Weighing up the property boom
Residential property prices are booming not only in Australia but also around the world. What’s the view for property investors and what factors should you consider before taking the leap?
Across Australia residential property prices are booming, thanks to pent-up demand, record low interest rates and ready access to mortgage finance.
Median house prices in metropolitan and regional areas have surged, and that trend is set to continue as owner occupiers and investors compete for limited stock.
National dwelling values rose by an average 2.8 per cent in March, the fastest monthly gain since October 1988, according to CoreLogic. This followed price rises in every capital city.
But what’s happening in the property market here is actually being replicated right around the world, for precisely the same reasons.
Data from the Organization for Economic Cooperation and Development shows housing prices in 37 developed countries have risen at their fastest pace in almost 20 years.
The United States, China, Canada, New Zealand, South Korea, and much of Europe, are all heading into new territory in terms of property prices.
Parts of the Chinese property market have risen around 16 per cent over the last year, while prices in New Zealand have jumped more than 20 per cent since the start of 2020.
And it’s a situation that central banks and financial regulators are monitoring very closely. Although any rises in official interest rates are almost certainly off the cards for some time, some regulators may impose tighter controls on lending.
While they’re unlikely to intervene in any way at this stage and disrupt the pace of economic recovery, a general concern is that if property markets become too overheated that could create stronger inflationary pressures.
This would ultimately lead to higher rates, which is behind the market sentiment that’s currently driving longer-term government bond yields higher.
In its March monetary policy minutes, the Reserve Bank of Australia noted its board members had noted that housing market conditions warranted close monitoring in the period ahead.
“In particular, it was important that lending standards remain sound in an environment of rising housing prices and low interest rates.”
The Australian Prudential Regulation Authority (APRA) is also monitoring the market, but says there is no cause for immediate alarm.
The view for property investors
Australian economists and other property market forecasters are predicting that house prices will continue to gain ground over 2021.
The same may not be the case for apartment prices, particularly in Melbourne and Sydney where there is an oversupply of existing properties and more new apartments are under construction.
For property investors, there are a wide range of factors to consider.
Although residential prices are gaining broadly, property price growth is never uniform and capital returns vary considerably across cities and regions, by location, by property type, and an individual property’s physical condition.
On a rental income level, current market conditions remain fickle.
The impacts of COVID-19 during 2020, including a rise in unemployment levels, resulted in governments enacting legislation enabling severely affected tenants to seek rent reductions and payment deferrals.
As a result, many property owners are still contending with lower rental income and, in some cases, have needed to seek mortgage payment relief from their lenders.
Rental demand also has weakened due to the departure of temporary residents as a result of COVID-19, most notably foreign university students. This will be further exacerbated with net overseas migration to Australia expected to remain negative into 2022.
The outlook for rates
On a monetary policy level, the RBA has made it clear that, like most of other central banks, it is not likely to be raising official interest rates for several years.
That’s because neither wages, or inflation are rising fast enough to warrant a rate rise to dampen consumer sentiment at this stage, and especially with unemployment rates still elevated.
Yet, investing into property should generally be considered a long-term strategy. So, even though rates are at record lows now, there’s every likelihood they will rise over the medium term.
This should be factored into your future capacity to service borrowings.
Assessing your investment goals
Whether you already own investment property or are considering an investment into direct property for the first time, it’s vital to see how property fits in with your overall investment goals.
What is your overall strategy with owning property and your investment time frame?
It’s also important to understand that property is an illiquid asset. Unlike assets that are highly liquid and can be readily sold on financial markets, either as a whole or in smaller quantities, generally the only way to realise capital growth from an investment property is to sell it.
The only exception is when it’s possible to sub-divide land and sell off part of a property.
Furthermore, like other investments, owning property is not an instant pathway to gains. There are substantial entry, holding and exit costs.
And, as past episodes have shown, such as during the Global Financial Crisis, there will be periods when property prices decline, and sometimes quite sharply.
So, it’s vital to weigh up both the pros and cons of buying residential property purely on an investment basis.