Opportunities abound in the property market, but don't expect another boom, writes David Potts.
Property investors have rarely had it so good, even if it's at the expense of first home buyers. Rents are high, interest rates low and prices are creeping up again.
House values rose 1.7 per cent nationally in the March quarter, and soared 3.6 per cent in Melbourne, where prices had been moribund, while rents on units jumped 2.2 per cent, according to Australian Property Monitors. That makes the well-worn real estate agent spiel about property values doubling every 10 years sound plausible.
To achieve that, it would take an average 7 per cent rise a year. With record-low rates, growing population and strong Asian interest in Australian property, such annual rises shouldn't be too challenging.
As principal-home owners instinctively know, capital gains are tax free. Less appreciated, and something that drives economists spare, is that not having to pay rent is an implied income that isn't taxed.
Property's other strong appeal is that it isn't superannuation, though it's attractive to DIY funds. Both sides of politics refuse to rule out more changes to super, making a geared property the only decent tax break neither would dare touch.
Not even the government's wide-ranging, and largely ignored, Henry review on taxation would go there. Even so, a way around the $25,000-a-year limit on salary sacrificing into super is borrowing to buy an investment property through a DIY fund - though the loan must be specially structured.
But forget a boom.
The Reserve Bank laid it on the line when a senior official, Luci Ellis, argued, in no uncertain terms, that "trend housing price growth will be slower in future than in the previous 30 years". Ouch. Left unsaid was trend growth has been about 10 per cent a year. But she did say there are more likely to be "mildly" deflationary years as well.
So choosing the right place is more critical than it was for baby boomers, who rode the debt escalator as prices took the express lift.
Values will rise an average 5 per cent in the eastern capitals at most this year, property experts say.
The single biggest influence on property is always population growth. No problem there. But the credit isn't available, or rather isn't being demanded, to fuel another price boom. On the contrary, owner-occupiers are more interested in paying down the mortgage. And Gen Ys are resisting the idea of having a huge mortgage in the first place.
Although the burden of mortgage repayments as a proportion of income has eased with record-low interest rates, it's still punishing because of high home prices, the jobs outlook or talk of a tough budget.
"First home buyers have gone missing," says buyer's agent and property expert Kevin Lee, principal of Smart Property Adviser and a mortgage broker with Smartline. For once, investors are more likely to be elbowing out each other, rather than first home buyers, at property inspections.
"This is a rare treat for property investors," says Joe Sirianni, executive director of mortgage broker Smartline.
Investors are armed with annual tax-deductible interest and expenses, while first home buyers must make do with a one-off government grant and stamp duty concessions. Investors have been given another leg-up by state governments in NSW and Queensland, which have removed the home grant and stamp duty concessions from established units or houses bought by first-time buyers.
As a result, loans for investors so far this year have jumped the most since the global financial crisis, though are still running at a relatively low level by past standards, but fallen for first home buyers, according to the Australian Bureau of Statistics.
The subdued housing construction that Australia has been experiencing since the global financial crisis is a mixed blessing.
There are fewer opportunities for developing new properties with their better tax break in the 2.5 per cent building allowance, but then it keeps supply tight, which is good for rents and vacancies.
Treasury expects a pick-up in housing construction will buffer the forecast winding down in mining investment later this year. There's something of a love-hate relationship between investors, who will continue to have the upper hand for a while, and their tenants - who are likely to be the first home buyers who they've outbid.
If you can't beat them, why not join them?
First-time buyers should consider investing before they settle down.
One of the best ways of building wealth is by staying at home longer and buying an investment property that you can move into later, or use the equity built up from it as a deposit for somewhere to live.
On average, the gross rent from a unit (except in Melbourne and Hobart) is more than the two-year fixed mortgage rate of 4.99 per cent. At first blush, that would make it almost impossible to be negatively geared since income would be greater than interest.
Alas, there are always maintenance and repair expenses, council charges, management agent fees and some periods without a tenant to be reckoned with.
The best rental yields are in Darwin, where units are averaging 6.3 per cent. But every city has its exceptions. Yields in Sydney's Ultimo, for example, are closer to 9 per cent before expenses.
Melbourne has the lowest thanks to a glut of apartments, beginning with Docklands, where prices are reportedly being discounted 25 per cent. There's also a vacancy rate of about 10 per cent.
