Your guide to property investing in 2015

9th Dec 2014By: Margaret Lomas

You would have had to be living in a cave not to see that the late 2012 predictions of a booming Sydney market came true in spades. Lower interest rates, a shortage of construction, and an increase in rental demand all resulted in a bumper 2014 for owner occupiers and investors alike.

Today, however, lurking in the background, unemployment rises are setting the teeth of economists on edge, and, as the country skirts the edge of another recession, concerns for the value of our country’s tangible assets also reigns. During a recession people have less disposable income available, and so the first thing that suffers is investment back into the country. As unemployment ramps up, home ownership usually falls, and so the values of property are immediately affected.

Recession hullabaloo

While the dynamics of this economic theory cannot really be challenged, plenty of empirical evidence exists to suggest that, in fact, our property markets will not be greatly impacted by a recession. While Sydney and Melbourne are stabilising a little, Brisbane is poised on the precipice of pent up demand and undersupply, and that highly affordable market seems definitely on the verge of a Sydney-like boom.

The problem is, investors tend to react to recession talk by closing up shop and playing the wait-and-see game, and this alone can create a stagnation of property values. Property investors need to be able to take a broader view when it comes to when and where they should buy, and this view must relate to their personal timeframes.

If your strategy for investing is to get in, make a profit from values growth and get out within, say, a two-year time frame, then you must be able to select your market with perfect timing, both in and out. Some markets, such as Sydney and Melbourne should be avoided as their hey day is, for the immediate future, behind them. Other markets such as Adelaide should also be avoided because, although that market has not even come close to its peak, it’s a definite long termer. Brisbane and some of the larger regional centres close to the recently boomed capital cities seem set to deliver on that short-term growth outcome, and this is where attention should be focussed.

The growth centres of tomorrow

If, on the other hand, you are an investor with a longer time period in which to invest, say five to 10 years or more, and you are prepared for the fact that a property you buy today may stagnate on value a little before it begins to rise, then there are many areas which are presently seeing a rental yield increase, and these areas are the growth centres of tomorrow. Adelaide, Perth and the larger regional centres outside of Brisbane all fit this bill – sound areas which can withstand the short-term economic instability and sit ready to grow well once stability returns. While rental yields are continuing to increase, this can mean that, while you wait for the cycle to begin its upswing, you can hold an asset, which will care for itself financially (by giving you sufficient rent to cover your outgoings) while you wait for growth to start.

There is some data suggesting that rental yields are increasing at the rate of around 8% per quarter across the nation. During our last recession, when unemployment tipped over the 10% mark, the country saw one of its greatest increases in rental yields as more people were forced out of the buyer’s market and into the rental one. Put simply, this means that for those willing to buy property now – even in areas which are not necessarily slated for immediate growth – the chance exists to wait for the next growth phase without suffering financially in the mean time.

Remember though that there is always the chance that recessionary conditions bring slow property growth and buying property now could mean a sustained period of slow or low growth. Now, more than ever, investors must understand what drives growth, and how to recognise the areas that have the greatest capacity to deliver growth in the shortest time.

The laws of luxury

Great risk still exists in property of a luxury nature. High-priced property is impacted most significantly during stock market turmoil, as owners of these types of property are often exposed to investment losses requiring them to sell down assets. Since, at the same time, the economy is also in slow- down mode and unemployment is rising, fewer buyers for this type of property exist, and so prices tumble as the owners become desperate to liquidate. The falls can be so substantial that it takes many years, more than most people have available in which to invest, for them to recover.

While property in lower price ranges is not without risk of its own, the dynamics of price movements for low value property are impacted by interest rate movements. As interest rates fall, more people become able to buy, and while the threat of a recession still impacts heavily on the property market in general, the pressure is eased and fewer people are forced to sell. While this will not result in any spectacular growth, it certainly provides a buffer against too sharp a fall in values.

If you’re planning on buying soon, first establish both the economic vibrancy of an area and the intrinsic growth drivers, which may be in existence. An increasing population in areas where little opportunity exists for new construction will place pressure on existing housing, both in the rental and the buyer’s markets. Where council is meeting its population growth with planned infrastructure to improve the lifestyle of those living within the area, the growth in resident numbers will continue. In areas where new business is thriving and services are all freely available within town, people will spend their money and work within the area, which adds further fuel to the economic engine. Where an area contains plenty of housing in an affordable price range, families will be attracted and subsequently grow with the area, laying down the foundations for a solid economic future.

What you need to know for 2015

Investing well is not about buying property with some quirky feature, such as those with sea views, in gated communities or offering marvellous holiday lifestyles. It also no longer follows that properties in CBDs are the only ones that have any chance at good growth, and contrary to this belief, regional properties have consistently outperformed their city sisters in some states over the past five years.

To invest successfully in 2015 and beyond, investors must get back to grass roots and buy to satisfy the coming demand. They must extend their investing time frames to allow the economy to, once again, thrive. They must proceed with caution and accept that property is not always the magic carpet ride provided to Sydney investors over the past two years. But most importantly, and as I have always said, investors need to become better educated, tread warily and be sure that financially they can afford both interest rate movements and tight financial circumstances. It is at times like these that investors who are prepared to commit can do well, however prudency remains key for a prosperous financial future.