With so many varying forecasts about the future direction of the property market, I thought I would ask Paul Clitheroe of Money Magazine fame for his view.
Here’s his response below:
It is indeed an unusual time. Hope you and family are well.
My view is pretty common sense, in short form below:
Your Investment Property in Australia Doesn’t Have to be Pre-Owned
Whether you buy an old or new property is one of the key decisions you’ll have to make when buying an investment property in Australia. Both have their advantages. With an old property, you can often secure a great deal, plus there’s potential to renovate and add value. You can also feel more certain about how the property will perform
A new investment property in Australia may not come with those assurances. However, you shouldn’t discount them outright. In fact, investing in new homes comes with several benefits that may earn you more money.
Benefit #1 – Higher Capital Growth
As we all know, location is important when buying an investment property in Australia. Choose the wrong location, and you limit the capital growth your property will enjoy. Buying an old property in a desirable location practically guarantees you’ll enjoy capital growth. That’s a given.
But many don’t realise that the same applies to new properties as well. In fact, a new property may enjoy greater capital growth than an old property in the same location. Newer properties tend to enjoy higher levels of demand than old properties. Buyers and renters want the latest mod cons, which they won’t always get with an old property. This increased demand makes the location more desirable which contributes to increased capital growth for your property.
Benefit #2 – Construction Quality
Have you ever bought an old investment property in Australia, only to find that you have to spend thousands of dollars on renovations? It’s not an uncommon problem. Properties wear out over time. Fixtures need replacing and appliances need maintenance. This is all money coming out of your pocket.
Yes, you can claim tax deductions in Australia for some of this work. But you may not want to deal with the hassle.
A new property allows you to avoid those problems. There are stringent regulations in place to ensure all newly-built properties meet certain standards. They have to be built to a certain quality level, plus they must be energy efficient. This means you can feel certain that the construction quality of a new building will be high. As a result, you don’t have to spend more money on making improvements.
Benefit #3 – Lower Prices
A lot of people will tell you that it’s almost impossible to get a new property at a low price. Developers know the value of their properties and won’t sell for anything less.
This may be true when trying to buy a new property after the developer has already sold most of their stock. However, it discounts the potential savings you could by getting in early.
Keep your ear to the ground so you can find out about upcoming development work. If the houses are in a desirable location, you should try to get in as early as possible. Many developers sell their new properties for less than they’re worth to investors who make early offers. If you’re among that group, you’ll have a great property that cost you less than it should have.
Benefit #4 – You Attract More Tenants
We touched on this point earlier, but it’s worth coming back to. Tenants want properties that offer the latest appliances. They also want to pay as little as possible on their utility bills.
Buying an old investment property in Australia sometimes means that you can’t offer these things to your prospective tenants. The fixtures and appliances may be out of date, which lowers the demand. The property may also not be energy efficient. In the end, you have to charge less rent than you may wish so that you can attract tenants.
That shouldn’t be a problem with a new property. The developers will have installed modern fixtures and appliances, which attract more tenant applications. You don’t have to pay for renovations, plus, you can charge higher rents.
Benefit #5 – You Get a Blank Slate
Let’s assume you aren’t buying the property as an investment. Instead, you want to live in it yourself. If you buy an established, older property, you’re going to have to deal with the previous owner’s choices. You may have to spend a lot of money to change things until they’re just the way you like them.
When buying a new home, you have more choice. For example, you can discuss your preferences with the developer to ensure the home is built to meet your needs.
The prospect of having a blank slate appeals to many buyers. Plus, you get to enjoy the other benefit’s we’ve mentioned if you do decide to take on some tenants.
You Could Use Your SMSF to Save on Your Tax Bill
You can use a SMSF (self-managed superannuation fund) to buy an investment property in Australia. However, this has previously been quite difficult. Many lenders would not allow SMSFs to borrow money, which means they had to fund the full purchase themselves.
However, that changed after the 2017 Budget. Now, a self-managed super fund can borrow the money needed to fund the purchase of an investment property in Australia. As a result, those who previously couldn’t afford to use their SMSFs to buy an investment property in Australia now have a pathway to do so.
