All eyes are on Australia’s property market after the global financial crisis. It is the bellwether of Australia’s emotional health and there are few who would argue that prices are inflated and affordability is low.
But if the property market was fragile before the crash, it is even more so now. Many people who suffered big losses on shares will be forced to sell property to cover margin-loan calls and other debts. Then there is the big wildcard – jobs. A serious recession would place many households under severe mortgage stress, forcing more property onto the market.
On the upside, interest rates have been slashed 1.25 per cent to 6.0 per cent with economists tipping 5.0-5.5 per cent by year-end. Housing supply remains tight, immigration is at record levels, employment is respectable, corporate performance outside of finance and property is solid, and rents are high (the last five factors are highly vulnerable to recession). Meanwhile, the Federal Government has guaranteed deposits and lending to boost system liquidity and debt.
This is the brave new property world in which the players will jockey for position. Gone are the days when anyone could invest in property and bank on a capital gain. In fact, capital losses are more likely to be the norm for those who bought at the peak.
For those willing to play, those with deep pockets, those with an appetite for debt, or those simply making lifestyle/lifecycle investments, strategic investment is critical to minimising risk at this stage of the property cycle.
Strategies to help navigate this market include:Be cautious. If the government is guaranteeing lending, it means it is propping up house prices. In other words, it is very hard to determine the true value of houses as an investment and to predict price movements. The only thing you can be reasonably certain of is that houses are trading well above true value and prices should fall to meet the market. This means it is a buyer’s market and buyers should use this to their advantage. Research local demographics carefully. The economic fall-out of the financial crisis is like to impact on some locations more than others. “Recession-proof” locations should be sought – those with limited supply, areas likely to attract retiring baby boomers (with enough young people and facilities to provide some economic grunt), and areas with attractive economic profiles will offer some cushioning. Look for “cash-flow” positive properties – properties for which rental incomes significantly outpace mortgage repayments and expenses. These not only provide a return on your investment but provide a cushion in the event of a broad-based market decline. At the moment, cash-flow positive properties can be hard to find given inflated housing prices. But rents are high and vacancies are at record lows thanks to record immigration and tight housing supply. Population pressures are unlikely to abate in the near term, nor will the housing shortage. Should housing prices fall, rental returns should improve marginally in some sectors, offering yield opportunities. The flip-side of this is that the onset of a serious recession would also bring a fall in rents. This suggests opportunities may exist in the lower-end property market. Buying cheaper properties means the potential to lose capital is less in the event of a major fall and that rentals are likely to fall less proportionately. Monopoly fans will also remember that the path to winning lies not in snatching up the expensive Mayfair properties but the inexpensive properties that have a greater market at the cheap end of the board. In the end, it all comes down to price and matching sellers with buyers. Once you have researched your location and evaluated its rental outlook, pick 10 or more properties that meet your requirements. Then, in States that allow buyers to place bids without buying, place an offer 20 per cent to 30 per cent below the asking price. One of these vendors is likely to respond at least with a counter-offer. Property fundamentals will remain constant, even in a depressed market. Pick properties close to amenities such as public transport, schools and shops; and close to cities, major employers and in regions with a diverse industry base.