Cool­ing off on prop­erty

Prop­erty has al­ways been a good long-term in­vest­ment but in the short term it may turn into a mug’s game for spec­u­la­tors, writes Graeme McDon­ald

ABC (Australia) - - FINANCE -

Many years ago, I was given some ad­vice about buy­ing in­vest­ments by a now re­tired  nance man­ager, and in hind­sight it was very good ad­vice. It went some­thing like this: “When a waiter in a restau­rant starts to give you share in­vest­ment ad­vice, it’s time to sell.” It’s sage ad­vice when I have watched this sort of thing over the years.

Many of us would think a hot tip is a hot tip, but what does that say­ing re­ally mean? Ba­si­cally, the mar­ket is way over­heated and it’s time to get out. Real­is­ti­cally this has been pretty true for a num­ber of cor­rec­tions over the years.

So what does this have to do with this month’s col­umn? In short, in my opin­ion it’s time to tem­per your prop­erty in­vest­ments. If you look back you will see that I have al­ways talked cau­tiously about prop­erty. I have watched as peo­ple have madly gone out and bought rental prop­er­ties and built heav­ily geared in­vest­ments be­cause rates are low, and, as many a prop­erty hawker says, there’s never been a bet­ter time to buy while in­ter­est rates are so low.

And there is a mod­icum of truth in that. Prop­erty is, and al­ways will be, a good base in­vest­ment as long as you’re buy­ing for a long game. If right now you are about to en­ter the mar­ket as a spec­u­la­tor, it’s prob­a­bly a good time to just take a breath and re­assess what your end game is.

Now, I’m not try­ing to scare any­one, and you should al­ways seek your own in­de­pen­dent ad­vice on all th­ese mat­ters, but if you fol­low the mar­ket as I do as part of my gen­eral job knowl­edge, you will have no­ticed that the auc­tion clear­ance rates have fallen over the last few months in what is typ­i­cally the busiest time of the mar­ket cy­cle. Mel­bourne has dipped to only just mak­ing it above a 70 per cent clear­ance rate.

In­ter­est­ingly Mel­bourne prop­erty val­ues are still hold­ing up okay, but I think it’s only time be­fore they start to come off their cur­rent highs.

Can­berra and Ho­bart are still hold­ing a strong growth line with houses far­ing bet­ter than units. All other na­tional cap­i­tals have ac­tu­ally recorded a drop in value for the av­er­age house price.

So what causes this? In part it has come as a re­sult of the banks’ tight­en­ing of lend­ing guide­lines. All banks have in­sti­tuted tougher guide­lines and higher rates for in­vest­ment prop­erty deals. They’ve also tight­ened up on lend­ing to the unit sec­tor, with many banks now seek­ing 30- 40 per cent de­posit on some units and are pulling right back on build-and- com­plete projects, i.e. pre-sales of units yet to be built.

Over­sup­ply is the other driver of val­ues. Over the past few years, the num­ber of new es­tates and apart­ment com­plexes be­ing opened up has even­tu­ally out­stripped de­mand. A cou­ple of places buck­ing the trend have been Can­berra, which has his­tor­i­cally al­ways had a rea­son­ably solid mar­ket due to the tran­sient na­ture of the work­force up there, and Ho­bart, which is still in most peo­ples’ eyes an undis­cov­ered growth mar­ket. Even then, most prop­er­ties over there rep­re­sent good value for money. West­ern Aus­tralia is an ex­cep­tion to all the rules as the mar­ket over there is in tur­moil fol­low­ing the end of the min­ing boom.

The  nal thing to con­sider at the mo­ment, and by no means the least im­por­tant, is the in­ter­est rate. Rates will rise – they can­not stay at this level for­ever. If you are en­ter­ing the mar­ket at this time, be­fore you get too ex­cited, make sure you can af­ford your com­mit­ment at a higher rate than what it is to­day. I be­lieve that by the end of 2018 we will see at least one rate rise of about 0.25 per cent, pos­si­bly more.

It’s im­por­tant that you have a buf­fer zone to be able to af­ford the in­creased re­pay­ments, and please, please, don’t do ‘in­ter­est only’ on your home prop­erty. It is, in my hum­ble opin­ion, im­por­tant to cre­ate eq­uity in your prin­ci­pal prop­erty so that you have a buf­fer there in case of per­sonal change of cir­cum­stances. If the only way you can meet the pay­ment com­mit­ments is in­ter­est only, then you prob­a­bly shouldn’t be buy­ing it.

Well, enough from me for this month. If you have any ques­tions or you want to dis­cuss any mat­ter, please feel free to drop me an email or give me a call. I’m al­ways happy to lis­ten and give you my opin­ion.

The views ex­pressed above are those of the writer and not those of the Pub­lisher soft his mag­a­zine. If you want to know more on this, or you have a sug­ges­tion for an ar­ti­cle please feel free to email me on graeme@mon­eyre­ The above in­for­ma­tion and/ or sce­nar­ios are for in­for­ma­tion pur­poses and should not be treated as spe­cific ad­vice. Please re­fer to your ac­coun­tant or nanci al ad­vi­sor for in­for­ma­tion re­lated to your own par­tic­u­lar cir­cum­stances.

p: 03 8699 5000 f: 03 9690 9484 m: 0401 189 160 e: graeme@ mon­eyre­sources. Graeme McDon­ald A mem­ber of the Money Re­sources Group

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