Property: investors step up

PORTFOLIO POINT: First-home buyer numbers grew as the property market rebounded, pushed by undersupply and government stimulus. Now investors are back.

It’s been a stimulating year for the Australian property market. How could it not be with almost $1 billion poured in to keep it bubbling along?

It all began in October 2008 when Prime Minister Kevin Rudd joined Treasurer Wayne Swan in the main committee room of Parliament House to announce what one member of the press called “the government’s first multi-billion dollar sandbag against the rising global tide of fear and loathing”, the $10.4 billion Economic Security Strategy.

So how has the government’s largesse affected the residential property market’s supply, demand and investor profiles during 12 months of emergency spending? And more importantly, what will happen next as we reach the tail end of a sprightly spring selling season and how can investors take advantage of it?

But first, a whistle-stop tour of the year of stimulation. The suddenness of the downturn in the property market took most of us by surprise and many more have been shocked by the speed and resilience of the revival. Compared to the gloomy property market decline in the early 1990s, this has been a fast-moving correction.

The stimulus money has arrested the slide in new housing construction but it has not addressed the reasons for the chronic and persistent supply problems.

Despite $1 billion in taxpayers’ money “targeted” at housing, Australia is still building at half the per capita rate of 25 years ago. This is always the major flaw in emergency spending strategies: stimulating demand is just a short-term fix without addressing supply constraints.

In established housing, vendors have not been motivated to put their properties on the market and supply constraints have been – and continue to be – felt in several areas.

The composition of buyers did change dramatically. First-home buyers made up 10% of the market in September 2008; this rose to nearly 30% at the height of the “boost boom”, and now it’s back to 20%. It’s important to remember that this incentive did not go to the new-home buyers but straight to the seller and to state revenue offices around the country!

Buoyancy in the lower-priced market has slowly percolated into the higher price levels, returning confidence to the $600,000 to $1 million range and even the sluggish $1 million-plus range in spring.

Experienced investors can now be seen bidding at auctions quietly and confidently, perceiving strong buying conditions. The rebound has been fast but we longer see the abundance of amateurs and speculators we saw in spring 2007.

So what to expect next? The falloff in first-home buyer activity is likely to continue as the boost wanes at the end of December. Investor demand is building, but a lack of supply in the lower price range will thwart some entry-level investors.

In the $600,000 to $1 million range it will be easier to find investment grade property, and opportunities above $1 million are there for the judicious investor. It’s investors in both these sectors who will be favoured for the rest of the year.

Although we’ve seen an increase in supply across the board this spring, it’s nowhere near the roaring market of 2007. I suspect supply will not fall much before December. Indeed, many of the indications I’m seeing point to a high volume of properties for sale in November. This supply will help meet some of the latent demand still flowing into the market, which augurs well for market stability and predictable price growth into 2010.

While interest rates are likely to keep rising, I doubt we will see Reserve Bank governor Glenn Stevens go beyond the “go gently” approach he has been following to date. He insists the economy is not overheating and many property buyers have factored in incremental rate rises to return to normal settings. A 25 or 50 basis point rise in November would be a harbinger for better times, not a red flag for investors to retreat.

So how do investors take advantage of our stimulated market near the end of the spring selling season?

Vendors: Late 2009 and early 2010 is still an opportune time to offload poorly performing investment property. The continued lack of supply and the ongoing demand means they should find willing owner-occupier buyers. Take this opportunity to free up resources and seek better capital growth elsewhere if you are holding second-rate assets.

Current investment property owners, not looking to buy or sell: Don’t just sit there! We still have the lowest interest rates in 40 years, so take this opportunity to reduce some debt.

Buyers: Many of the best-performing properties in the $350,000–550,000 range have been picked up by marauding first-home buyers and earlybird investors. If you are at that entry-level investment stage, research the market thoroughly and don’t rush to purchase property; there are lots of duds out there.

For investors at the next level, $600,000 to $1 million, stick closely to high land value areas and you should find some solidly performing long-term investments.

In Melbourne, that means two-bedroom apartments in the inner south-east and two-bedroom cottages in the inner north.
Sydney investors should look for two bedroom terraces, cottages and apartments in the inner west.
Watch out for three-bedroom family houses along the major transport routes in Brisbane’s inner and middle ring.
Perth’s established houses and strata properties in inner ring suburbs with high amenity, plus properties close to the northern beaches should be on your watch list.

It’s been an interesting ride on the Stimulus Train through Australia’s property market in 2009. Now that the fanfare is over, good buying conditions remain for investors looking for high-performance properties. If you are one of these investors, just make sure you do your homework.

Property Q&A

This week:

Is this Albany deal as good as it sounds?
What to do with the flat leased to a family member?
Where to look for the first investment in Melbourne?
Fixed or variable mortgage?

Albany attraction

I'm 50, new to investing and can borrow $225,000 for an investment in Albany, Western Australia. I’ve come across a unit leased to an established holiday and corporate stay complex. The unit has a seven year lease, guaranteeing $240 a week indexed to CPI, as is the maintenance fee, which is currently $1066 pa. The complex pays shire and water rates and guarantees returns independent of occupancy rates, close to 100% for the whole year. It looks like a good investment compared to mainstream returns, whereby I could buy a normal unit for $205,000 get a maximum of $190 a week, be liable for outgoings and still have the risk of untenanted periods.

