Silver lining for investors
FLAT and falling property prices have been a pain in the neck for South Australian property investors for the past year or more. Added to that, recent research says rental incomes also have been flat in the past 12 months. Landlords must be wondering what comes next – a giant auctioneer’s gavel so they can whack themselves in the face every day or so to remind themselves of their misfortune, perhaps?
However, even with disappointing price and income growth, most investors are getting a better financial deal than they were a year ago, thanks to the Reserve Bank of Australia. Only a minority of mortgages in Australia are on fixed interest rates, which means most borrowers are riding the rates roller-coaster.
We have had two official interest rate cuts since November and many economists expect the RBA to cut the official rate again next week, though it’s debatable about how much they will cut it by and how much, if any, the banks will pass on to borrowers.
Whatever happens, a property investor with a $400,000 loan is $2000 a year better off today than they were at the start of November. That’s equal to a rental rise of almost $40 a week.
If the dodgy financial situation in Europe gets worse and the world sinks into another recession, we can expect more rate cuts that will benefit almost all borrowers. In fact, it’s often said that a recession is good news for anyone who holds on to their job because everything else becomes cheaper.
Of course, at some time in the future interest rates will rise again but that usually goes hand in hand with an improving economy and hopefully improving rents and house prices. In the current situation, where rents are not moving and many properties not selling, the best strategy might be to sit tight with your investments.
The latest rental price report by Australian Property Monitors found the median asking rent for houses in Adelaide was $340 a week in December, exactly the same as it was 12 months earlier.
Rents for Adelaide units fared a bit better, up 3.7 per cent over the year to $280 a week. Both figures are among the weakest growth rates for all states.
Adelaide’s gross rental yield for a house is 4.46 per cent and for a unit it is 4.73 per cent, the report says.
It is not as good as bank interest but remember that bank interest does not come with tax deductions for things such as depreciation and building costs.
Factor in those and at these levels many i nvestors will be positively geared – which is the ultimate aim of a successful property investor.
An investment that doesn’t suck money from your pocket is an investment worth holding on to through the bad times, because when things improve in the future, it will be party time.