The first thing to remember is that you shouldn’t set up a SMSF solely to buy a property. However, having it available makes sense for a lot of small business owners. After all, a business owner can occupy the SMSF’s investment property in Australia, as long as they use it for business purposes.
However, managing an SMSF takes a lot of time and hard work. To help you along, we’re going to show you some of the secrets of using an SMSF for property investment.
You’ll need some money in your SMSF before you can use it to buy an investment property in Australia. How much will depend on your situation, but as a rough guide you should aim to have $200,000 available.
This will help you to cover the deposit and the fees associated with taking out a home loan. Furthermore, you’ll probably have some money left over for diversification. This is important, as investing only in property could come back to bite you if the market crashes.
The funds should come from every SMSF member. You don’t have to fund the entire thing yourself.
Know How Much You Can Borrow
Most lenders are still quite wary of lending to SMSFs. That shouldn’t come as a surprise, as many have only just started doing so following the 2017 budget. As a result, it’s unlikely that you’ll be able to secure a home loan with a loan to value ratio (LVR) above 80% of the home value.
In fact, most lenders prefer to offer 50% LVR on SMSF loans. Having a 50% deposit available for your investment property in Australia increases the lender’s confidence and puts the property closer to being positively geared.
Of course, you need to make repayments on the home loan once you’ve secured it. This is where the self managed super fund can really help an investor. You can use your super contributions, which you can deduct from your taxes, to make the repayments. The same goes for any rent or other payments that the SMSF receives.
As a result, you often won’t need to spend any of your own money to repay the home loan. Better yet, you can deduct quite a large portion of the repayments from your tax bill. Of course, it’s best to work with a tax professional to ensure you set up the correct structure for this.
The Tax Benefits
Let’s look at the tax benefits of buying an investment property in Australia using an SMSF in more detail. For one, the fund only has to pay a maximum tax rate of 15% on any income the property generates.
However, the bigger benefits come if you choose to sell the property. Assuming the SMSF has held the property for at least one year, you only have two-thirds of the capital gains tax (CGT) you would have paid on a property you personally own.
Better yet, both of these tax contributions disappear if the SMSF keeps the property until its members start claiming their retirement pensions. As a result, retired SMSF members can benefit from the property’s income, without having to pay any tax. They also receive larger lump sums if the SMSF sells the property because they don’t have to pay CGT.
Can Everybody Do It?
Property investing using an SMSF sounds appealing, and it can provide you with a lot of benefits. However, it’s not for everybody.
As mentioned earlier, you should avoid using your SMSF to invest in property if it doesn’t have a large sum of cash available. Diversification is crucial when investing, so you don’t want to be in a situation where your SMSF relies only on the property’s income. A lost tenant or property market crash could cause major problems.
Furthermore, those on low incomes should think twice about investing using an SMSF. Remember that you have to make regular SMSF contributions. These contributions benefit you when it comes to your taxes, but they’re also long-term benefits. You may struggle in the short term if you don’t have the money to make regular SMSF contributions.
You Could Bag a Great Investment Property in Australia at Auction
Trying to buy an investment property in Australia at an auction is something of a mixed bag. On one hand, you have the chance to snap up a bargain. A lot of sellers use auctions as their last resort. As a result, they may ask for less than the value of their property. As long as you don’t get caught up in the heat of the moment, you may get a great investment property in Australia at auction.
However, you also have to consider the other possibility. Auctions are emotional places. If you get caught up in a bidding war, you could end up spending more than you intended. That makes it much more difficult to generate a good return on your investment property in Australia.
So how do you get the most out of your visit to a property auction? We have a few tips that should help you.
Tip #1 – Prepare Your Finances
Did you know that you have to pay the deposit for any properties you win on the same day as the auction? There’s no cooling down period, which means you need to be prepared financially.
This means you need to prepare yourself financially for the auction. Firstly, make sure you have a budget, and enough cash available to pay the deposit relevant to that budget.
You also need to consider how you’ll buy the investment property in Australia. If you’re buying using a trust or self-managed superannuation fund (SMSF), you need to make sure it’s organised for the purchase.
