Property investing in a matrix of confusion
May 2, 2017
Media outlets write an endless number of articles about real estate designed to captivate reader’s interest. Many of the articles have alarming headlines - but the content is usually about isolated cases or mere forecasts of a possibility.
So how do you make sense of the matrix of interested and conflicting “news” and feel more assured about your home and/or investment property value not crashing through the floor, but rather increasing over the long term?
It’s important to understand that there are strong vested interests - no government would allow themselves to appear to be incompetent by crashing values or hurting affordability (our ability to repay home loans).
The government wants to improve housing affordability for first home buyers, however it is difficult to achieve this without causing an artificial increase in prices, which is what happened with the introduction of the large First Home Buyers grants.
Property construction is expensive in Australia. We have high workplace standards, high OH&S costs, and high hourly rates. We have high population growth so to meet this demand it is important that construction rates stay steady. We currently have an undersupply of property - the litmus test indicator is that vacancy rates have been falling and rents are increasing.
At the end of the day, the value of your home or investment property is set by what buyers perceive they should or must pay. The latest NAB Residential National Property Index rose from +16 to +31 in the March Quarter from the previous quarter, which indicates a sentiment of general positive expectations for price and rental growth.
As investors, we do not depend on huge price growth year in year out as that is unsustainable. Sustained capital value increase over the longer term, when we are likely to access the equity or financial benefit of the property, is ideal. The vested interests in keeping housing and banking stable and costs put an upward pressure on capital growth and rents indirectly.
What about interest rates?
It is an interesting, complex scenario and calculation. A big increase would cause a major reduction in housing supply due to new loan affordability reductions (qualifying for new loans) for the next round of buyers, especially first home buyers.
This would then place upward pressure on rents because vacancy rates would then tighten. We witnessed a similar scenario during the GFC when housing rents also increased due to construction downturn (due to GFC banking issues).
Construction interest costs would also increase further (as they are higher than home owner % rates); increasing build prices and so reducing supply as a lot of build feasibilities would fail; thus disqualifying many builders and developers from gaining bank construction finance.
In turn this would cause the cancellation of many constructions projects and a number of developers & builders would go broke (don't be overly alarmed by this because what hurts some people is an opportunity for others in other ways; including property investors).
Furthermore, a reduction in our construction industry would hurt the economy badly, and together with the financial services sector that it entails, Australia's biggest industry. Jobs would soften with a downturn in the construction industry; a big employer and the business community would need the comfort of interest rate reductions if the economy and/or jobs market softens.
All these factors combined would step us up from a current overall national housing undersupply to a more severe undersupply. Nobody wants the above scenario to unfold, especially the government, as they would be wearing a lot of mud until being voted out at the next election - so it will be avoided at all feasible costs.
Even if interest rates were to increase substantially, it would not affect investors as much as owner-occupiers. For an investor the increase can be tax deductible (please ask your tax advisor) and somewhat offset by a logical flow through of rent return increases.
Certainly the above is valid and even somewhat comforting to consider if trying to determine the logic of investing in property. Therefore, when, how and why should you make a decision to consider investing in property? A fantastic way to explore your specific options is to have a free consultation through which you can gain advice on your options; supported by the required team of experts at BCV Financial Solutions. It is from that position that you will have the right information to make qualified decisions. The only worthwhile advice is advice based on your specific needs and financial position.
Andrew Gabriel is an experienced property market researcher and licensed estate agent. He assists many clients in understanding the property market and making wise property investment choices. Please feel free to call Andrew for a chat on 0414 411 510.
Investment Property Researcher
This information in this article is for general discussion purposes only. It is not intended as financial or investment advice and should not be construed or relied on as such. Before making any decision of a financial nature you should seek advice from a qualified and registered financial, tax and legal adviser. No material contained within this article should be construed or relied upon as providing recommendations in relation to any financial products or assets or to make any decision. All readers should make independent inquiries to satisfy themselves of the accuracy and suitability of the information to their personal position. No liability is accepted for decisions made using any views in the article. All Content is provided "as is"and without warranties of any kind, either express or implied. Andrew Gabriel is an independent Property Researcher. The views expressed in this article are the views of the author, and do not necessarily reflect the views and opinions of BCV Financial Solutions.