A falling property market could be the best time to invest and build your wealth

As more Australians face the reality of low wage growth and rising costs of living, the importance of accumulating assets cannot be understated. For anyone looking to become financially independent, securing your future requires careful planning.

Real estate has long been a favoured asset class to manufacture wealth. Property has delivered investors significant returns via capital growth over many years, in addition to rental yields. However with house prices falling, investors are cautious. But the reality is, now could be the best time to invest and build your wealth.

Why invest in property to amass wealth?

So why invest in property? Let’s consider the alternatives. If you avoid investing, you’re not developing your wealth or becoming financially independent. You are eliminating the prospect of returns.

Putting your money in a bank is safe but it is a low-growth option. Most cash deposit rates will earn 1-2% per annum. Even then, you may be restricted from accessing that money. In contrast, according to CoreLogic, property returns average more than 10% per annum over the last 20 years.

While the share market sees periods of high return, it comes with significantly greater risk. Shares are far more volatile than house prices. Many Australians are uncomfortable with such volatility as you can lose the entirety of your capital if your investment fails. Many well-known companies have collapsed, wiping out shareholders.

Share market losses may take longer to recoup, leaving you with an opportunity cost. Look at the Australian Stock Exchange, which is yet to reclaim its all-time highs of 2007. Property investing requires less day-to-day oversight and you can physically see the asset.

Real estate is also favoured because of the leverage available. A small deposit may provide means to generate great returns and wealth over time. You can borrow against equity in the property to expand your portfolio. For these reasons, property remains a standout asset class for those with the ability to research and find the right properties in a correction.

Setting aside fear and uncertainty when investing in property

At the peak of the market, people are confident. However this may actually be the worst time to buy from a value perspective, given higher prices. Conversely, people are reluctant to invest when there is uncertainty or fear of the unknown.

It’s human nature to seek assurances, which is why many listen to the media. They are looking for a ‘guarantee’ to say nothing bad will happen. But something bad always happens. Expectations of smooth sailing do not align with reality. From the Global Financial Crisis, to wars, natural disasters, regulatory changes - it is inevitable bad events occur. Yet still, property appreciates over the medium to long-term.

Consider interest rates. In 1990, lenders rates were around 20%. Shortly before the GFC, buyers took out loans at 9%. 10 years ago, the RBA rate was double what it is now. In each instance, property investors have substantially grown their wealth despite high rates.

Now, interest rates are at generational lows and possibly heading lower. This is the single largest component influencing property investment returns. Taking advantage of this by locking in low rates will help garner great returns and let you accrue wealth. Many investors try to time their market entry when in fact, it’s better to be in the market instead of doing nothing.

The value proposition of a falling property market

When property buyers hesitate in a falling market, better value emerges. Investors face less competition at auctions. Deposit thresholds decrease. Property prices deviate from forecast growth trends, offering a larger buffer to realise capital growth and wealth.

Investor mindset can act as a major influence. People don’t hesitate when market sentiment is positive and prices ascend. When the market declines, they freeze, even though property is a long term investment and we always overcome socioeconomic challenges. It’s smarter to invest when others are deterred and uncomfortable than when buoyant amidst higher prices.

Although Warren Buffet focused on shares, his famous quote speaks true to value arising in a falling property market. That is, to be “fearful when others are greedy and greedy when others are fearful”. Value may always be found in any given market, even during a correction. Right now there is lots of value if you research and identify properties in the right areas to buy.

Sources: Annual total return on shares and property graph and RBA Graph of the Cash Rate