Finally, lodge a home loan application and get it through to the pre-approval stage. This means the lender is confident that they’ll approve your loan, barring a couple of extra checks. Having pre-approval means you can feel more confident in your bidding. It also places you in a good position to negotiate if the property doesn’t meet its reserve price, and you’re the highest bidder. The seller will see that you’re serious about buying if you have pre-approval, which may help you pull the price down.
Tip #2 – Look the Part
Impressions play a bigger role than you might realise at an auction. There are going to be all sorts of people there, so you need to play to the crowd a little bit.
Make sure you look the part. Ideally, you should arrive in business wear, so you look like the investment professional that you are. Bring a small notebook to jot things down. You may not need to write anything important, but it’s a little thing that could make inexperienced bidders wary of you.
The key is that you need to look confident, so people think you’re an experienced auction-goer. If you look like you have money to burn, a lot of people will refuse to bid against you. This gives you a distinct advantage, so you may secure an investment property in Australia for less than it’s worth.
Tip #3 – Bid Early
Many people try to lodge late bids when buying an investment property in Australia at auction. This tactic seems to make sense. You wait until the last second before making your bid. You rattle the other bidder, which lends you an advantage.
That tactic can work, but it has some risks attached. If you leave it too late, you may miss your bid. The auctioneer will bang the gavel, and you’ve lost out on a great property.
It’s much safer to bid early. This puts you in the running straight away, plus the auctioneer will start paying attention to you. As a result, you may get a touch more time to make that last bid count. Furthermore, jumping straight in with a strong bid can unnerve your opposition. This can reduce the bidding pool, so you face less competition.
Tip #4 – Don’t be Afraid to Walk Away
Walking away from a property you want is one of the hardest things you may have to do. However, it’s sometimes necessary.
Remember that you have a budget, and that every property you buy has to offer a good return on your investment. The bidding may get heated, and there may be people who can top every bid you make. It happens. You just have to make sure to react in the right way.
Stay calm and walk away if it looks like you’re going to spend more than you’re comfortable with. This protects you financially and ensures you have more money left over for any other properties you may be interested in.
You can make a lot of great purchases at property auctions. However, you need to avoid getting caught up in the emotion of the event.
If you follow these tips, you’re sure to bag some bargains eventually.
The 6 must-know takeaways from these budget changes:
- For residential property, you will only be able to claim depreciation on plant and equipment items (ovens, dishwashers etc.) when you buy a brand new property.
- You will still be able to claim the building allowance (bricks, concrete etc.) on any residential property built after 1987.
- If you bought a property built prior to The Budget on the 9th of May, 2017 when the changes were announced, you are not affected in the slightest.
- There is no change at all to commercial or other non-residential property.
- If you personally buy any item for your property after the settlement you can still claim the depreciation on that particular item.
- Perhaps the most interesting point: Whilst investors purchasing second-hand property can now no longer claim depreciation on the existing plant and equipment, they will have the benefit of paying less capital gains tax when they sell the property, by claiming any unclaimed depreciation as a capital loss.
Moving forward, property investors will have a choice of ordering a building allowance report only, a CGT schedule or a combination, from Washington Brown.
What does Trump’s election victory mean for Aussie real estate?
Since the US election, there’s been endless speculation about what the win from Donald Trump will mean for not only the US, but other countries around the globe.
Would you believe that the predictions for Australia’s property market range from doom and gloom through to uplifting and very positive, including that property prices could rise, property prices could fall, there could be a recession…
But the key here is that it’s all speculation. What will really happen remains unknown, particularly since Trump’s policies seem to be subject to change and we don’t know what will actually be implemented until he’s in office next year. In fact, he probably doesn’t know himself!
Let’s look at the positive vs. negative case
‘The Donald’s’ election win scared investors and sent shockwaves through the share market, with $32.5 billion wiped from the ASX. It quickly rebounded, however, with more than $50 billion added the following day, the best session since 2011.
Did the confidence of real estate investors take a hit too? Since the real estate market doesn’t see the impact of these events until further down the track, we don’t yet know. However, in the initial aftermath of the election, there has been a case put forward that Trump’s win could actually benefit our market.
