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
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 firstname.lastname@example.org. 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. com.au Graeme McDonald A member of the Money Resources Group