When “experts” talk about knowing the best time to invest in property, they are usually talking in the past tense. The truth is, even the experts don’t know the perfect time, otherwise they would all be living in multimillion dollar mansions and driving Ferraris!
The only thing we can do is assess the economic factors and key drivers which increase property prices in each cycle. Below is an outline of the factors affecting the economy and the property market.
1. The Australian Economy
The Australian economy came back to life earlier this year after modest gains in 2009 and a largely contracting 2008. It now seems to have stabilized slightly, possibly because of the 7 interest rate rises in the last year! There are other factors as well, the mining sector has lost some confidence because of the so called ‘resources super tax’ but Julia Gillard has quashed talk of that recently anyway.
There has also been concern about the European Debt Crisis with Hungry joining the party recently, and the world markets, including Australia, have taken a hit over the last few weeks. With it, the Australian dollar has also plummeted, so we are by no means ‘home free’. Although, there is the feeling that even if things do get worse, if any country can withstand it, it is Australia.
With all that said, the Australian economy’s vital signs are healthy and it is performing much better than anyone would have expected this time last year. Ultimately, indicators like strong employment levels, wage and productivity growth and manageable inflation, drive confidence levels and the demand for goods, including property.
2. Increased Demand and Lack of Housing Supply
Record levels of net migration into Melbourne over the last few years along with the only baby boom since, well, the baby boomers, has seen the population of Melbourne rise significantly. Unfortunately this has not resulted in the construction of more dwellings, leaving an ever growing shortfall of property in the urban areas.
There are many reasons for this, land banking (where developers and governments don’t release land so as to increase the price of existing land, therefore the land they hold ), red tape from the local councils slowing down the development approval process, tighter lending conditions and a lack of infrastructure in the key areas, just to name a few
The conclusion to all this is a shortage of supply and strong continuing demand. Add that to the increasing cost of development, including higher land, infrastructure and building costs, means that the value of new dwellings will have to continue to rise.
There has been a lot of comment on property lately in the newspapers, with constant dribble about how Australian property is unaffordable, when comparing average wages to median property prices. Sure they are less affordable than they used to be in Australia but what about world standards? Are Melbourne properties more expensive, using this comparison, to properties in Western Europe… Paris, London, Munich?
3. Residential Rents
It goes without saying that with the population increasing and no new dwellings being built, this puts pressure on the already tight rental market. The Melbourne rental market has now gone more than 65 months since the vacancy rate tipped over 2% and this looks set to continue until the supply issues are well and truly past us.
With demand for rental properties outstripping supply, rents have increased strongly over the last few years. Record low vacancy rates, fewer investors bringing new properties onto the market and low housing starts, all mean residential rents will rise even further over the next few years.
The Melbourne property market, by all reports, is 1 year into a 7-10 year cycle, and with the demand and supply issues facing both the rental and sales markets it looks as though we have a few years yet of positive growth ahead of us.
When considering an investment property, there is an old adage that we have modified slightly that we think is the most accurate truism:
“the highest gains in the property market are not made by perfecting
your timing of the market, but rather, your time IN the market”
Although it is true that buying earlier is important, it is also imperative to take your time and select the best performing property that fits into your needs/requirements. Make sure you confirm you are buying at market value (get an independent valuation), the rental returns are at least 4% per annum (ask a local agent to do a rental appraisal) and the property purchase is structured in the best possible way to maximize the tax efficiency (indicative tax depreciation reports are a great start, but most importantly, speak to your Accountant).
Bill Nikolouzakis – Director of Nyko Property.