I don’t know about you, but 2018 has shot out of the gate and literally taken off. You will no doubt be aware of all the latest media doom and gloom headlines that have Melbourne and Sydney property labelled as ‘unaffordable’, ‘over inflated’ or ‘about to bust’ – I’m sure the next thing that they’ll be saying is that the sky will be falling in too!
I have never taken much notice on these sorts of headlines because I know that if you are hit with enough of them, then they will become a self-fulfilling prophecy. I prefer to drill down at find out the real truth before making my investing decisions.
Having said that here is my take on the current state of play in the Australian property market:
- The Sydney and Melbourne property market booms have to a large extent been driven by low interest rates, huge influxes of highly skilled migrants and a large number of Asian property buyers. The rest of Australia didn’t boom like Sydney because most of the new migrants wanted to live in either Melbourne or Sydney and Asian property buyers didn’t want a bar of any property outside of Melbourne or Sydney.
- The Sydney market has now peaked largely because the Chinese government has stopped Chinese investors from investing in property overseas. However, Sydney and Melbourne are still both experiencing huge influxes of skilled migrants each year (+100k/year), so while interest rates remain low these migrants will continue to put an upward pressure on property prices.
- Meanwhile, the rest of the Australian property market including Brisbane, Adelaide, Canberra, Perth and Darwin have not experienced the recent boom that Sydney and Melbourne had. Houses in these cities and large regional areas are affordable, provide reasonable yields and continued good capital growth.
- Interest rate projections are that they will stay low for the foreseeable future. At the time of writing the RBA had kept the cash rate the same for the last 18 months and you could still get fixed interest rates at 3.99%. Banks have recently hit interest-only investors with higher interest rates, but have kept P&I interest rates for investors low.
- APRA meddling in bank lending rules appears to have plateaued. They have generally been able to achieve what they wanted to achieve by the changes imposed so far, therefore, I don’t expect much more from them this year.
How to profit from real estate in 2018
Maybe you have got a property and are ready to buy again. Maybe, you’re a first timer looking to get onto the property ladder.
Either way – it’s time to move forward with your investing, but first there are a few rules you need to follow. These are the ‘golden rules’ in fact – as they’ll guide you towards making smart, safe and profitable property decisions in 2018:
- Invest with your eyes wide open. Get yourself sorted, understand how much you can borrow, get your spending under control and be disciplined with your budget. Why? Banks love it! They love good money managers who are fiscally responsible… they often want to lend you more.
- Get a strategy! That means a proper plan that incorporates your budget, your goals, your risk profile and your time in life. A decision to buy a house in your own suburb and do a renovation is NOT a strategy.
- Location, location, location. We have all heard the saying and it’s true BUT here’s the follow up: you could buy in the best location, but if you buy something that tenants don’t want to rent, then chances are you’ve bought a lemon. An important rule is to buy property that tenants want to live in – and the best way to find out what tenants want is to ask the local property managers (as many as you can) for their input. Using that data makes your property selection easy!
- Negotiate, negotiate, negotiate. In 2018, if you don’t negotiate, you’re a bloody idiot! Use the negative media headlines to your advantage. If the sky is falling in Melbourne and Sydney and vendors are becoming more motivated due to buyers drying up, then be that buyer and bag yourself a great deal. But be sure to do your research and negotiate a better price especially if there is less competition. Remember the bigger the discount you achieve, the less deposit you need and the more capital you will have for the next deal.
- Can’t afford to buy in Sydney or Melbourne? Don’t worry, I’ve got you covered. Affordability is a major issue for many investors, so if Melbourne and Sydney are out of your reach, then turn your attention to emerging markets such as Adelaide, Perth and Brisbane. Even Tassie is presenting some great cashflow deals at the moment. Also, don’t be afraid to look at large regional areas as well. Just make sure the population is large enough to sustain a number of industries and not just one. Also make sure these towns have longevity, so you enjoy future capital growth.
Why is 2018 a good time to invest?
- Mortgage Interest rates are at record lows and are projected to continue to stay low in the foreseeable future.
- Our economy is stable – we are not headed for a recession any time soon.
- Demand for housing continues because of the huge migration into the country.
- Immigration is strong and is predicted to stay that way.
One word of caution…
Stay away from high-risk properties in any state, such as high-rise apartments (5 levels or higher with more than 30 units in the complex). I often hear the story of valuations coming in well below what people have paid for them at settlement time and the banks lower their LVRs.
Don’t put yourself in financial stress if you don’t have the equity or borrowings behind you to settle a deal that goes south. Better to stick to houses, townhouses and units (on the ground). Investing in property should be an enjoyable process with a long-term outlook.
With a clear strategy, solid research and guidance from a mentor, 2018 should be your best year yet.