It’s all to do with confidence and sentiment. The big positive for Australia in all of this could be an increase in foreign investment. Our country is seen as a safe-haven in the midst of global volatility, which could lead to greater demand for property and hence, push up housing prices.
Some commentators suggest demand from foreign investors could come from the United States itself, with its citizens choosing to either relocate elsewhere (although this is unlikely – just think of all the celebrities who have already reneged on their promises to leave the US!) or simply invest their money in a country they consider to be safer than their own. The US is already one of the biggest sources of foreign investment in Australia’s property market.
Chinese investment in our real estate market is also likely to rise. The case is already pretty compelling for Chinese investors to move their money here; irrespective of Donald Trump they love buying Australian real estate. Australia has long been seen as a safe-haven for Chinese capital. Despite measures introduced to curb foreign investment, Chinese investors continue to buy Australian real estate in large quantities, lured by not only the perceived security of our market but by factors including our lifestyle and great schools. In this sense, the Trump phenomenon could just be another factor strengthening their desire to invest in Australian real estate.
While some Chinese investors seem to indicate they don’t care about Donald Trump and his election to the US presidency, there is an argument that he has “declared war” with China, with promises to tighten trade agreements and increase tariffs on goods imported from China into the United States.
Some economists have argued that Trump’s trade policies could have a very detrimental impact on the global economy, potentially leading the Australian economy into a recession, negatively impacting upon the share market and the property market, which is where price fall predictions come in.
It seems interest rate predictions have already changed since Trump’s election; prior to it there was an expectation of another fall in the cash rate, but now an upward move appears more likely, as Trump’s trade policies could cause global inflation to climb. Combined with a weakened Australian dollar, this could provide an impetus for the RBA to increase the base rate.
Trump’s real estate interests
Let’s not forget Donald Trump is a real estate tycoon with property developments around the globe. He has built office and residential towers, hotels, casinos and golf courses around the world, perhaps surprisingly, he has towers in countries including Turkey, Panama, India, the Philippines and Uruguay.
While post-election Trump has said he now doesn’t care about his business empire, the fact remains that he clearly has a vested interest in real estate and keeping property markets around the world buoyant – at least where he has properties!
It will, of course, have to be balanced by his responsibilities as the leader of the free world and his determination to do what’s best for the US and its citizens.
Other interesting snippets about Donald Trump and property include:
- Trump is reportedly committed to bringing regulatory relief to the financial services industry in the US, which could make credit more readily available and increase activity.
- Infrastructure is expected to be central to his administration’s policy agenda, which could benefit the property market.
- Despite a lot of hostility towards the incoming president, Trump-branded properties are reportedly thriving and likely to grow even further in value after his election win, with greater buyer demand. The Trump International Hotel and Tower in Chicago are said to have increased 25% to 75% in value and in New York the tower reportedly increased in value by around 200% since he was elected.
Remember it’s all about hypotheticals at the moment
We can all sit here and make claims about what Trump’s presidency will mean for Australia’s real estate market, but the reality is that we don’t know. It’s all speculation, and there’s a lot of misinformation out there too. What will really happen will only be determined in time.
At the end of the day, the fallout will be all about confidence and sentiment. IT will come down to whether people have the confidence to continue investing in the share market versus property, and in the US versus other countries that are perceived to be safer.
It also depends on whether Australians have the confidence to keep investing in Australian real estate. Unless a recession hits, it’s likely they will. Why? Because of the fundamentals supporting our real estate market, including population growth, a stable economy, a strong banking system with tight lending restrictions, and a shortage of properties in some areas.
Any deterioration in confidence will likely be short-lived, just like Brexit.
As time goes on the initial shock will subside. The protests will eventually come to an end, and it’s likely Trump’s presidency will be more measured than people expect. Which should translate to sentiment being restored in the long term.
Property prices in the UK have indeed defied all the naysayers’ post-Brexit, being up by 7.7% over the past year according to the latest figures.
With everything being just predictions and speculation, how about we add another to the mix: Maybe the best course of action is to go and buy some shares in Boral so you can benefit when the wall is built along the Mexican border?
