhaps most importantly, property encourages a long-term mindset.
Property doesn't make everyone rich
There is an important distinction that needs to be made. Property can build wealth over time, but it doesn't guarantee that property will definitely make you rich.
Buying the wrong property at the wrong price with too much debt can produce a very different outcome. An investor who buys solely because a property is cheap may end up with an asset that experiences little capital growth. If you focus entirely on rental yield for cashflow, this may sacrifice long-term growth.
Investors who borrow too aggressively may be forced to sell at exactly the wrong time, and buying too many properties in the same market without considering their overall portfolio can eventually result in being overexposed to debt and a single market.
If you really want to build wealth in property, you must consider your time strategy. A good property held for three years may produce a modest result, but a good property held for 20 years has a completely different opportunity. During those additional years, rents can increase, debt can be paid down, the property's value can potentially rise and equity can accumulate.
That equity can potentially provide opportunities to acquire additional assets. This is how a single property can become the foundation of a much larger portfolio and is also why trying to predict exactly when the market will boom is less important than many investors think.
The investor who buys a quality property, structures their finances appropriately and can comfortably hold through the inevitable ups and downs is often in a stronger position than the investor who spends years waiting for the perfect moment.
If your investing in property to become rich, you need to be more sophisticated and understand supply and demand. You must research locations and understand the need to assess the quality of the underlying asset. You need to understand finance and manage your debt carefully whilst considering cash flow as well as the capital growth in the market and consider how each acquisition will fit into the overall portfolio.
Shares should absolutely have a place alongside property, particularly for investors who are starting with smaller amounts of money or who want greater diversification and liquidity. But for investors with sufficient capital and borrowing capacity, property still offers a combination of leverage, income, scarcity, value creation and long-term compounding that is difficult to replicate.
Despite all the headlines suggesting the Australian property story is over, I believe it is far from finished, and for the right investor, it can be one of the most powerful vehicles for building lasting wealth.
This article is general educational information only and does not constitute personal financial, investment, taxation or legal advice. Property and shares both carry risks, and past performance is not a guarantee of future returns. Investors should consider their own circumstances and seek appropriately qualified professional advice before making investment decisions.
