Is property still a good investment?

Investment properties in Australia are being hit by falling rental earnings. So is it possible to still make money from investment properties? We consider the challenges and opportunities of the current Australian property market and how to navigate both.

 

Jumping on the investment property bandwagon

Australian investors are continuing to enter the market in large numbers, especially in Sydney and Melbourne; driven in part, by low borrowing costs and rising prices, which are both very attractive. Home loans to landlords now account for more than half of all mortgages, the highest share on record.

 

Increasing property prices

House prices in major Australian cities rose 8.2% in the year through December 2014, according to CoreLogic Inc – the largest property data provider in the world. They have climbed 12.4% in Sydney (the most of all Australian cities) and 7.6% in Melbourne. So in terms of capital gains – in the major cities at least property is still performing well as an investment.

 

Falling returns

The downside is that these higher prices coincide with an increase in the supply of homes for lease, which is causing rental earnings to fall.

A quick snapshot across eight states and territory capitals in October 2014 shows rental earnings dropped to 3.7% for houses and 4.5% for apartments. That’s a drop from 4% and 4.7% a year earlier, CoreLogic figures showed. The result is that investment properties are getting more expensive to buy and returning less cash flow through rent.

 

Warnings

There’s been a lot of debate about the Australian ‘housing bubble’; the argument being that the current property market is overinflated and prices are due for a fall. Late last year, The Reserve Bank of Australia warned that the increase in investor lending might be, “a sign of speculative excess”. The implication is that investors may be paying too much and are at risk of a period of negative equity. This timed with falling rental earnings, makes investing in property look increasingly high risk in the short term.

 

Six tips to consider

If you are an investor or looking to invest in property, here are six things you can do to mitigate some of this risk.

1. Get some up-to-date advice. Revisit or even rethink your investment strategy by speaking to your financial adviser. Your financial goals will determine whether property is good for you in the short and long term.

2. Take a long-term view. All types of investments go through cycles of growth and retraction – property is no different.

3. Do your research – look for hot spots. Having the right location is key when looking to invest in property. You should be on the look out for areas that have future growth potential. These areas might not be fashionable, but they make good investment sense. On top of this, you may be able to purchase an affordable property that can potentially grow in value in a short period. Also consider regional and commercial property, which at times can perform better as an investment.

4. Don’t get in over your head by borrowing too much or overcapitalising. Do the math between what you need to spend on a property, the rental returns and the projected capital gains. Make sure you have a plan about how to cover the shortfall if interest rates go up.

5. Make sure you’re getting all the value you can through gearing and other tax strategies. Again speak to your financial adviser about how to maximise these.

6. Diversify your investments. A balanced investment portfolio should include a range of asset classes, not just property. In fact property, depending on your stage of life and financial goals, may not be the best choice for you. Again, get good advice.

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