Despite growing pressures, investors will once again be turning to bricks and mortar thanks to the volatility of global share markets and the ASX dropping to 2013 levels.
However, there are challenges ahead and you should tread carefully to ensure you avoid unnecessary losses.
1 ONGOING FOREIGN INVESTMENT
With the Australian dollar at just over US$0.70, our property market continues to be attractive to foreign investors, which means competition at auction will remain brisk. This comes despite changes to foreign investment laws last year, which sadly added up to little more than ‘extracting a few more coins from the ashtray’ and have barely dampened foreign investment or the purchase of owner-occupied properties.
NAB’s quarterly residential property survey, released
in October, reveals that during the September quarter,
19% of all new apartments, and 14.9% of new homes, were purchased by foreign buyers, up significantly on the 16.1% and 11.5% levels recorded in the three months to June.
In Victoria, foreign activity was significantly higher
than the national average. Over the quarter, foreign buyers accounted for 28.5% of all new apartments sold, and 26% of all new homes. But what raised a few eyebrows was that, despite stricter restrictions on foreign investment in the established residential property market, the NAB survey suggests that foreign buyers also accounted for a significantly high number of established property sales.
What to do
Avoid a bidding war
Avoid a bidding war – and one which you are unlikely to win. Opt to buy properties well before they go to auction if you can.
Research, research, research
This is key to buying a great property, be it owner-occupied or investment. This involves understanding both the macro and micro principles
of buying property
It includes understanding the economics and demographics of the area you are buying into, the pockets of value that exist there (i.e locations near new hospitals, schools, transport), the types of property available (houses, units, apartments), and the price points for these property types.
Ideally, you should be buying quality properties in areas showing good value but are at or below the median price. What is meant by quality is a property that will generate good returns in the short, medium and long term.
Strip away all emotion
When looking to purchase an investment property, avoid being emotional, sentimental or, heaven forbid, ‘attached’ to your purchase. You don’t get emotional about buying BHP or CBA stock, so apply the same rules to property.
2 OVERSUPPLY OF INVESTMENT PROPERT LOOMS
Given the number of cranes dominating the skylines of many of our capital cities, and the recent availability of secure but cheap ﬁnance, oversupply is set to be a major issue in coming years. Those mostly affected will be investors and home owners buying off-the-plan properties, who will begin feeling the impact of their poor investment decisions in late 2016 and through 2017.
Coupled with ASIC and APRA changes, this will place enormous pressure on rental yields and valuation prices at settlement time, with buyers needing to kick in additional money or equity at time of settlement. This is especially the case in markets such as Melbourne and Brisbane, where oversupply of investment property is a major problem.
What to do
For many buyers, they could be better off walking away from their deposit than being lumbered with a poor quality asset for the next 10 years.
View it like any other investment
For those prepared to hang on, treat off-the-plan like any other asset. Make sure that you have a sound investment strategy
in place that includes an understanding of the demand for your property now and into the future, and from both a rental and sales perspective.
3 IMPACT OF APRA/ASIC REGULATORY CHANGES
These major regulatory changes – such as changes to servicing sensitisation and the introduction of tiered interest rates – which have tightened bank lending to property investors, will have a knock-on effect well into 2016.
While we will always support a safer environment for Australians to both invest and lend in, the changes will mean that it is tougher for new and existing investors to expand their property portfolios, making it more difficult for those looking to become self-funded retirees to grow their wealth and retain their independence.
Ironically, these changes come at a time when the Government is facing a deluge of Australians entering retirement.
What to do
Meet your lender’s policy requirements
Ask yourself the following question: do you best emulate their ‘ideal client’? If you don’t, you are simply wasting your time trying to secure a loan. You could shop around. However, a broker will short-circuit the process, enabling you to quickly find the right match.
Provide banks with proof of capacity
As banks tighten their policies, borrowers will increasingly need to provide proof they have the capacity to service their loans, rather than simply having sufficient equity or the minimum deposit.
You will not only need to demonstrate your capacity
to not just hold interest-only loans, but to reduce the principle amounts borrowed over time. This will need to be demonstrated via stronger cash flows, meaning your PAYE, wages and earnings or rental returns from your investment property will need to be stronger and more consistent than has been the case. Consult with your accountant to get to get the right advice. After all, you need to ensure every dollar you invest is working for you.
Ensure you have a strategy
When making an application for credit, you will need a clear investment strategy that you can articulate to the lender. An effective strategy will outline what your plans are for the next five to 15 years – when you will buy your next property, if you are planning to grow your equity to buy another property, if you are looking to buy in a specific area, and so on.
If you are struggling in this regard, seek advice from a professional. Being well prepared will ensure your lender has no reason whatsoever not to provide you with finance!
Align yourself with a lending institution that understands your future needs
Ask them how they will support you when you are buying your second, third or fourth property, or have more than $2m in debt.
Keep in mind, your ideal institution does not necessarily have to be one of our Top 4 banks but simply an institution that has your interests at heart. Remember, aligning yourself with the right institution will help you better navigate more straightened economic times!
4 TIERED INTEREST RATES
The move last year by banks to a two-tiered interest ate structure saw many investor borrowers paying interest rates between 0.27 and 0.6 percentage points higher than those charged to owner-occupiers.
These additional costs are likely to be passed on to tenants rather than being borne by the investors in VIC and NSW, but may see rents fall in WA in a market that is already under pressure with the mining boom now over.
What to do
Get your broker to find the best possible deal for you
A really great deal could go a long way to balancing out your future needs. However, it does not necessarily have to be one with the cheapest rate! The key is finding a lender that can service your needs today and well down the track.
Check that your existing debt is priced correctly
This is particularly relevant to Australians who have decided to move into their investment properties
in recent years. With a change in the tiering of rates, borrowers need to make sure their loans represent their intended purposes.
If you live in what was once an investment property, you will need to review your lending structure (including rates, ownership and product) to ensure you are not paying more than you need to.
5 NEGATIVE GEARING
This will remain on the agenda as the Federal Government looks for pools of revenue to fund its $44b deficit.
As we all know, negative gearing is the practice whereby an investor borrows money to acquire an income-producing investment property, expecting the gross income generated by the investment, at least in the short term, to be less than the cost of owning and managing the investment and so on.
Usually investors entering this arrangement expect the tax benefits and the capital gain on the investment on disposal to exceed the accumulated losses of holding the investment.
What the Federal Government will discover is negative gearing is not awash with the rivers of gold it had hoped. The reality is there are few people on the top marginal tax rate in a position to truly beneﬁt from this property strategy.
Also, 70% of all investment property owners own just one investment property!
Changes to the negative gearing laws could have a harmful and far-reaching effect on the entire property market – from buyers to sellers, developers and even those that rent.
We could see the knock-on effect in the ancillary industries that supply the construction industry, resulting in the devaluation of the property market and a reduction in net wealth, as pressure applied to the investor market begins to affect the more than two million investment property owners in Australia.
Don’t forget that property has been a key strength in an economy facing challenging headwinds, so absolutely needs to be in good shape to help secure our future.
So should investors avoid negative gearing altogether?
No, you should not avoid it. Simply understand it
Remember, gearing offers both pros and cons and is about maximising your benefits depending on your circumstance.
Everyone’s situation is different. Also, keep in mind that your investment structure and strategy needs to reflect both your immediate and your future needs. A great ‘wealth’ accountant, who understands the tax effects of gearing and how this will impact your strategy, is well worth consulting.