Warren Buffet says you should buy when investors are running for the hills and you should sell when everyone else is buying. It's only normal to fear buying a property when others are increasingly concerned about doing so. Adding to this fear are reports on 60 minutes (covered in a previous article) and the ABC that preach disaster for the Australian property market. Let's take a look at the current market in Australia and look at why buying now, may not be such a bad idea after all.
The current slowdown in the market has been primarily caused by the credit squeeze brought on by APRA intervention not by higher interest rates which we have seen in previous cycles.
Firstly, APRA restricted the number of interest only loans banks were able to provide, to 30% of new mortgages. Which saw these type of loans reduce to 16.6% of all loans. Additionally, following the outcome of the Royal Commission, which saw evidence of widespread corner cutting during loan approvals, APRA ensured that banks looked more closely at serviceability and verifying incomes. The flow on affect was that developers were put under the bank's microscope to ensure they could deliver on projects.
There is also concerns that if/when labour gets into government in May this year, that negative gearing legislation will change. Bill Shorten has been vocal about this however he has said it will not apply to existing properties that have been purchased prior to the planned changes or new properties. This means that the 1.3 million property investors who currently use negative gearing will still be allowed to offset their income with any property losses. It will also not affect investors who buy off the plan apartments or those that purchase land and construct a dwelling. Some people argue that the proposed legislation changes may have an affect on the value of all properties as the demand for existing properties will drop due to less tax incentives for 25% of market demand. I personally think that any new legislation will have very little affect on the current values of property. Remember that 75% of property buyers are owner occupiers who do not purchase a property for a tax break. The result will be less investors buying existing property and instead they will purchase new properties. It is not investors that drive up the value of properties but owner occupiers. Investors drive up rents and with a lower supply of existing older properties being available for rent the affordable rental market will slowly disappear - most likely causing median rents to increase as investors purchase only new properties with higher rents.
The good news about credit squeezes is that they come and go.
a) APRA has recently relinquished its cap on interest only loans on 1 January 2019
b) We are not seeing broad oversupply of properties in the Australian market, just some areas. The easiest way to spot an over supplied property market is to look at the vacancy rate. Equilibrium is 3.0% and according to SQM Research, Melbourne is still a landlord's market with a vacancy rate of 1.9%. Brisbane is at equilibrium at 3.0% and Sydney at 3.2%.
c) The headline decline in the value of property has largely occurred at the higher end with more affordable properties showing very little to no decline.
d) Proposed negative gearing changes are unlikely to have any affect on the value of property. If anything rents should go up which are good for investors
e) Interest rates are not likely to be increased by the RBA in 2019 or 2020. While the decline in housing prices remains a threat to the overall economy, interest rates will not be increased by the RBA. We are more likely to see a decrease in the cash rate in 2019/20 than an increase.
The best news is that it is now easier to find good properties that you would never have found before with less competition around. It's a buyer's market and you will also get better terms such as due diligence periods, longer finance clauses etc.
Invest for cashflow during times of low capital growth. As capital growth declines, rents increase. Keeping in mind, to never sacrifice growth for cashflow.
Buy vacant land and subdivide to create equity. Some people bought land during the peak of the cycle and can no longer get finance to build. Their speculation is your opportunity.
I always advocate that buying land and building is the best investment, however if your budget is under $400,000 you can buy off the plan apartments at a discount that have already started construction. My favourite location is Melbourne where long term (past 25 years) capital growth of 6.6% for units out performs most other capital city housing markets. Developers will sometimes pay for stamp duty or provide other incentives. Be careful here as the less favourable projects offer the biggest discounts.
You need to make a decision. Who do you listen to? Professional investors like Warren Buffet or a journalist that chooses who they interview and what parts of the interviews they show you? It is easy to act out of fear and do nothing, but in doing so, you may lose an opportunity to buy an outstanding investment property that will bring you years closer to your retirement.
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