THE property market is showing signs of cooling, and the recent interest rate hike is likely to keep the lid on prices for a while longer. But if you choose the right property in the right location, the long term growth prospects look good.
I know many people will shudder at the thought of borrowing in an environment of rising interest rates. If your cash flow is tight, you’d definitely be wise to build a buffer of savings before signing up for a hefty mortgage. But if your budget can handle loan repayments, a quieter property market can offer good buying opportunities.
It always makes sense to buy an asset when prices are depressed. Figures from research group RP Data show that home values in many Australian capital cities fell over the quarter ended August 2010, or only rose a little.
Perth values copped the biggest fall with prices down by 4.8% in the three months ended August. Melbourne prices were down 1.5% over the period, while quarterly values also dropped in Brisbane (down 2.3%), Adelaide (down 0.2%) and Darwin (down 1.4%). Sydney values were almost static, rising just 0.2% over the quarter ended August, while Canberra was up by 1.2% and Hobart up by 1.4%.
For investors, flatter or lower prices have the effect of pushing up the rental return, in percentage terms, on their property. According to RP Data, gross yields on houses nationwide are around 4.0%, and for a unit you can expect a yield of about 4.9%. Remember, this rental yield is in addition to long term capital growth.
Despite uncertainty in the present property market, the long term outlook for residential property remains strong. It’s ironic that in a country as big as ours, we would have a housing shortage, however, developing land for new residential regions takes time. In the meantime our population is growing, and this, coupled with our healthy economy is fueling an ongoing housing shortage that should prevent the massive falls in house prices experienced in the US property market.
As a guide, the National Housing Supply Council (NHSC), which was set up by the Commonwealth Government to gauge the undersupply of housing in Australia, estimates we currently have a shortfall of 99,500 homes. In just four years time, this undersupply could reach 308,000 homes.
I’m not suggesting that we’re on the verge of a new property boom. But whether you’re buying as a first timer, an upgrader or as an investor, it makes sense to buy good quality property while the price is subdued so long as you take a long term view of, say, seven to ten years minimum.
Be aware that we could face further rate hikes in 2011, which makes it more important than ever to ‘stress test’ your budget. That means crunching the numbers to ensure you could comfortably handle mortgage repayments if rates were to rise by a further 2%, or more. It may not happen, but at least you won’t lose sleep at night if rates do climb somewhat higher.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
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