Is property still a good investment?

Good-quality properties are still selling on auction day, and usually at the top end of their quote ranges.

The professional investors and analysts in Australian property are not panicking. They do, however, predict continuing softness in the market as a cyclical correction following an extended period of growth.

“After five years Australia’s major capital cities have seen prices plateau and even fall in some areas,” says Richard Wakelin, founder of Wakelin Property Advisory.

“There is less bidding competition at auctions, and the power balance is shifting towards buyers. But good-quality properties are still selling on auction day, and usually at the top end of their quote ranges.”

Property prices continue to fall

Wakelin expects prices to continue to fall, perhaps five per cent for high-quality property, before a gradual recovery over the following 12 to 18 months. Despite this, he advises investors against trying to time the market.

“Regardless of market conditions, if you’re willing to enter the marketplace with a long-term view and buy a quality asset, the best time to do it is when you can afford to,” he says.

“For someone ready to invest, these are reasonable conditions in which to buy. Investment-grade properties are coming to market, and there is a little less buyer competition.”

A common mistake for investors aiming to buy a property, renovate it and sell quickly at a profit is to underestimate the time involved. There is a shortage of skilled tradespeople, so unless the investor has a good list of contacts, organising a large-scale renovation can be a difficult undertaking.

Wakelin looks to the fundamentals of the market as a guide for long-term investors.

He says there is still substantial demand for housing due to population growth and an increase in the number of Australian households, but the construction industry is not completing dwellings in sufficient numbers, or of the type needed, to meet this demand.

“That undersupply is the bottom line. It has persisted for over a decade and will take a long time to change. As long as it continues, the downside risk for property prices is low.”

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Where the property market is headed

Overall, the Sydney market has fallen back, although for some time it has been regarded as due for a correction. The Melbourne market is relatively stable, although prices have fallen in some segments.

In a reversal of the trend of the past few years, in the capital cities older-style apartments are faring better than houses.

There have been sharp falls in prices of high-rise apartments in city centres. Supply has overtaken demand and there have been restrictions on overseas buyers, such as a 50 per cent cap on foreign ownership in new developments.

The falls in this segment, however, do not seem to have fed through to other parts of the real estate market.

There has been no real improvement in the level of affordability, according to research from the Real Estate Institute of Australia (REIA) and Adelaide Bank.

“Our Housing Affordability Report found that South Australia was the only state or territory to show an improvement in both rental and home purchase affordability during the second quarter of 2018,” says REIA President Malcolm Gunning.

He points out that the proportion of median family income required to meet average loan repayments increased by 0.9 percentage points to 32.2 per cent in the quarter. Renters are doing fairly well, with the proportion of median family income required to meet rent payments decreasing by 0.7 percentage point to 24.1 per cent in the quarter.

The picture on the number of new house loans is mixed.

“Across the country, the number of loans increased by 8.3 per cent, with increases in all states and territories and the largest in New South Wales, at 12.6 per cent,” Gunning says.

“Some increase was expected over the quarter, due to traditional low rates in the first quarter. However, there has been a decline of 3.8 per cent in the number of new loans since the same quarter last year. All states and territories showed a decline except for Tasmania, where there was a 2.6 per cent increase.”

Wakelin says that first-home buyers, downsizers and investors are all competing for the same types of properties – apartments or small houses in the inner suburbs. 

As a result, these property types continue to outperform family homes in the outer suburbs. There is also a group of buyers who are looking at regional centres within two hours’ travel from the state capital. They are willing to accept longer commutes in order to buy affordable property.

Outlook for interest rates

The industry consensus is that official interest rates are unlikely to fall in the next year, although there have been some increases in bank rates for property buyers. This stems from higher interbank lending rates and tighter regulatory restrictions. The costs have been passed on to customers, but the impact on the market has, as yet, not been great.

Four key tips for property investors:

  • Be realistic about your timeframe for buying, holding and selling in a soft market
  • Consider how you will pay for repairs and factor all taxes and other government charges into your calculation of income
  • Can you afford a period without cash flow if the property cannot be rented? You might be buying in a “hot” area but lenders will make a calculation assuming a period without rental income when you apply for an investment loan
  • Get to know the local real estate agents when you are looking at properties and choose a good property manager. A manager with experience in the location will have invaluable advice about rents and when to review them, will have good tenants on their books and a clientele of potential buyers when you are ready to sell.

Read next: Outlook for property prices: lower for longer?

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December/January 2022
December/January 2022

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