Residz Team 6 min read
What do you get when you cross a growing number of households with a shortage of homes and rising rents? You get investment opportunities.
Investors priced out of the market during the COVID-19 property boom are surely seeing the headlines and thinking 2023 could be a decent time to jump in and buy.
Here we look at the factors for and against investing in property now.
These are some reasons you would be wise to consider buying an investment property in the near future.
A “landlord’s market”
Rents are rising at the fastest annual pace ever seen across the combined capitals, according to the latest Domain Rental Report.
The report calls it a “landlords’ market” with the unprecedented growth driven by low supply and high demand, creating a highly competitive environment for tenants.
Across the combined capitals, house and unit rents grew over the December quarter to a new record and saw their largest-ever annual increase, it says.
“Across the capital cities house yields have seen the greatest quarterly increase in 11 years and positive annual growth for the first time in three years.” - Domain Rental Report
Low vacancy rates
Nearly a third of households in Australia rent the homes they live in, according to the Australian Bureau of Statistics. But new households are forming all the time, and those people will struggle to secure an affordable rental.
Rental listings were down 38% annually and were at the lowest level on record for December, according to the latest Domain Rental Report.
“Something in the demand side of the equation really drove up demand from tenants for property for rentals in the immediate post-COVID period,” said Steve Mickenbecker, chief commentator with Canstar on SBS.
More demand for rentals
Property Planning Australia (PPA) says the biggest driver of demand for residential property is the household formation rate.
And, Australia is similar to the U.S. which reported nearly unprecedented levels of household growth from 2019 through 2021.
PPA says new households are created as a result of a number of factors including:
– Overseas migration
– Interstate migration
– Adult children leaving home
– Couples setting up house
– Divorces and separations
– Older people remaining independent
Plus, the Federal Reserve Bank in the U.S. said in its notes mid-2022 that a new development related to the pandemic was that relatively fewer adults were living with roommates and more were living alone.
AHURI also notes the new household formation was in part caused by relationship breakdowns and share houses dissolving due to COVID lockdowns.
With overseas migration only ramping up now, there will be strong household formation growth in 2023.
Renters can live and work from anywhere, and this is good news for investors. Regional property is more affordable than a capital city property but remote and regional areas can offer the best yields.
In fact, Realestate.com.au recently reported the small rural town of Kambalda West, 57 km south of Kalgoorlie in WA, where the median house price is $150,000 and the median weekly rent is $330, is at the top of the list, with a 12.1% yield.
REA says yield refers to the measurement of a future income on an investment. A property's gross yield is calculated by taking the annual rental income, dividing it by the property value, and then multiplying it by 100.
More research tools for investors
Real estate investors have never been better looked after when it comes to online property research tools.
For example, the website Residz.com give investors a real helping hand with new features like the PEXA Property Report, offering an extraordinary amount of data on almost everything required to ‘know’ a property.
Investors can instantly find out the investability score of a suburb, nearby development applications, and the property’s most recent sold price (where applicable), plus a whole lot more.
These are reasons you might consider being cautious about buying an investment property in the near future.
Higher interest rates
To a bank, an investment property is considered riskier than an owner-occupier property. That’s because, as one Reserve Bank governor once privately commented “Australians will eat dog food before defaulting on their mortgages.”
According to The Mortgage Reports, mortgage borrowers tend to bail on rental properties before they’d bail on their primary residence if the going gets tough.
It says as a rule of thumb you can expect investment loan rates to be at least 0.50% to 0.75% higher than the rate on your primary mortgage.
With interest rates still rising, this makes borrowing money more expensive than its been for years.
“At today’s average rate of 5.5% (5.535% APR) for a primary residence, buyers can expect interest rates to start around 6% to 6.25% (6.035 - 6.285% APR) for a single-unit investment property.” - The Mortgage Reports
Stagnant or dropping values
Plenty of real estate commentators, like Coolabah Capital’s Christopher Joye, predict house values will drop in coming months.
“On our estimates, Aussie housing should register its worst cumulative loss in 42 years within two to three months.” - Christopher Joye in AFR
It comes after big house price falls are being reported in some of the country’s most expensive areas - in some cases dropping more than $2 million - according to CoreLogic’s annual Best of the Best report at the end of 2022.
More than half of the country’s house and unit suburb markets saw a fall in value in 2022, according to CoreLogic.
Investment properties may need renovation or improvements before they can be rented at higher prices. However, residential construction costs surged by a record 11.9% over the past 12 months, according to the latest Cordell Construction Cost Index.
“The industry has been through a very challenging 18 months to two years, with extreme periods of volatility in pricing due to restricted domestic supply chains, material and labour shortages,” says CoreLogic Construction Cost Estimation Manager, John Bennett.
He says things have improved since the runaway September figures, however the quarterly rate of growth remained higher than the five-year average (1.4%).
Australians are anxious about what lies ahead.
EY’s Future Consumer Index late last year showed 25% of Australians were feeling worse than they did a few months earlier with high levels of caution and concern emerging around how the next 12 months will unfold.
“Large tranches of consumers are edging towards much more frugal – and in some cases austere – behaviour as the mindset of constraint takes hold.”
This is leading to consumers:
For landlords, their risk appetite may be lessened as a result. For renters, they may find rents increasingly harder to pay due to cost of living pressures.
Bank lending limits
Borrowing to buy an investment property isn’t quite as easy as it used to be.
The Australian Prudential Regulation Authority (APRA) introduced restrictions that have impacted lending for investment purposes.
BInvested says in response the banks have changed serviceability requirements on investor loans, making it more difficult for investors to gain finance.
“Borrowing capacity has been downsized, interest rates have risen and the repayments on existing debt are assessed at a much higher rate.”
Tips for investors
Coupled with less competition and motivated vendors, property investors could be in a better position than they’ve been for years. However, economic uncertainty and reduced borrowing power are factors against investing now.
If you want to explore investing in property further, here are some tips from Residz ambassador Rob Klaric from his book Secrets of The Property Expert.
Residz can help buyers and sellers reduce the stress:
Photo by Christian Velitchkov on Unsplash