Investment risk and uncertainty in the real estate housing market
It’s tough being a property investor sometimes.
Where is the best place to buy? Is now the right time to buy? Will the property market crash? Has it peaked? These questions and many, many more like them can make investing in property seem a little overwhelming.
This is certainly not helped by the media. Newspapers only seem interested in selling stories about the property market going through a “boom” or writing about the possibility of a forthcoming crash.
Sensationalist headlines like “Australian Property Market Certain to Crash” to sell newspapers have become so common across most mainstream media.
Why is this a problem? Well, you see, Australia is a big place. No singular property market exists. The country is made up of many, many individual, diverse and not-necessarily interlinked property markets.
You try telling someone who paid $800k for a property in the mining town of Moranbah that is now worth $100k, that the property market hasn’t crashed yet!
Recognising the above leads me to discuss the two main markets in Australia, the Sydney and Melbourne property markets.
I can think of many reasons why the Sydney & Melbourne property markets are set for major corrections and I can think of many reasons why they aren’t.
I guarantee you that if I could find five experts to argue that these two markets are stable and will continue to grow, I could find five experts who believe a crash is imminent.
Having said that, I’m going to tell you my number 1 reason why these markets won’t crash.
Wait for it. Drum roll, please…
The number one reason the Sydney & Melbourne Property market won’t crash is….
IT’S TOO BLOODY OBVIOUS.
You see, you don’t see market crashes coming. Yet, every day at the moment I can find an article predicting that the end is nigh.
How many of you sold all your stocks just before the GFC? In hindsight, it was pretty obvious that was coming. Seen the movie the Big Short?
Any of you sell all your tech stocks before the crash?
Remember the Asian economic crisis in 1997…did you see that coming?
Well, I didn’t.
With daily comments warning that an oversupply of apartments is coming, it’s TOO obvious to predict a Sydney & Melbourne market crash.
However, there is one BIG caveat on this reasoning and it relates to gearing.
If you have bought a property in the last year or so and are borrowing or have borrowed more than 80% you may see a crash.
Why? Well for you, the market only needs to go down 10% and you have lost 50% of your hard earned money. That’s a crash in anyone’s language!
If you have borrowed sensibly and have bought in a good location, you certainly have less chance of facing a market crunch.
When Mike Baird announced he was resigning as Premier of New South Wales in January there was a lot of commentary around his legacy. Most of this focused on infrastructure in the state.
Contrary to his predecessor, Bob Carr, who once said Sydney was full and couldn’t cater for any more growth. Baird believed building was very important for NSW to forge ahead. He knew it was the key to facilitating further growth.
In fact, one of the reasons the former investment banker entered politics was to remedy how far the state has fallen behind in infrastructure, making it a less attractive place to live.
He says infrastructure investment is a crucial way in which state governments can not only create better services, but drive economic growth.
So after years of inaction Baird took action, funding many projects through public asset sales. Now, NSW has plenty of infrastructure both under way and planned.
Upon announcing his resignation, Baird himself said he had “unleashed an infrastructure boom in Sydney and the regions”.
Infrastructure in the pipeline
Infrastructure basically refers to the structures enabling the effective operation of a society. This includes transport and communications systems, water supply, sewers and power plants. It also includes services such as schools and hospitals, and facilities including public parks.
When it comes to property, one of the most important types of infrastructure is transport. The majority of projects in the NSW pipeline fit into this category.
While more are mooted, here’s a quick rundown of some of the projects in the current infrastructure pipeline for NSW:
- WestConnex – A 33-kilometre motorway linking Western Sydney to the airport and Port Botany.
- NorthConnex – A 9-kilometre tunnel linking the M1 Pacific Motorway at Wahroonga to the Hills M2 Motorway at West Pennant Hills.
- Sydney Metro Northwest – This is Australia’s largest public transport project. It will provide an automated rapid transit system running from Bankstown in Sydney’s southwest to Rouse Hill in the northwest.
