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Don't think 'first home', think 'first investment'
If you believed everything you read about the housing affordability crunch, you'd be forgiven for thinking there's only one choice: struggle like mad to buy a house to live in, or rent for the rest of your life.
If you're continually missing out at auctions or private sales because other buyers have more money to spend, there is an alternative. You can't stop the market, so instead of running after your dream home and watching it get further out of your reach, it may be better to face reality and direct your energies into something more productive. All it requires is a change in your thinking.
Instead of thinking "first home", think "first investment". Keep renting a place to live - and buy an investment property instead.
If you focus on buying purely for investment, you don't have to factor in your lifestyle wish list during the search process. If the property has fewer bedrooms or a smaller backyard than one that you'd want to live in, it won't matter. It may be less expensive than a larger property, making it easier for you to break the cycle of disappointment and get a foothold in the market.
In other words, the savviest way to approach the property market may be to purchase something that you wouldn't live in yourself, knowing that other people will. When it comes to investing, time should work for you, not against you. It's far better to be in the market and allow capital growth to do the work than stuck outside the market and unable to save as quickly as the market is moving.
If this sounds like a viable option to you, it's essential to choose a property that meets the criteria for a high-quality investment. First and foremost, this means buying an asset with strong capital growth potential. Look for locations where demand from buyers has consistently outstripped supply for a long period.
You can research this by looking at median house price movements, which are usually published by organisations such as Australian Property Monitors and the Real Estate Institute of Victoria. If the median price for a particular suburb has increased at a faster rate than the rest of the Melbourne market over at least five years, it could be an indication of strong capital growth potential.
Auctions are also a good indicator of capital growth potential. Have a look in this newspaper to track the location of auctions each week. Auctions work best in areas where demand from buyers outstrips the number of properties available for sale. If there are consistently more auctions than private sales, it's a sign that capital growth is likely to be strong.
You should also attend as many auctions as possible before buying to get a feel for the market in your chosen location. If there are several bidders competing strongly and driving up the purchase price, it's another indicator that demand is outpacing supply and capital growth should be strong. |
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Property hot spots for 2008 |
Property hot spots for 2008
The mining boom is more likely to dictate the value of a property purchase than your home address.
For Martin Perelman buying his first property was a case of "go west young man, and turn left at Adelaide".
That's correct, the unlikely boom town of 2008 will be Adelaide, if the experts are right.
Investors in other capital cities will be eating crow - oops, Freudian slip - as real estate prices taper off from what has been a good year everywhere but western Sydney, where they will just stay down, and Perth, where they have peaked.
Perelman, 29, looked to Adelaide for his first property purchase because he could snap up a two-bedroom two-storey townhouse within five kilometres of the CBD for $236,000. The property is already let for $245 a week.
He is paying more rent in Sydney than interest on his mortgage in Adelaide, in part thanks to his broker, Wayne Dive of Smartline, who organised a fixed three-year loan at 7.69 per cent - four rate rises below the standard variable rate.
RATE RISES
It is the threat of another interest rate rise that could yet put the mockers on property prices.
"The signs are that clearance rates have peaked. I could feel the hesitation last weekend," warns John Wakefield of CPM Research.
Once a rate rise is out of the way, the market will more than likely take it in its stride.
For all the bad press - who, me? - that rising rates get, they aren't the be-all and end-all of property prices.
With the rental market as tight as a drum, there won't be too many investors who will lose sleep over rising rates, which are tax deductible anyway.
Research group BIS Shrapnel is forecasting price rises of up to 10per cent next year despite its expectation of a rate rise about March next year.
But even three rate rises might do no more than halve the growth in price increases, says Robert Mellor, BIS Shrapnel building services director.
That should get things in perspective: a doomsday scenario for interest rates still has property getting off lightly. Home prices are driven more by population and job growth, location and land availability over time than interest rates.
Most of all, there is a shortage of places to live, in a period when we have record immigration.
BIS Shrapnel calculates the shortfall this year was about 30,000 houses and units.
Besides, there is likely to be a one-off boost next year to property investment because, as the panel shows, DIY super funds can borrow for the first time.
It is no secret that a lot of DIY fund trustees would prefer to be in property rather than shares - especially when the sharemarket is so volatile - but can't afford it unless they are able to borrow.
Michael McNamara of Australian Property Monitors has a theory that the natural ceiling for the property market is a median house price of $550,000.
"At $550,000 the market is maxed out. The debt train runs out of track," McNamara says.
That's why Melbourne and Brisbane prices can still rise another 10 to 15 per cent, but Sydney and Perth will be flat except at the top end, where different rules apply.
Among all the capital cities, including Canberra, Hobart and Darwin, there is only a 16 per cent gap between the dearest and cheapest unit prices, McNamara says.
That is unprecedented, lending weight to his argument of a natural ceiling.
HOT SPOTS
But back to Adelaide.
Perelman invested there because "it's an up-and-coming place with all the mining opening up [at Roxby Downs]."
Good move. Adelaide home unit prices soared by 31 per cent this year, the RP Data-Rismark Hedonic Index shows.
Mellor admits that: "Adelaide surprised us."
The city had not been doing well in the migration stakes, but the statistician rejigged the immigration figures and discovered South Australia is gaining more than 13,000 residents a year from overseas, while 3600 residents pack up their bags for other states.
