Jumping on the investment property bandwagon
Currently, Australian investors are entering the market in large numbers, especially in Sydney and Melbourne; driven in part, by low borrowing costs and rising prices, which are both very attractive. Home loans to landlords now account for more than half of all mortgages, the highest share on record. And the record low cash rate of 2.5% is fueling continued demand, as is increased investment from overseas.
Increasing property prices
House prices in major Australian cities rose 8.9%in the year through October, according to CoreLogic Inc – the largest property data provider in the world. They have climbed 13 per cent in Sydney (the most of all Australian cities) and 8.9% in Melbourne. So in terms of capital gains – in the major cities at least – property is still performing well as an investment.
The downside is that these higher prices coincide with an increase in the supply of homes for lease, which is causing rental yields to fall.
A quick snapshot across eight state and territory capitals in October of this year show rental yields dropped to 3.7% for houses and 4.5% for apartments. That’s a drop from 4%and 4.7%t a year earlier, CoreLogic figures showed. The result is that investment properties are getting more expensive to buy and returning less cash flow through rent.
There’s been a lot of debate about the Australian ‘housing bubble’: The argument being that the current property market is over-inflated and prices are due for a fall. In September, The Reserve Bank of Australia warned that the increase in investor lending might be, “a sign of speculative excess”. The implication is that investors may be paying too much and are at risk of a period of negative equity. This timed with falling rental yields, makes investing in property look increasingly high risk in the short term.
So if you are an investor or looking to invest in property, here are seven things you can do to mitigate some of this risk.
- Get some up-to-date advice. Revisit or even rethink your investment strategy by speaking to one of our Planners at Southern Advisory. Your financial goals will determine whether property is good for you in the short and long term;
- Take a long-term view. All types of investments go through cycles of growth and retraction – property is no different. It’s well known that over time, property has increased in value in Australia;
- Do your research – look for hot spots. Areas that you can still get a bargain but look to increase in value in a short period. These areas might not be fashionable but they make good investment sense. Also consider regional and commercial property, which can perform better as an investment;
- Don’t get in over your head by borrowing too much or overcapitalising. Do the math between what you need to spend on a property, the rental returns and the projected capital gains. Make sure you have a plan about how to cover the shortfall if interest rates go up;
- If you believe you will get a greater rental yield, improve the property(s) you currently own;
- Make sure you’re getting all the value you can through gearing and other tax strategies. Again speak to an adviser about how to maximise these;
- Diversify your investments. A balanced investment portfolio should include a range of asset classes, not just property. In fact property, depending on your stage of life and financial goals, may not be the best choice for you.
With any type of investment it's imperative to seek advice. Contact Us to arrange an obligation free consultation to discuss your financial plan and your investment goals.