- Light rail – Sydney’s tram network is being extended with the CBD and South East Light Rail project. There’s also a light rail project for Newcastle and a proposal for more light rail in Parramatta.
- Badgerys Creek Airport – This is a second airport for Sydney. It will be built at Badgerys Creek in the city’s west.
- Parramatta Square – An urban renewal project designed to transform Parramatta into a vibrant mixed-use hub.
- Barangaroo – A waterfront redevelopment project on the western edge of the Sydney CBD. This includes James Packer’s new Crown Casino.
Why is infrastructure needed?
Building enables cities to cope with population growth. It’s needed for citizens to have access to services and amenities, and employment.
If there isn’t adequate provision of building there can be major disruptions affecting productivity and day-to-day life, such as traffic gridlock. People will flock to areas with infrastructure, choking them up and putting pressure on existing services and amenities, while shying away from other areas.
Sydney has already experienced strong growth in population. It surpassed 5 million people last year, and there’s no sign of growth slowing. Recent projections show 6.42 million people are expected to call Sydney home in 20 years. And the NSW population is expected to hit nearly 10 million by 2036.
Infrastructure is needed to cater for this growth to prevent putting further pressure on already-stretched resources.
Since Baird left the Premier’s office and the new Premier Gladys Berejiklian has been installed there have been calls for the focus on infrastructure to continue to provide adequately for future growth.
Chris Johnson, chief executive officer of the Urban Taskforce, said: “Sydney is Australia’s global city, and as a result, it must develop into a well-connected metropolis, with additional density, housing and services located around a metro rail network. It is crucial the new Premier continue this approach to ensure Sydney’s continued success as a growing, prosperous global city with a high standard of living.”
The Urban Taskforce also stressed the importance of providing infrastructure in growing regional areas of NSW, in addition to Sydney.
Infrastructure provision isn’t just something NSW should be concerned with. All state and territory governments – and the Federal Government – should be looking to provide both new infrastructure and update existing infrastructure to ‘future proof’ their cities.
Unfortunately though, many governments – especially in the modern day, where they seem to turn over so quickly – focus only on the short term rather than looking to provide long-term infrastructure solutions.
Australia’s population is set to rise from 24 million to 30 million in 2031. So if governments are not planning for this growth now they are going to run into significant problems down the track.
How does infrastructure impact upon property?
Building is a key growth driver of property, and specifically prices and rents.
As an investor you want your property to be in close proximity to existing infrastructure so people want to live there. People want to be close to schools, major public transport routes and other amenity.
If it’s not close to existing infrastructure, you want your investment property to be in an area where major building projects are underway. That is, you buy in an area knowing there’ll be growth when the planned infrastructure is completed. This is because there will be higher demand to live in the area from both buyers and renters.
In these areas growth can actually explode, along with property prices and rents, meaning you have a great investment on your hands.
New transport projects in particular can have a huge impact on the appeal of a location.
While upgraded or new infrastructure is a great indicator of capital growth. On the other hand a lack of infrastructure can prevent an area from reaching its full potential.
Are there still growth areas in Australia’s two major capitals, Sydney and Melbourne? If so, where can they be found?
Sydney and Melbourne were the star performers of the property market last year. Recording significant growth in dwelling values of more than 11%.
In comparison many of the other capitals saw price declines, according to CoreLogic RP Data figures. With only a moderate increase of around 4% recorded for Brisbane and Canberra.
Experts have predicted the Sydney and Melbourne markets will cool this year, and indeed this seems to be the case, with dwelling values having grown by only around 2% over the first quarter.
These cities are still holding relatively strong however with only Hobart (6.5%), Darwin (2.4%) and Adelaide (2.4%) seeing greater growth so far.
Melbourne appears to have a slight edge over Sydney. With dwelling values rising by 2.2% this year and 9.8% over the past 12 months. Compared to 2% and 7.4% in the New South Wales’ capital.
Anecdotal reports suggest investors are now turning away from the major capitals. Looking for more affordable markets with not only cheaper housing but better rental yields than the 3% to 4% on offer in Sydney and Melbourne.
