The property cycle typically has a period of prices rising (sometimes quickly) and then flattening out (and sometimes falling). More volatility can be experienced in regional areas, or areas with high exposure to a single industry (such as mining or tourism). We generally recommend purchasing in major growth centres, and holding for at least two property cycles (usually ten or more years). In this situation, it would be extremely unusual not to experience good capital growth.
For a review of negative predictions about Australian property prices, by Terry Ryder the founder of HotSpotting, please refer to Forecasts of housing price collapse are a dime a dozen (PDF).
For an assessment of the likelihood of Australian property prices falling by AMP Capital’s Head of Investment Strategy and Chief Economist Shane Oliver, including long term trends over the last century, please refer to Oct 2017-Conditions for Australian housing crash not in place_ Shane Oliver AMP (PDF).
In October 2017, the Bank for International Settlements released a Working Paper looking at housing prices around the world (link). It showed that over the last 55 years Australian average house price growth was 8.1% pa, with the largest annual fall (nationwide average) being -2%.
There are restrictions and procedures with investment in Australian real estate by non-residents. For detailed information, please refer to:
Different groups measure property prices in different ways. Measurement of the overall property market is complicated by the following factors:
- properties typically sell only every 8 to 10 years
- every property is different
- there can be long lags between when a property and sold and when the sale price is reported – in the case of off plan properties this can be years
- aggregate data can be misleading because, within a city, there can be large variations in price movements between regions, suburbs, and property types
- suburb level data can also be misleading because of the risk of small sample size distorting the data
A good explanation of various ways to measure property prices is provided by CoreLogic/RPData A refresher on housing market measurements (PDF)
NRAS stands for National Affordability Rental Scheme. It is a federal government initiative to provide affordable housing for middle and lower income earners. The government provides the investor with around $10K per annum tax free and indexed for 10 years if the investor buys an NRAS property and reduces the market rent by 20% to 25%.
For more information, please refer this NRAS Report (link).
Valuations are undertaken by humans. Because humans have different opinions, valuations will differ across valuers.
This Valuation Article (PDF) released in 2019 explains how a “bank valuation” differs from a “market valuation” (a bank valuation is lower because it assumes that the property needs to be sold in a short time due to borrower default. It also explains the process valuers go through (and should go through – they are not always the same) to obtain a bank valuation.
This press article (PDF) was released in January 2015 and contains comments by a finance industry watchdog, valuers, and the company ValEx which organises most of the valuations requested by banks.
The main points are that:
- valuations on the same property often differ substantially between valuers
- valuations are typically below sale price, because a conservative valuation reduces risk for:
- the banks that pay for the valuation, because: they lend less and the borrower needs to contribute more equity; or the borrower needs to pay mortgage insurance, and
- valuers – who could be sued (and have been sued) if a valuation proves high
- “the majority” of valuations guided by ValEx come within 10% of the sale price – this statement still allows for a substantial minority of valuations to be low by more than 10%
We find that there are usually a few valuers that will value at or very close to the purchase price. However, consistent with the article, most valuers will value low by up to 10% (and sometimes more). ValEx selects bank panel valuers at random, so you will not know which valuer you will obtain. If you get a low valuation for an investment property (or even your own home) then often trying another valuation from another funder will get a very different result.
Buying property in a SMSF has become easier now that a SMSF can borrow money to purchase an investment property. There are a range of factors that determine the best entity to buy an investment property. Using a SMSF can have substantial long term tax benefits, but has the disadvantage of the property being held in the super fund with the rental income or resale proceeds not accessible until retirement. Again, advice should be sought before using a SMSF to buy property. Contact us today to capitalise on our expertise.
An important factor that many inexperienced investors do not take into account is market timing. Many inexperienced investors enter the market toward the end of the “rising market” stage and buy close to the top of the cycle. The best time to buy is at the bottom of the cycle – considerable experience and research is required to identify this point.
Time in the market is also important, as property has considerable costs associated with buying and selling. We recommend that investors aim to stay with the property for at least two “up cycles”. Many investors sell to early. Contact us today to capitalise on our expertise.
Location is very important for a number of reasons. It needs to be affordable, and some locations are more affordable than others. We also look for locations that have existing infrastructure and planned future infrastructure. These locations provide better rent yield in the short term and higher potential capital growth in the long term.
It is also useful for investors to consider diversifying their investments rather than simply holding all their property in the one region. This is because the Australian residential property market is now quite diversified and cities do not all follow the same cycle – there are also markets with markets, and it takes research and experience to identify the best opportunities.
Contact us today to capitalise on our expertise.
Like any investment strategy, each person’s financial requirements are different – advice should be sought to determine your circumstances and financial capacity to own a property.
Contact us today to capitalise on our expertise.
Compass Capital is able to provide advice to investors better than most property companies. The principals have extensive qualifications and backgrounds in investment advice and economic research – this allows us to provide help to investors which may not be available elsewhere. Contact us today to capitalise on our expertise.