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In today's rising interest environment, the question of whether property investment is still worthwhile looms large.

It's a common concern, especially for younger generations facing unfamiliar financial territory. But before dismissing property investment, let's delve into why it might still be a lucrative option, even in today's market.  

The Generational Mindset Divide (AKA Trap)

Historically, an 8% interest rate has been factored into property-buying calculations. However, this conventional wisdom may not fully apply today, with rates never exceeding 7% in the last 25 years.

With their accumulated wealth and solid equity base, Gen X may remain unfazed. But for Gen Y, facing the highest interest rates in adulthood, the hesitation is understandable.  

Buying a property can seem like a wallet drain, where hard-won savings are funnelled into a mortgage with a 'hefty' 6.5% interest tag…. plus, all those upkeep costs chipping away at your pay check. It's enough to make you want to throw in the towel, right?  

But before you do, it's worth looking at the hidden hero: Tax perks!

Tax Optimization: The Hidden Gem  

Owning property comes with some sweet deductions—like claiming back a chunk of those interest costs. For example, if you're in the 32.5% tax bracket, that's 32.5 cents back on every dollar spent on property expenses.  

Plus, if your property's relatively new, you can write off depreciation (a loss on paper only), boosting your tax return without denting your cash flow.  

And here's the kicker: you can even reduce your weekly PAYG tax through a variation, essentially giving yourself a mini tax return every payday – boosting your cash flow.  

With smart deductions and PAYG tweaks, your pay check will breathe a sigh of relief. Suddenly, that investment property's looking a lot more affordable!

The Miracle of Compound Growth

Let's talk about the power of compound growth—because when it comes to building wealth, it's a total game-changer. When we stash money in a savings account (or a property), compound interest works its magic, turning a little into a lot over time.  

But here's the kicker: mortgage repayments don't work the same way. The interest you pay will shrink over time rather than grow.  

Very quickly, you will see that the returns on your property outpace the costs associated with holding it. Picture this: a $1 million property appreciating at 6% this year nets you a cool $60,000. Next year? Add another $63,600 to the pot.  

Keep this up for a decade, and even if the growth rate matches your interest rate, you're looking at $105,000 in appreciation annually—while your interest repayments dwindle. It's a win-win situation that puts money back in your pocket.

Holding Costs Decline Over Time  

"All sounds well and good on paper, but what about the real cash in my pocket?"

True, those interest payments might initially tighten your budget, but holding onto your property has its perks.  

Over time, as you chip away at the principal and rental income climbs, your cash flow gets a boost.  

Plus, smart strategies—like using equity to fuel more investments—can ramp up your profits in the long run. It's all about playing the long game and watching your wallet grow!

The age-old advice stands: Nothing good comes easily. The reward for a modest sacrifice now is immense peace of mind later.  

The Pitfall of Expectations

Despite all the good reasons to buy property, Gen-Y faces a significant obstacle: expectations. Concerns about sky-high prices and a potential bubble loom large. They see a gap between the rapid appreciation of property values and their ability to save quickly enough to keep pace.

But let's get real: while prices are indeed climbing, they remain within reasonable averages. It typically takes 8 to 10 years for properties to double in value – which is what we have been seeing.  

So, what's the shift? Smaller plots and larger homes—picture spacious apartments or townhouses replacing sprawling half-acre blocks.

While many traditional Aussies cling to the suburban dream of yesteryear, newcomers embrace high-density living, enjoying the benefits of appreciation and eventually upgrading. This trend fuels the market, leaving the hesitant behind.

Conclusion: Looking Beyond Face Value  

Investing in property during periods of high interest rates requires a strategic approach. Property investment can yield substantial returns by leveraging tax benefits, understanding market dynamics, and adopting a long-term perspective.  

Consider your unique financial circumstances and objectives when evaluating the viability of property investment in today's market.  

In essence, don't let today's interest rates deter you from exploring the potential of property investment. With careful planning and a forward-thinking mindset, it could be rewarding even in challenging economic climates.  

Worked Example

Refer to our sample scenario below to see how these principles apply across a 10 year span, both with and without repayments on the loan principle.

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