Quarterly Property Investment Market Report

Quarterly Property Investment Market Report

The Australian property market is currently under significant stress. Record increases in interest rates are now being felt by nearly all homeowners’, as fixed rates have expired from their previous record lows. Simultaneously, we are experiencing an unprecedented housing supply shortage, which is forecasted to peak with a shortfall of over 150,000 homes per year.

How will these competing dynamics play out in the future?

In this quarterly report, we delve into the latest data, explore the challenges investors face, and offer solutions to stay ahead in this dynamic market.

Quarterly Property Investment Market Report
Source: ABS, Oxford Economics

House Prices

Over the past twelve months, the housing market has experienced notable variations across different regions. More affordable markets, such as Brisbane, Adelaide, and Perth, have seen significant price increases, with Perth leading the way with a remarkable 22% rise in dwelling prices. On the other hand, Melbourne, Canberra, and Sydney have shown more modest growth. Notably, Hobart, which had enjoyed substantial price increases over the last five years, has now recorded a decline.

Quarterly Property Investment Market Report
Source: CoreLogic

 Rental Increases

On the rental front, we observed significant increases in most cities:

  • Sydney, Melbourne, Brisbane, and Adelaide: Over 8%
  • Perth: Leading the charge at 13.6%
  • Canberra, Darwin, and Hobart: Below the 10-year average of 3.6%
Quarterly Property Investment Market Report
Source: CoreLogic

What’s Going On?

A combination of factors is contributing to the current market situation:

  1. Housing Shortage: We are currently short by approximately 150,000 houses per annum.
  2. International Migration: A massive increase in international migration has not been matched by government-planned housing.
  3. Construction Costs: The private housing sector is suffering from huge increases in construction costs. For example, a house built for investors pre-COVID at $320,000 now costs $490,000.
  4. Developers’ Challenges: Large developers face over 50% increases in construction costs, making developments of apartments and large townhouse sites non-viable until prices rise substantially. Additionally, small developers are hindered by excessive red tape and over-regulation in the housing sector.
  5. Mum and Dad Investors: These investors are dealing with increased home loan payments and struggle to borrow for new investments.

Impact on Rents

Rents are increasing due to the combination of a lack of supply and rising interest rates. There is a direct correlation between rising interest rates and increasing rents. As inflation remains stubborn, relief for tenants will be a long time coming, even if interest rates drop.

Market Outlook

If you were surprised that house prices are rising despite record interest rate increases, the supply issue explains this phenomenon. The supply problem cannot be fixed in the short term, and even with an optimal government response, it would take ten years to address adequately. Until prices rise further, large-scale private developments won’t commence, and most Mum and Dad investors won’t enter the market on a significant scale until interest rates decrease.

Five-Year Medium Forecast

The following table provides the forecast for medium house and unit prices over the next five years across major Australian cities:

Quarterly Property Investment Market Report
Source: Oxford Economics

What does this all mean for property investors?

If they can afford to invest now, the odds are substantially in their favour, and they are likely to see significant returns over the long term. The challenge they face is to navigate the lending market to secure a loan that allows them to invest while finding a property that won’t be a cash flow drain on their daily life.

Part of navigating the current property investment landscape calls for a strategic approach to mitigate the challenges posed by high interest rates, housing shortages, and rising construction costs. Here are some key solutions and strategies that can help investors succeed in this environment:

1. Long-term Investment Planning:

Given the current market volatility, adopting a long-term investment perspective is beneficial. Short-term fluctuations should not deter investors from pursuing their goals. Focusing on properties with strong rental yields and capital growth potential over a longer horizon can mitigate the impact of interest rate increases or down turns in property pricing.

2. Understand their full financial position

Property investors need to have a clear understanding of their financial position and borrowing capacity. In addition, they need clearly defined investment goals and a property investment plan that aligns with their financial goals.

3. Refinancing and Loan Structuring:

One of the most effective ways to manage the impact of rising interest rates is through refinancing existing loans. By locking in lower rates or switching to a more favourable loan product, investors can reduce their monthly repayments and improve cash flow. Additionally, structuring loans appropriately to maximise tax benefits and manage repayments is crucial. Consulting with a knowledgeable mortgage broker who specialises in investment lending is essential for this process.

4. Leveraging Equity:

Homeowners with existing equity in their properties can leverage this asset to finance additional investments. By using equity as collateral, investors can fund investment properties a 100% plus costs without the need to use savings. This strategy allows for portfolio expansion and diversification while being tax effective.

5. Exploring Emerging Markets:

With traditional property hotspots having experienced significant price increases, investors should consider emerging markets that offer growth potential at more affordable entry points. Areas with strong economic fundamentals, infrastructure development, and population growth are likely to provide good returns. Conducting thorough market analysis and staying informed about developments can help identify these opportunities.

6. Utilising Tax Benefits:

Understanding and utilising available tax benefits is crucial for maximising returns, and significantly improving financial performance of an investment property. Securing and optimising investment loans, tax structures and debt management are all important factors for implementing and optimising the right financial structure.

7. Diversification:

Diversifying an investment portfolio may help manage risk and improve overall returns. This can be achieved by investing in different property types and locations that align with their financial goals and risk appetite. Diversification that aligns with your financial goals, ensures that the performance of the entire portfolio is not overly dependent on a single market or property type.

8. Staying Informed:

Regularly staying informed about market trends, economic indicators, and government policies affecting the property market is essential. Regularly reviewing their portfolio with their professional property investment adviser to maximise returns and minimise risks will ensure their financial goals are being met and each investment property is being fully optimised.

9. Professional Property Management:

Engaging professional property management services can ensure that investment properties are well-maintained, tenants are managed effectively, and rental income is maximised. Property managers can handle day-to-day operations, allowing investors to get on with their lives.

10. Engaging a Professional Property Investment Advisers:

Working with an experienced professional property investment adviser who have a deep understanding of market trends and investment opportunities can significantly enhance the chances of success. Advisers can provide insights into the best locations, property types, and investment strategies tailored to individual financial goals. Their expertise can help investors navigate complex market conditions and make informed decisions, ensuring they get the right property for their goals and can sleep peacefully at night.

Brokers, if you want to help navigate these challenges for your clients effectively and successfully, and position yourself as your clients’ trusted adviser, then seek our trusted property adviser in creating your clients a customised property plan. Vision Property Investment, is here to provide you with the expertise and support needed to help you help your clients invest smart, secure their future and build a legacy for their kids.