Property investing in an era of wild economic uncertainty

For investors, the landscape of 2025 looks more volatile than it has for some time.

The old joke of ensuring you’ve taken your heart medication before logging onto your share trading account has never been more apt.

Through the rocky times of the global financial crisis and the pandemic, Australian property proved more resilient than other investments. But will that outperformance continue in a world of trade wars and economic uncertainty?

Share market gets Trumped

If there’s one certainty, it’s that the next four years of American government will produce ‘interesting times’.

In his first two months in office, President Trump has upended decades of open trade agreements and pushed his ‘America first’ agenda hard.

At the time of writing, that has translated into jumps in tariffs for America’s trading partners with perhaps bigger increases to come when the 90 day pause ends.

Who knows where this will end up. What matters is that everything we’ve seen to date suggests a rise in American inflation, which is likely to feed into Australian inflation, as well as hits to the economic growth outlook for our major trading parties.

Insurance unobtainable

While the world’s attention is focused on trade wars, there are other areas of growing uncertainty that investors need to factor into their thinking.

One of them is insurance and, as can be seen in this chart, the cost of premiums has outstripped other price rises over the last decade by quite some margin.

The industry is blaming increasing natural disasters and the higher costs of repairing ever more valuable properties.

Australia could be on the same pathway as America, where in two of its largest states, Florida and California, home insurance is unavailable to new customers at any price. This has forced governments to step in to the market.

Insurers worldwide are finding it increasingly difficult to operate in areas prone to climate enhanced risk.

The international trend matters because insurers need to offset the risks through global reinsurance pools. That sees the huge expense of episodes like the Los Angeles fires and Spanish floods feeding into the price of premiums in Australia.

The World Economic Forum Global Risk Report 2024 predicts half a million Australian homes will be uninsurable by 2030.

The average home premium of around $2,000 per year (plus an equivalent amount for landlord insurance for investors) is only going to rise. Shrewd investors understand that minimising this amount by buying a property with low risk is a smart move. 

For investors, insurance used to be an afterthought. Now, it’s a necessary step to assessing whether a property has the right profile.

The investing climate

Also lost in the daily news cycle is the increasing impact of climate-enhanced natural disasters.

Climate is an issue that investors - greenies and sceptics alike - typically don’t consider in their investment plans.

Those days are over.

After the recent cyclone, Queenslanders found themselves cleaning out flood damage for the fourth time in 15 years.

That comes four years after fires destroyed 3,000 homes across the eastern seaboard.

The growing impact can be seen in this chart tracking the cost of natural events over time.

The 30 year average (far left) represents ‘business as usual’ while the average of the last five years shows the impact doubling to an average $4.5 billion a year.

The average annual cost of floods is now four times its long term average.

In urban and regional centres alike, investors need to consider how climate-enhanced risks like flooding, fire, storms and sea inundation may affect a property they’re considering.

Strategies to minimise risk, accentuate upside

So, what approach should investors take in the age of uncertainty?

The first thing to note is Australian property remains an island of security in an otherwise unstable world. Even in its darkest hour, residential property is more secure than other investments like shares or crypto currencies.

But property investors should exercise risk mitigation strategies – now more than ever.

The first strategy is to buy in broader, deeper markets that have experienced a flat year in terms of price growth. While it can be tempting to chase last year’s tear away market, it is usually wiser to capitalise on a larger market currently sitting at the bottom of its property cycle. 

The second factor should be present no matter when or where you invest. Always buy a property asset that has all the right attributes and is situated in a location with strong macro drivers bolstering demand. 

Buying into a market with strong fundamentals that has experienced a period of slow growth is much safer than investing in last year’s hero. Additional to that equation is a realistic assessment of natural disaster risk and insurability.

Capital growth and cash flow

The reason fundamentals are so important is they are the best indicator of above-market capital gains, still the most important objective when investing in property.

But for those with a portfolio, the role of income is now elevated.

While it is important for investors not to buy on yield alone, portfolio owners should have one property that generates strong cash income to act as a bulwark against rising costs and greater uncertainty.

A decade ago, I was telling investors to consider capital growth as 75 per cent of the objective, with rental income around 25 per cent of the equation. That has now moved to a 65:35 split.

Portfolio diversity

Perhaps one of the most common mistakes I see investors making is having their holdings concentrated in one area.

Owning several properties in one suburb or town because it’s a ‘hotspot’ or a first time investor buying an investment close to home magnifies location risk.

The goal for investing in an age of uncertainty is to minimise all the risks you can.  

Even with the current uncertainty, the outlook for residential property remains solid.

The prospect of reduced interest rates and investors exiting the share market and transferring their buying power to property underlines the sector’s resilience.

Investors who know how to reduce risks and who have an eye on the long term are as well placed in property as they could be anywhere else.