Property investment – the current situation

The investment property situation is looking rosier than it has for a while. We are seeing a gradual upward trend that appears set to stay for quite some time and is certainly one that will be interesting to watch.

Falling property prices in many Australian regions over the past three or so years deterred many investors from entering or re-entering the market. A number of these decided to invest in shares as an alternative.

But with 2007’s seemingly upward swing in property prices, I would say decent to strong capital growth expected over the next five years is one of the main reasons a number of property investors are entering the market, especially during the past three to four months.

Increased rental yields due to the much publicised ‘rental squeeze’ in metropolitan areas is also adding to the renewed interest. A number of states are experiencing some of the lowest rental vacancy figures they have ever had.

For example, according to the latest Real Estate Institute of Australia (REIA) data, Perth’s average vacancy rate for all rented dwellings is a mere 0.8 per cent.

Low vacancy rates in Western Australia have seen rents there increase significantly over the year to March 2007, by 16.7 per cent for houses and by 13.6 per cent for other dwellings.

Demand for rental accommodation is exceeding supply across many areas of Australia, resulting in rising costs for tenants (most of whom have spent the past few years with few or no rent increases). There are even rumours of rental auctions now occurring, where the rental property is leased to the highest bidder on the day.

The ‘squeeze’ is a sore situation for many tenants but great news for those who own, or are about to buy, investment properties in these low vacancy locations.

It must be noted that with housing affordability at a low for a significant number of homebuyers, it is a good time for these Australians to think about initially becoming property investors instead, perhaps in an area that has cheaper housing.

Many areas around Australia are showing signs of growth, some quite strong signs. Hence, there are good long-term opportunities to be had for those willing to research and perhaps move out of their comfort zone; outside the areas within which they were previously aiming to purchase.

The financial benefits of buying an investment property can often outweigh those of buying a home.

Maybe it is time potential homebuyers put aside their emotions and thought about what they can achieve by purchasing an investment property now to help them build a portfolio that will allow them to leverage accumulated equity and purchase a home and/or more investment properties further down the track.

Another current hot topic when it comes to property investment are the super laws coming into effect on July 1, 2007.

As you know, the legislation allows up to $1 million in after-tax contributions to individual super funds on or between May 10, 2006, and June 30, 2007, when the contribution limit will drop to $150,000 or less per annum with an allowable limit of three year’s worth of contributions at once.

I would say a small number of older property investors are taking advantage of this, but many others are happy to hold on to their assets for the benefit of capital growth.

We suggest property owners look before they leap into action and sell simply to take advantage of the superannuation situation. There are other ways to take advantage of it, and obviously the best course of action would be for them to speak with their financial planner and accountant first.

People should think about exactly how smart it is to be paying capital gains tax, and so on, costs now for some (possibly) tax-free superannuation later. It is a good idea for any investor to thoroughly assess their situation before selling off an asset that could make significant financial gain for them in the future, especially at a time many are saying is the bottom of the property cycle for some states.

Either way, property equity is a crucial part of retirement funding for many. It is simply a matter of when to take advantage of it to create the best situation for the investor in the short or long term, depending on their goals.

Importantly, when it comes to investment in the property market, patience is a virtue. It is savvy for the vast majority of investors to consider their involvement in the property market as a long-term strategy, especially now property price growth in most areas is at a slower pace than we experienced during the boom a few years ago.

Investing in property is an exciting and life-changing decision that can set investors in good stead financially, given the right choices and commitment to its long-term nature. In today’s market, a reliable short-term investment strategy for property is difficult to achieve for the average Australian.

Over the long term, there are many regions where good gains can be made if the buyer researches well and identifies the strengths and weaknesses involved.

Investors should be aware that to gain a healthy profit on a property they should be thinking at least five to 10 years ahead before they consider selling it, whether it be a home or purely an investment.

Many investors prefer long-term, interest only loan products such as lines of credit with split facilities, particularly where there is still some owner occupied debt to be repaid. This gives them flexibility and breathing room to afford managing loans on two or more properties.

It is most important that investors consider carefully the seven to 10-year property cycle and how much value that property or properties could add to their financial portfolio in the long term.

This is especially true now, when many are saying we are moving towards another upturn in the property market. You never know what can happen — we could very well be heading for another ‘boom’.

Overall, the current investment property situation is one of the most robust to be had in a long time, and certainly something that mortgage and property market players are reacting positively to.

Property is usually a sound investment, but a lasting strategy is prudent.

Warren O'Rourke is the national corporate affairs manager at Mortgage Choice.