One of the best ways that people can protect themselves against the impact of inflation is by investing in property.
Over many years, astute property investors throughout Australia have been investing in property because it delivers higher rates of return than inflation. For example, the latest national CPI figures for the capital cities in Australia show that during the year ending March 2016, the annual inflation rate was 1.3%.
In comparison, combined capital city home prices during the same period increased by a whopping 7.3% or nearly six times the annual inflation rate. While Sydney and Melbourne accounted for a large part of this annual increase in property values over the past year, it is worthwhile remembering that over the long term property values have increased at a much faster rate than inflation.
Over the last decade, the annual inflation rate in Australia has increased on average by around 2.8%. However, the annual change in the combined capital city values during the same period has increased on average by 5.5% each year – well above the inflation rate.
It is also well worth remembering that these are average growth rates for all the combined capital cities. In Sydney and Melbourne, dwelling values jumped on average by 7% and 6.1% respectively each year of the past ten years. And within these specific market, there were many areas that achieved annual capital growth rates in the double digits.
These figures are important for property investors because one of the key reasons why many people decide to invest in real estate is to protect themselves against the impact of inflation and to build personal wealth over the longer term. This is particularly the case for younger investors who need to take a long term approach to property investment.
With average weekly wages in Australia recording very modest rates of growth, investing in property can provide an excellent way for young people to build wealth over the long term.
However, first time property investors need to undertake careful research before buying an investment property so they can focus on areas that will deliver above average capital growth over the long term.
TOP FIVE TIPS FOR FIRST TIME INVESTORS
1. Don’t make an emotional decision when buying an investment property. Too many first time investors make the mistake of buying an investment property they would like to live in themselves without looking at whether it will appeal to renters.
2. Focus on affordable areas with proposed new infrastructure such as a new rail link. Investment in social infrastructure will make the area more popular with both property buyers and renters over time.
3. Consider buying a property where there is a broad range of property owners rather than just investors. For example, if the area has a significant number of owner occupied homes it means that the potential pool of people wanting to buy your investment property in the future will be much higher than a property that just appeals to investors.
4. Make sure you get your finances in place before searching for a property. This means that once you have found a suitable property, you can act quickly to buy it.
5. Always work towards a strategy of buying several investment properties rather than just one or two. Through owning several investment properties, you can create significant amounts of personal wealth. To achieve this outcome, put in place a long term strategy and stick to it.