Worse, there's a backlog of new apartment blocks that will be completed over the next year, adding to supply and depressing prices and rents. This could even spill to middle-ring suburbs.
Perhaps head due south for capital gains: Hobart is proving the best performer, having the advantage of coming off a low base.
The first decision for a property investor has to be the city in which to buy.
Unfortunately, looking down the street usually isn't a good idea, even though a property there is handy to keep an eye on and you might not need a managing agent.
Looking further afield offers far more opportunities and reduces the risk of having all your eggs in one location.
After all, one area, say in Queensland, will have a different property cycle to one in Victoria. You don't want everything going up or down together, do you?
So don't rule out buying interstate.
An immediate benefit is you'll avoid a potential land-tax liability, especially if you intend to have a portfolio of properties.
In a boom town such as Darwin, you might even get the best of both worlds: higher rents and price gains.
Even the Gold Coast, a serial underperformer for property investors in recent years, might be coming into its own now it has direct flights to Asia, where there are potential investors.
"I'd still be hesitant about an established apartment, but there are new developments in walking distance from [Gold Coast beaches] which cost $6000 a square metre compared with $11,000 to $12,000 in Sydney," says Jason Anderson, chief economist at property economist MacroPlan Dimasi.
One ready-made way of investing interstate is buying a Defence Housing Authority (DHA) home. Properties are listed at dha.gov.au.
These are let to defence personnel and can be anywhere from Sydney's upper north shore to the back of beyond. Usually they are houses, but occasionally, new townhouses and apartments are offered.
They're sold under a leaseback, with the rent virtually government-guaranteed, payable whether or not there's a tenant and reviewed annually.
The DHA does all the letting and property management for a fee of 16.5 per cent of the rent for houses or between 12 per cent and 14 per cent for apartments and townhouses.
A lease is for nine or 12 years, after which you can sell or lease privately. But when it's up, you're on your own.
Location is always paramount when making property investment decisions.
Whatever you can afford must suit the demographics of the neighbourhood, which will also decide whether to buy a new or established property. New buildings come with extra tax concessions and are likely to be easier to let with fewer maintenance issues.
By the same token, you will be paying a developer's margin when you buy. On the other hand, an established property lends itself to capital value-adding renovations and will have a scarcity value. But don't go over the top with renovations, which are notoriously difficult to budget for.
Often a lick of paint, new carpet, stove and light fittings are all that's needed.
"Most important are the kitchen and bathroom," Lee says.
Units are doing better than houses, the result of baby boomers downsizing and younger buyers preferring to live closer to the city to save on transport costs. Even so, determining the better investment between units and houses will boil down to the area.
In a young demographic close to the city, proximity to transport, amenities, cafes and jobs will be paramount. For a house, you want a family demographic and it should be close to parks and schools.
Either way, you want somewhere with a growing population.
A capital investment idea
Have the tenants pay off your mortgage and the capital gains will look after themselves says buyer's agent and mortgage broker Kevin Lee, of Smartline.
Pauline and Mark Klemm are doing just that, having snapped up four properties in 12 months with gross rental yields up to 9.7 per cent after narrowly avoiding a negatively geared disaster.
Operating room nurse Pauline, 49, and operating theatre technician Mark, 50, are latecomers to property investing but are quick learners.
They almost bought an off-the-plan unit in Melbourne's city centre, a rental disaster area, but backed out after Pauline "got a gut feeling" about the dubious figures the developer presented.
"I would have been crying now if we'd bought that apartment," Pauline says.
Because their equity was limited in the outer Melbourne home they own, the Klemms decided to invest in the country.
Pauline paid a three-day visit to Orange, only to buy a house she didn't see.
"I knew the street by then," she says. "I was a bit emotional — I could have negotiated better. But I was determined to buy something and it was all over and done in half an hour. I learnt from that."
Lee arranges their mortgages and Pauline isn't fazed by having four extra ones. "They all pay for themselves," she says. "When you're positive or at least neutral geared the tenant pays down the mortgage. The capital gain is the equity from the tenant paying it off. Any capital gains on top of that are just extra."
Her middle son, 22-year-old Darcy, a third year apprentice, is interested in investing as well. "I think as his first purchase he'll buy an investment property," Pauline says. "If he does I don't mind him staying at home!"