Every investor – whether expert or amateur – should be looking for the same things in a property investment to ensure its success.
While there is no exact formula for buying a successful investment, it’s handy to have a checklist to consult to make sure you’re on the right track.
Below are some of the fundamentals you should be looking for when buying. Be aware that this isn’t an exhaustive checklist. However, it can serve as property investment tips that will help guide your decisions.
Property must haves:
- Good location – The old adage still rings true; it’s all about location, location, location. Well, maybe it’s not all about location, but the fact is you can change a property, but you can’t change a location. Being close to amenities such as shops, schools, public transport and even major transport routes is key when it comes to selecting a good investment property.
- Growth drivers – Are there any major projects taking place in close proximity to drive up the value of the property? This might be in the form of new or planned infrastructure or commercial developments that will improve amenity or access to the area. This is likely to draw more people to the area, pushing up demand for homes.
- Population growth – Are people moving to the area? Look at population growth figures in the area you’re buying in. Then determine whether there are factors drawing people in, such as employment nearby and improved amenity.
- Tenant appeal – Is there demand from renters in the area and for the type of property you’re purchasing? Does your property have the features tenants want? What are the vacancy rates? Demand from your target demographic is the key to securing a strong return.
- Build quality – While location is key, the property you buy is important too. This is especially true if you want to attract quality tenants. Do your due diligence, which includes getting a building and pest inspection, to ensure the home you’re buying is of a good quality.
- Value-adding potential – A well-selected property should see capital growth. However, it’s always a good idea to have the ability to add value through a renovation or by adding a room or a car park, for example. Value-adding potential also comes in the form of a change in zoning that will allow for development. If the market slows you may need to manufacture growth to increase your equity.
- Liveability – Does the property have a good layout? Does it have the features people want, such as extra bathrooms, car spaces, security, and a nice outdoor area, whether it be a roomy balcony or a good deck and backyard? All of these things will make it more sought after. Liveability also goes for the suburb. Ensure you buy in an area with a good community due to plenty of amenity and nice aesthetics.
- Individuality – A property that is unique is some way – or that stands out from the crowd – can experience strong growth as it will be in high demand amongst buyers. This is especially the case when it comes to units, particularly in areas with a lot of supply.
- Scarcity – Does demand outweigh supply in the area in which you’re buying? This applies to the area in general as well as the property type. If there is greater demand than supply in terms of both buyers and renters, the property value and rental rate will be pushed up.
- Low maintenance – Select a property that won’t require a great deal of maintenance. This will save you money and keep your tenants happy.
- Proximity to employment – People like to live in close proximity to work, so make sure there are employment options nearby. If you’re buying in a regional area make sure there’s more than one industry in the town.
- Stability – Have property prices been stable in the area in which you’re buying? Ideally you want a history of consistent growth, avoiding areas that have experienced big price falls.
- A solid history – Do your research and make sure the property hasn’t been sitting on the market for a long time, and if it has, determine why. Make sure it’s not due to an inherent problem with the property. Finding out why the sellers are moving on is also important. The last thing you want is a property that isn’t selling for a good reason.
- The right numbers – You want the property to stack up from an investment perspective, with good potential for capital growth and decent rental yields. Make sure the numbers add up! What is the rental yield, what are the total costs, how much will you be out of pocket for?
Ahhhhhhhh, housing affordability. That old chestnut. It’s a topic that’s been hotly debated a million times over! And will no doubt continue to be for many years to come.
The general consensus is that property in Australia is unaffordable. The results of a recent survey seemed to confirm this, with the proportion of adults who own their own home falling from 57% in 2002 to 51.7% in 2014.
The annual Household, Income and Labour Dynamics in Australia survey, authored by Professor Roger Wilkins from the University of Melbourne, also found that the rate of home ownership is expected to keep falling, and may drop below 50 per cent as early as next year.
So, is home ownership falling because Australians simply can’t afford to buy properties due to hugely elevated prices, or is it due to other factors?
Property prices have significantly grown
It’s certainly true that property prices have significantly risen in Australia over recent decades.