Adelaide's only drawback for investors is not having the land constraints of Sydney and Brisbane.
With low vacancy rates and Roxby Downs on its doorstep (well, it's closer to Adelaide than anywhere else) prices should rise 8 per cent, Mellor says. "Adelaide is quite affordable and remember it's extremely well placed for the resources boom," McNamara says.
"It never got the 40-per-cent-a-year growth of Perth and Darwin, so it's got much more sustainable double-digit growth."
Adelaide is even attracting investors from Perth, last year's hot spot, said Rod Cornish, head of property research at Macquarie Bank.
For all Perth's proximity to the resources boom, apparently enough is enough. Housing prices have reached those of Sydney, which is to say they are expensive.
So it is the same old problem of affordability, which also suggests the two property markets most sensitive to another rate rise would be Perth and Sydney.
Even then, a rate rise in the new year would mean "the return of investors in 12 months' time," Mellor predicts.
With the exception of Perth, where BIS Shrapnel expects a 1 or 2 per cent drop in prices next year, everywhere within a bull's roar of a mine is hot. In fact probably very hot this time of year.
Financial adviser and property specialist Richard Sheppard is recommending Gladstone in central Queensland for residential and commercial properties to his clients.
With a population of 30,000, annual spending is worth $700,000 per person, he says.
Gladstone is one of the epicentres of the resources boom, and its port is being expanded.
Brisbane remains a hot spot, with spill overs to the Gold and Sunshine coasts.
Even so, the days when Sydney and Melbourne investors could pick up a property at half the price they would pay for next door are long gone.
Rents in Brisbane are starting to soar, a siren song for investors.
Mellor predicts 10 per cent growth in prices in Brisbane next year which is better than Adelaide, but dearer to get into..
Melbourne hasn't looked back since the number of auctions took off after the footy grand final.
"Its fundamentals are very good," Mellor says. These include an unusually low vacancy rate, and prices should rise an average 7 per cent next year. Rents will also rise.
Sydney's outer ring can expect stable prices or very low growth at best next year.
Affordability was worst in Sydney so "even a 10 per cent increase in the middle rung would run out of steam very quickly," Mellor warns.
It is a different story for rental returns. Sydney will get the same growth in rents that other cities are getting from property prices.
"Strong rental growth will last three or four years," Mellor forecasts for Sydney, growing annually by 7 to 10 per cent.
HOUSES v UNITS
Units usually lag behind house prices - but not this time.
This year, the growth in unit prices has outstripped home prices, especially outside Sydney and Melbourne, the RP Data-Rismark Hedonic Index shows.
In top-end suburbs buyers are paying "similar money for apartments as they would for houses," says John McGrath, chief executive of McGrath Estate Agents.
"Apartments are increasingly attracting older couples with teenage kids, empty nesters and professionals," he says.
In inner Brisbane, prices of new units soared 32 per cent in the September quarter, says Alison Timchur of Colliers.
But it is ahead of Sydney in terms of rental growth "by a couple of years", Mellor says.
"Many home buyers are considering medium- and higher-density housing as more affordable options in a market where affordability is very low," says Noel Dyett, president of the Real Estate Institute of Australia.
But McNamara is more pessimistic.
"I'm forming the view that unit price growth in Brisbane and Melbourne will come to a screaming halt this year," he says.
Oddly enough, rents are rising faster for houses than units.
Asking rents for Sydney houses jumped 14 per cent in the year to September compared with 12 per cent for units, Australian Property Monitors found.
In Melbourne, the gap was even wider: 16 per cent for houses and 12 per cent for units. |
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Commercial realities
The indicators for commercial property aren't as easy to read or obtain as they are in the residential market. But they're arguably even more important. Shane McNally
You're looking at buying a small commercial property but the standard indicators aren't available to help you choose the right investment. There are no median sales charts to show the last 50 properties to sell in the suburb because the offices or shops you're considering have little or nothing in common and there probably wouldn't be 50 sales in 10 years, let alone one. In short, assessing a sound commercial investment has a different set of guidelines and strategies to buying residential. But there are some pointers that make the search easier.
Macquarie Bank head of property research Rod Cornish says investors need to pay attention to vacancy patterns and local business growth when considering office space and interest rates and spending patterns for the retail sector.
"Definitely prospective investors should be looking at where the vacancies are falling and demand is increasing before buying into the office market," he says. "Lower vacancy rates typically lead to rental growth. What we're seeing now is low vacancies are driving up rents and that's flowing further into value increases because investors can see the rents rising."Cornish urges investors to consider the age and efficiency of commercial properties. He says investors need to treat older office buildings more cautiously than they would a residential property of the same vintage, where age may be a character asset.
"They also need to consider sustainable or green issues, which are a major factor in today's office market," he adds. "An older, rundown residential property in a prime location could be refurbished but a similar standard building in the commercial market would be relying very much on the site value."
Cornish says CBD locations are in strong demand in all capital cities, so smaller investors should look to buy as close to the prime areas as possible to gain the greatest benefits.
"The Brisbane and Perth CBD markets have done exceptionally well, with office vacancy rates the lowest they've ever been and Melbourne's the strongest in 35 years," he adds. "The CBD rises first and then tenants tend to look at near-city locations." |
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