Listen up, investors: the omens are good for rental markets
With residential property prices around the country on the rise, some real-estate investors are wondering if they have missed the boat.
“I have been considering investing in a unit for about 12 months,” writes Kate, “but I thought prices would fall significantly due to the global economic crisis, and they didn’t.
Then I expected prices would ease when government grants to first-home buyers dropped, but that does not seem to be happening either. Should I wait until the next cycle?”
Well, Kate, with Australia’s population tipped to be heading towards 35 million, and a shortage of new accommodation being built, the pressure on residential property prices is likely to continue for quite a while.
Of course there will be dips in some markets from time to time but, as Kate has shown, if you try to time the very bottom of markets it’s likely you will never invest.
Conditions are ripe for a sustained recovery in residential property prices, economic forecaster BIS Shrapnel says in its Residential Property Prospects, 2009-2012 report.
“Low interest rates, solid growth in rents and housing shortages evident in most markets” are the factors that will drive prices, the report says.
And although interest rates are on the rise, they are still very low. Indeed, leading property commentator Monique Wakelin says that interest rate rises will widen opportunities for investors to get into prime residential markets.
First-home buyers have dominated the market but rising interest rates and falling grants will curtail their activity.
Rising interest rates are not nearly as big a problem for investors, Wakelin says.
This is because, for an investor, the interest on borrowings is a tax-deductible expense, which is not the case with a home buyer. Investors on the top marginal tax rate only have to wear about half the increase in mortgage payments arising from interest rate hikes.
The apartment sector in inner cities has already benefited from rising prices, Wakelin says, but she predicts prices will grow further.
She particularly likes Melbourne’s bayside suburbs.
Two things investors must guard against are over-leveraging themselves by borrowing too much and buying second-rate properties, Wakelin warns.
“Investors can short-change themselves by going for the $400,000 unit in the secondary location, rather than paying $500,000 for the prime spot. The difference in capital gains between the two can be as much as half for the lesser property.
“Buy the best you can afford, even if that means accepting less accommodation – say two bedrooms instead of three – for your money.”
Negatively geared real-estate investments are also expected to become more attractive to high-income earners who have had the amount they can tax-effectively contribute to superannuation drastically reduced. This will increase competition for suitable properties, which will also help to underpin prices.
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