The median dwelling price for the combined capital cities is currently sitting over $500,000, according to CoreLogic. But prices of course range widely between the capitals. Hobart is the cheapest at around $300,000 and Sydney being the most expensive at nearly $800,000.
This decade so far prices have risen across the board by 35%, and over the previous decade they rose by around 140% according to CoreLogic figures.
But since the beginning of 2010, it’s been the two major capitals of Sydney and Melbourne that have seen the majority of growth. Prices are increasing by around 60 and 40 per cent respectively (as at May this year). The other capital city markets have seen either little growth or have fallen in value, so theoretically, in some places affordability is actually improving.
This is especially the case when you consider interest rates; in this regard 2016 actually presents quite a good time to buy with the cash rate now sitting at a record low of 1.5%; very different from the double-digit interest rates investors experienced decades ago.
We, of course, also need to consider incomes in relation to price growth. Depending on who you ask, there can be a case to say housing has or hasn’t become more unaffordable. It’s clear, however, that house prices have risen faster than incomes, making it harder to save for a deposit.
Priorities are changing
While property prices have clearly risen, it’s also the case that priorities for more recent generations have changed.
Once upon a time – not that long ago really – youngsters left school and got a job, with their primary objective being to save for a deposit to buy a home.
Nowadays, however, younger generations seem to have different priorities. They often leave school with the intention of travelling abroad for a gap year (or two or three). Or if they go straight into a job they’re not necessarily saving, but buying the latest gadgets; in our modern society it’s about instant gratification.
So does that have an impact on affordability?
It makes sense that it likely impacts on the ability to save for a deposit.
We need to consider which is the cause and which is the effect, however. Some – including a Sydney real estate identity recently – argue that this generation is simply too selfish to make the necessary sacrifices, such as cutting back on commodities such as widescreen televisions and designer clothes, to save and get a foothold in the market.
But on the flipside others argue that priorities have changed simply because it’s impossible to save the huge deposit required for property these days. So younger generations are instead deciding to spend their money on something else because property is out of their reach.
But are the expectations of younger generations now just too high? When they complain about property being unaffordable, is that because they want to buy a flash pad in inner Sydney as their first home, rather than buying something further from the city in a price bracket they can actually afford? Essentially, many want to buy what would traditionally be their last property – often what their parents have worked their way up to – first.
Add to all this the fact that renting has also become more socially acceptable. The Great Australian Dream perhaps fading a little, and we have a little more insight into the affordability debate.
Consider your options
It’s clear that the debate around housing affordability isn’t clear-cut; there are many aspects to consider. As the debate continues to rage, demands for reform or government measures to curb price growth will persist.
While Australian property prices have risen and are unlikely to fall (despite claims from doomsayers), leading many to feel as though it’s impossible to break into markets such as Sydney, there are always more affordable opportunities within each capital city if you care to look. Consider buying further from the city, or a unit instead of a house. Scale down your expectations and buy where and what you can actually afford.
And if you don’t want to scale down your expectations, become a ‘rentvestor’. This means you choose to rent where you want to live and invest where you can afford to buy.
For investors, it’s of course better to buy where there’s more potential for growth. Chances are that’s in an area that hasn’t already seen huge growth. Yet where there are lower prices with more room to move.
Will you strike property gold after the Olympics by investing in the cities?
WITH the Rio 2016 Olympic Games having recently come to a close, it’s the perfect time to talk about whether there are opportunities for property investors in the host cities of sporting events such as the Olympics and Commonwealth Games.
On face value it seems as if the answer would absolutely be ‘yes’. Surely the high of such an event would last well into the future, spurring on the city and its economy, and in turn, pushing up housing prices?
The reality isn’t as clear-cut though. There are a multitude of factors determining whether there’s an increase in housing prices in the host city after – or perhaps even before – such an event.
What does history tell us?
It’s difficult to measure the impact of the Olympics or Commonwealth Games on a property market. While in some cases there has been a boost after the event, it’s hard to qualify what this is due to – is it a flow on from the sporting event or the result of something else?
There has been some research on what’s happened to property prices in host cities in the past, but the results aren’t exactly conclusive.