There clearly isn’t a great deal for investors to get excited about when it comes to these two cities. However, there are always growth areas to be found. We asked some of the experts to tell us where those might be.
The west dominates in Sydney
Since the property boom in Sydney has “run out of steam”, property lecturer and author Peter Koulizos says the key to investment success will be location selection.
“It’s not like last year where you could buy wherever you wanted to and make money,” he elaborates.
Koulizos’ top picks are the inner southwestern suburbs of Tempe, St Peters and Marrickville. Situated between five and seven kilometres from the CBD.
“They’re close to town, they have nice character homes that can be renovated to add further value and they’re close to the airport, which is a big hub of employment activity,” he says.
He adds that there are infrastructure projects in the area, which is fantastic for the local economy. And the suburbs have been experiencing gentrification.
Buyers’ agent and CEO of www.propertybuyer.com.au Rich Harvey believes the inner city will remain in demand in Sydney, and there’ll be capital growth in areas where demand is exceeding supply.
He also likes western Sydney, where he notes there’s strong demand in the right areas.
Harvey says a buyers’ agent on the ground can pinpoint exact locations for growth. He names some of the key areas as Parramatta in central western Sydney, as well as Liverpool and Bankstown. He also picks Campbelltown and Camden in the southwest and areas around Castle Hill in the northwest as good potential locations for investors.
There are several areas earmarked for higher density, Harvey says. These are typically connected with transport hubs, which will lead to growth.
Harvey adds there are several transport infrastructure projects in western Sydney that will drive growth by improving access to and from many of the suburbs. These projects include the North West Rail Link and the South West Rail Link. The NorthConnex tunnel linking the M1 Pacific Motorway at Wahroonga to the Hills M2 Motorway at West Pennant Hills, and the M5 East extension.
He adds that the construction of the Western Sydney Airport at Badgerys Creek will also provide a boost to surrounding suburbs.
Where to look in Melbourne
Not only has the Garden State’s capital performed better than Sydney this year. It was also recently revealed as having the fastest and largest population growth of all the capitals, with more than 1700 people arriving each week.
This should come as no surprise since it has been named the world’s most liveable city for the past five years running by The Economist.
Koulizos’ top picks for investors looking to buy in Melbourne are the inner-city suburbs of Flemington, Brunswick, Coburg and Footscray.
“Traditionally the inner city is where the majority of capital growth happens,” he says. “When a market is booming you can make money anywhere but when it’s not focus on being close to town.”
Koulizos says these suburbs have character housing, are well serviced by public transport and are being gentrified.
Harvey says investors in Melbourne should focus on areas with good transport links. Naming Coburg North and Campbellfield, between 10 and 16 kilometres north of the CBD, as good spots to consider.
Coburg is set for a major building boom. With plenty of development in the pipeline including a $1 billion residential project at the former Pentridge Prison.
Hotspotting.com.au founder Terry Ryder, meanwhile, believes the areas with the greatest momentum in Melbourne at the moment are the outlying areas. He says locations closest to the city always see growth first, with that growth then rippling out to outer suburbs.
Those areas, says Ryder, include Epping in the north and Sunshine in the west. And in the far southeast he suggests investors look at the City of Casey.
“These are affordable areas with good transport links, job nodes and are within easy reach,” he says.
Is there anywhere to avoid?
As with most cities, the experts warn investors to stay away from oversupplied apartment markets – particularly those with high rises.
In Melbourne this largely refers to the inner city and Southbank. In Sydney Green Square is one such area to avoid.
What about the regions?
Outside of Sydney, Harvey believes other parts of NSW have good potential for investors. In particular, he names Newcastle as being one of his top areas to buy for both capital growth and strong yields.
He says the city, around 120 kilometres north of the state’s capital, is a significant metropolitan town that provides excellent value compared to Sydney.
Newcastle has plenty of fundamentals driving growth, adds Harvey, with one being substantial redevelopment planned for the area.