Don’t be confused by talk of property bubbles

Recent articles in the Australian property press alluding to mortgage stress has fuelled speculation that the residential property market in Australia has been in ‘bubble’ territory.   This simply is not true.

 

The current housing market is firm but is not in “bubble format”. The strong sales results have been to the demand for accommodation where people wish to live.  This has been accentuated in the rise of population due to domestic and international migration in our two largest cities, Sydney and Melbourne.  This includes the movement of existing residents from one suburb to another driven by downsizing by baby boomers and up sizing by their children.  Australian Prudential Authorities in conjunction with the banks have taken steps to gradually tighten restriction on riskier loans and have raised rates on interest-only loans.  These measures along with the increase in Stamp Duty for overseas buyers as well as changes to rules for Stamp Duty on Off the Plan sales have also had a cooling effect.  However demographic factors continue to point to the fact that demand for accommodation will continue to remain strong.

 

 

The investor in rising or falling markets

 

For the investor there are only two or three components that will identify the value of any market and these components relate to rental return, likely cost of replacement of the dwelling, the cost of the money to mortgage it and the potential demand in the future which is driven by social or demographic components including the recalibration of the suburb driven in part of its growing desirability.

 

The problem is identifying how to do this and the timing that is necessary for this to occur. In most cases it is driven by the price range which will then be reflected in the rental return which is the component that drives owner occupiers into certain suburbs in which they are prepared to rent and to form an opinion as to whether they are prepared to become buyers rather than renters. One way to do this is by sizing up the existing potential based on rising rental and capital required. This sits the house as a yield driven investment in accommodation with the bonus of capital gain in the future.

 

This is the assessment of return that the property is likely to produce to service a landlord’s mortgage. The property may not be particularly glamorous, even old fashioned in concept but it is a precursor for ongoing improvement in the future.

 

This judgement comes from a deep knowledge of where people are living, where they want to live and the demographics that that entails. As housing prices rise it will result in yields getting lower if the rents don’t follow the rise in the house prices. There is some prediction that money will become more expensive, that lenders will require more capital contribution and this will also be impacted by interest rates rising. This reflects how important it is to concentrate on what the property can rent for to service the mortgage and the possibility of a change in perception in the suburb in which it is located.

 

Experience counts

 

It is the experience in the specific rental market that is the primary feature for success in the original purchase, which has been seen, in the historic performance of inner suburbs such as Carlton in Melbourne and Surry Hills in Sydney. It is a combination of timing and suburb acceptability combined with the known components that drive the market.

 

Long term in depth knowledge of these factors can help control the risk factors around an investment property purchase.  This knowledge and expertise can only be achieved through time.