You’re right: the numbers behind this deal do look fairly solid; but at the end of the day, while it’s great for them it doesn’t necessarily do much for you. Before you buy, you should understand that investing in residential property is about achieving capital growth first and rental income second. The combination for the investors in this holiday and corporate stay complex is the wrong way around.

Serviced holiday units like this one are marketed to investors as affordable investments with solid cash flow but they come at a high price: the capital growth they achieve is typically sub-standard. They also typically have high management fees and levies and give you virtually no personal control. Despite the seemingly affordable entry prices, I am yet to see a worthwhile serviced apartment proposition for investors.

Units like these are nice to stay in but most are poor investments. My advice to you is to look for a well-positioned two-bedroom unit in Albany. With this budget, you should be able to find buy a unit within walking distance of the town, in a low-rise complex with a small number of units and high notional land value.

Family values

My husband and I were very fortunate in receiving a small house in Bondi Junction as a wedding present from my husband’s family, where we now live in with our son. Before we were married, we had bought a two-bedroom apartment in a middle-ring western suburb, which we lease to his brother. Unfortunately, we didn’t know a lot about investing and I fear the apartment is sub-standard, as its value has not increased over the past five years. What do you think we should do?

Families, apart from being the foundation stone of our society, also present some interesting dilemmas when property is involved. You don’t provide a detailed description of the apartment so I cannot give you a view about its investment potential. This area of Sydney has plenty of worthwhile property investment prospects, but that does not mean every property will be worthwhile for investors.

The first thing you need to do is to have a qualified, independent property adviser assess the apartment for its intrinsic value, likely sale price under current market conditions, and investment potential before deciding what to do with it. The current market price will tell you exactly how this property has performed since you bought it five years ago and whether this is the right property to hold for investment aside from the technical approach.

If there is a family understanding around the leasing arrangement then the property may have a special place in the portfolio. If it doesn’t then assess it on a rational basis. Base your decision on where your investment dollars will provide you with the greatest long-term return both in capital appreciation an in rental return.

Know your product

I am looking to buy my first investment property, either a house or a unit in Melbourne. I have a deposit of $50,000 and could afford a loan of about $500,000. I am in my late twenties with no debt or dependants and earn a stable income of about $100,000 a year. Should I be looking at a unit or a house, and in which areas? Should I be aiming to borrow as much money as I can or to purchase a property worth $300,000–400,000?

The amount you should borrow is determined by what you can afford to repay without unduly compromising your lifestyle. If your job is secure you should be able to invest with confidence. Test how much you are going to borrow by calculating what your repayments will be if interest rates go up by two, and then three percentage points. Be absolutely honest and you will have a robust budget to work with.

With $550,000 to spend, you have two options to get into the property market. First, you could look for a well positioned two-bedroom apartment in the south-east, with a superior aspect. Start in areas such as Armadale, Prahran and South Yarra or inner bayside suburbs such as St Kilda or Elwood. Alternatively, you should be able to find a period two-bedroom brick or weatherboard house in the inner north. This budget probably won’t find you an investment-grade house in Brunswick or Northcote these days, but you should be able to find a house in Coburg, Thornbury or Preston.

If you decide you would be more comfortable spending a smaller budget, of $400,000 or so, you should be able to buy a one-bedroom apartment, in the south-east or if you can find one on the market, an apartment in inner north areas such as Northcote. Make sure that whatever you buy is well-located, has high notional land value, architectural scarcity, an allocated car space or garage and is located on a main road.

Betting on rates

My son is about to buy a house as a first-home buyer. Would you suggest that he seek to lock in his rates or go with a variable home loan?

The first thing your son should do is check with a few banks and a reputable mortgage broker to compare the interest rates and the fees over the next two to three years and the life of the loan, to see which product is the most competitive and advantageous.

In essence, locking in to a fixed rate now suggests you have better information than the major banks about where interest rates are heading in the next three to five years. The sweet spot for fixing rates appears to have been in March this year and fixing rates now will probably cost him more in repayments than paying a variable rate over the next several years.

If he has a very strong view that interest rates will rise well above interest rate forecasts, then the best strategy is to fix part of the loan at the best rate he can and keep part variable so that he can keep reducing debt, which important in this climate. At the very least, he will know exactly what his repayments will be. But if he is unwilling to pay an interest rate premium for that certainty and bet thousands of dollars against the bank, the best way for your son to manage his first home loan is to stay variable and take advantage of low interest rates we have right now.

Reducing debt while we have low rates is probably the best thing he can do. He can start by making additional lump-sum payments, reducing the amount of interest he will have to pay over the life of the product.

Monique Wakelin is co-founder of Wakelin Property Advisory, a Melbourne-based independent property acquisition and advisory company, and co-author of Streets Ahead: How to Make Money from Residential Property.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Monique Wakelin? Send an email to monique@eurekareport.com.au.