According to Goldman Sachs there’s evidence to suggest hosting the Olympics can push up local house prices. Their analysis only looked at two Summer Olympics (Los Angeles in 1984 and Atlanta in 1996) and found that the impact was felt in the few years after the event, rather than immediately.
Since their analysis was restricted to only two cities, Goldman Sachs stress it may not apply to all host cities or Olympic events as there are country and city-specific factors to take into account.
They argue that theoretically house prices should rise due to the host city experiencing a high, with optimism flowing through to the economy. It can also be due to the greater profile enjoyed by the city, with a boost to tourism and the economy, but the other major factor is the inevitable improvement in infrastructure in the host city.
Indeed, some studies suggest the biggest impact on the real estate market is felt in the host cities that are smaller and less developed, such as Athens and Barcelona. The 1992 Barcelona Olympics led to a complete revitalisation of the city, along with significantly improved transport infrastructure, which is believed to have had a direct positive impact on property prices.
In contrast, it’s argued a bigger and more developed host city, such as Sydney, which held the Olympics in 2000, is less likely to experience a boost to its property market. Outside of the gentrification of Homebush, in the vicinity of Sydney Olympic Park, the consensus is that the sporting event had little direct impact on Sydney’s real estate market, with any price rises likely due to other market factors.
Likewise, while there was a rise in Melbourne’s property prices in the two years after the city hosted the Commonwealth Games in 2006, it’s not attributed directly to the event.
As seasoned property investors know, a whole host of factors can determine whether a property market experiences a boom, and while an event like the Olympics or Commonwealth Games can have an impact, it can be overshadowed by wider economic conditions or housing supply.
Other factors such as the stability of the country can also have an impact by either encouraging or deterring investment, particularly from foreigners.
Olympic Games certainly aren’t always good news for host cities – in Montreal, for instance, things went pear-shaped in 1976, with the event costing more to run than it made and taxpayers were stuck with a bill that wasn’t paid back until 2006!
Are there opportunities on the Gold Coast?
With all this in mind, investors might be wondering whether they should consider buying on the Gold Coast ahead of the 2018 Commonwealth Games.
While research indicates that the impact on house prices seems to be evident after the event rather than in the lead up, many property professionals are claiming that the Gold Coast market is already experiencing a boom in anticipation of the Games.
It makes sense that the region will experience a boost from the event, especially since there’s an estimated $950 million in development underway to provide the necessary infrastructure and a likely $2 billion injection into the local economy.
The profile of the city has already been lifted and will continue to be in the lead up and during the event, with confidence also having been boosted.
Recent figures from PRDnationwide indicate values in suburbs around the Commonwealth Games venues already significantly rising, by an average of almost 10 per cent over 2015.
But is growth being witnessed on the Gold Coast actually due to the Games or is it simply part of the natural property cycle, with the city now bouncing back after suffering in the aftermath of the Global Financial Crisis?
We won’t know the impact until a few years after the Games of course, but investors considering buying in the region now should do their due diligence and ensure there are plenty of drivers pushing ahead growth in their chosen suburb over the long term, rather than the short term.
Certainly it’s clear the Gold Coast is growing, with predictions it will double its population to 1.2 million people by 2050, and there are a few major projects such as the light rail, providing a boost.
The city’s affordability also being a drawcard for buyers, along with an improvement in the economy, which has created jobs.
Some experts, however, believe the market will abruptly slow post the Commonwealth Games, with less activity and weaker price growth due to a desertion by investors after the event.
To buy or not to buy?
If you’re a property investor trying to capitalise on the potential in the host cities of major sporting events you’ll need to do thorough research before you buy, as with any purchase.
While it’s true that there can be a boost to real estate markets after the Games are held, there’s no guarantee, so investors should always ensure there are long-term drivers for growth in the area in which they’re purchasing.
The fundamentals need to be right – it should have a diverse and strong economy, employment, population growth (permanent, not just short-term) and infrastructure, including transport links.
While an event such as the Olympic or Commonwealth Games can provide extra incentive for purchasing in a particular city, all of the fundamentals – or most – should be there to safeguard your investment and ensure growth.
