Real estate: Pam Walkley

Prices in the hot property markets appear to be cooling, so is it time to cash in?

When is a good time to sell your investment property? It depends on lots of variables – where it is, how long you have held it, what your circumstances are and whether you have another use for the money.

In early March an investor sold his unrenovated small terrace in the inner Sydney suburb of Surry Hills under the hammer for $1.47 million. He had made almost $110,000 every year since he bought it about six years ago when Sydney house prices were in a trough.

Undoubtedly the inner-Sydney market is red hot, and Melbourne is not too far behind. If the investor had held onto his Surry Hills property it’s unlikely he would have enjoyed the same level of growth, as prices are now out of the reach of many. He may have to pay capital gains tax on his windfall, but as he lived in the house before renting it out and then moving overseas he may be able to claim it as his principal Australian residence. This means he won’t have to share his good fortune with the taxman.

Some real estate experts say never sell, just use the equity you build in each property to buy more. But what if you continue buying in Sydney’s overheated market and there is a “significant downward correction”, which is Organisation for Economic Co-operation and Development-speak for a market crash?

In a report released in early March, the research arm for the world’s richest nations said: “Australian house prices and household debt have reached unprecedented highs, in part because policy rate cuts have lowered debt servicing costs. A continued rise of the market, fuelled by both investor and owner-occupier demand, may end in a significant downward correction that spreads to the rest of the economy.”

And it’s not as if it hasn’t happened before! Some of us can remember the crash of 1987, with interest rates rising to 17.5% in 1990.

If you have a long time to retirement and have only had your property for a couple of years, you may decide to ride out the cycles and hold long term. Those following this strategy should be confident they can keep their jobs and be able to service their debt even if interest rates spiral.

But what if you’re close to giving up fulltime work and the value of your real estate portfolio has increased substantially. You could use the rental income to help pay for your dream retirement but with rental yields so low this may not even provide as much as you could get from parking your money in the bank.

The average gross dwelling yield across the combined capital cities fell to 3.2% over February, according to CoreLogic, reaching a record low. In Sydney it fell to 2.9%. Five years ago the average capital city yield was a full percentage point higher at 4.2%.

The rewards of negative gearing won’t be as lucrative in retirement as when you’re earning a big pay cheque. The opposite is true for capital gains tax, which is based on total income, so the less you earn from work the lower your CGT is likely to be.

And keep in mind that if Labor does win the next federal election it’s likely to weaken negative gearing and capital gains perks, a move that would put pressure on real estate prices. Its policy is to limit negative gearing to new houses after a certain date and to halve the CGT discount from 50% to 25% for assets bought after a certain date.

So for many investors, especially those with Sydney or Melbourne properties, it’s worth at least considering whether it may be a good time to sell.