When it comes to purchasing property there are a multitude of factors to consider. Where should you buy? What should you buy? How much should you pay? While these are the most common questions investors will ask, perhaps one of the most pertinent questions that needs to be answered before anything else is ‘Why should I buy?’
To put it more clearly, you need to have clear goals for why you’re investing in property, and then devise a strategy to help you achieve those goals. Surprisingly this isn’t something many investors do, but it’s essential for success.
A large part of your strategy will be determining whether you need to buy properties that offer strong capital growth or rental yields.
There are those in each camp espousing their respective benefits, but which one takes precedence is often different for each investor depending on their financial circumstances. Ultimately, however, every investor should be aiming to acquire a property that offers both – not one or the other.
Capital Growth Property
Having a capital growth strategy means you’re aiming to buy a property that experiences strong growth in value over time.
A property that has the best chance of growing in value is one for which demand outstrips supply. It’ll be in high demand due to its investment fundamentals – that is, it’s in a good location, close to employment, amenity and public transport, and there are imminent growth drivers such as infrastructure projects.
Often properties with high potential for capital growth have lower yields and are therefore negatively geared, with expenses exceeding the income.
Having a high-yield strategy means you’re aiming to find a property where the rental income covers most, if not all, of the costs associated with owning it.
While the capital growth on these properties will often be lower, they won’t cost you as much to hold.
Having a strong rental return is more important than many investors realise because it enables you to hold onto a property for the long-term while you wait for capital growth. If your portfolio is too strongly negatively geared you can run into financial trouble – if interest rates rise, for instance, or you have a big unexpected expense, you’ll be forced to find more to pay out of your own pocket.
Can you have it all?
Believe it or not, you can have a property that offers both good rental returns and capital growth.
It may not be easy to find, but if you do thorough research the right property in the right location will provide both. That’s not to say a high-capital growth property will necessarily provide an investor with positive cash flow, but it may be only minimally negatively geared after tax deductions.
What you should be aiming to buy is a property that offers the best possible cash flow for the best possible growth. You need both to invest as the former will keep you in the market, enabling you to service the debt, while the latter will eventually get you out, enabling you to realise a profit.
If you can’t find a property with both capital growth and a solid yield from the outset, then find one that has all the fundamentals for capital growth and where the yield is likely to increase soon due to strong rental demand.
Your yield can also be improved through measures such as minor renovations, adding extras or even by furnishing your property (for more on this see our upcoming blog providing 13 suggestions for maximising your rental yield).
How can you decide which to prioritise?
The broad goal of property investing is to create wealth over the long term, and it’s clear that focusing on capital growth is the way to do this.
While a property investment’s yield is crucial to its success, it’s not the key to wealth creation, and when investors make the mistake of prioritising yield over growth, they usually end up losing money.
High-yielding property might seem tempting, but when you do some simple calculations it’s evident that in the long-term you’ll make more by focusing on capital growth. Not only will your property be worth more, but the rental income will also be higher. Consider the following example:
||Value in 20 years
||Income in 20 years
|Capital growth strategy
Capital growth will also largely be the key to expanding your property portfolio;
it will give you equity, which you can leverage off to buy more real estate.
While capital growth is the key to creating wealth over the long term, you will also need to be able to service further debt with subsequent purchases, and that’s where rental yields come in.
Ideally with each purchase you’ll be aiming to have both strong capital growth and decent yields, but if you have a portfolio of properties you may also opt for balance – that is, to have some that are negatively geared and some that are more cash flow positive. The surplus cash flow from the high-yielding properties can be used to cover the costs of the low-yielding properties.
Tax deductions can also help you service debt and hold your property, minimising any shortfall between rental income and expenses.
Just how much of a shortfall you can afford will depend upon your circumstances at the time you buy. If you don’t have a great deal of surplus cash you’ll need to look at focusing on high-yielding properties so your holding costs are smaller, while someone with an adequate surplus will be able to comfortably meet the shortfall between rental income and the costs of holding the property, and will be able to focus on a capital growth strategy.
This may change over time – once you have acquired a few high-yielding properties your improved cash flow might allow you to focus more on capital growth.