As a property investment advisor and former property valuer, I see many good and many bad investments.
At each event I present at someone will always tell me that property values always go up, and that values always double every 7-10 years. I can tell you, this is certainly not always the case. We meet many investors that have lost tens of thousands of dollars, and even hundreds of thousands on the wrong property investment. We have a report that is exclusive to Suburbanite that lists 1,194 suburbs in Australia that have had 12 months of negative growth for 2016. But don’t worry, it’s not all bad news. With sound research and a good property strategy investing in real estate can be life changing and can create true financial freedom.
There is certainly good money to be made through strategic investing, and one of the key drivers is market timing. Many people believe that the overriding factor is low interest rates and this is why the market is doing so well. But Perth, Darwin, many regional and tourism markets and Tasmania have not been preforming very well the past few years, in fact Darwin and Perth have been actively and aggressively retracting in value in this time. Did someone forget to send them the memo that interest rates are low so values should be sky-rocketing? So is it then down to larger economic forces, such as the mining boom that has created the boom then bust in some areas like Perth and Darwin. Well it certainly is one factor, but if you look to historical trends and past economic influences how did the GFC impact the market. Our data shows that the Melbourne market had an average growth of 27% the year after the GFC. So did someone forget to tell Melbourne we were in a global downturn and the property market should act accordingly rather then bucking the trend?
Let me tell you the secret to the biggest influencer of property market movement, it is the timing in the cycle. This overarches all other factors, and whilst we whole-heartedly agree that interest rates do have some impact on performance, as does local and global economic factors, theses are just one piece of a much bigger puzzle.
Lets explore a typical cycle. Above are the national averages over a typical 20 year cycle, for Australian capital cities. It is important to remember that not all markets are created equal and do not all perform the same. Regional areas, tourism hubs, oversupplied markets like new housing estates or new units in CBD areas are far more volatile than the graph represents. The trends I am talking about reflect capital city housing markets.
The graph also highlights the stable part of the market where there is little to no growth in values and that is usually about 6-8 years of a cycle. Then we see the active stage of the growth cycle where we see about 3-4 years of aggressive growth, then there is a small correction of typically 5%-10% of the properties values are stripped off and then we go back to the stabilisation stage. So the idea is to be buying at the lower part of the cycle but not too early or the property will sit flat for years before the investor sees any real growth and we certainly want to avoid buying at the peak or in the correction.
It is important to note that during the correction we often see vacancy rates rise quiet significantly too, so that can make it hard for investors to hold the property through the pain and out the other end if the rental returns aren’t stable.
Firstly, lets refer to our growth matrix sourced from corelogic 2017 data release.
The black line shows the past 12 months data and reveals the negative growth trend for Darwin and Perth. So certainly markets we want to avoid right now as your property’s value will likely go backward before it goes up. Very counter intuitive way to invest.
Looking at the Sydney and Melbourne for a moment and changing our focus to the yellow line, this shows the average annual growth on a 10-year cycle, revealing Sydney and Melbourne having seen about 8% pa on average for 10 years. Compounded this is statistically more than a doubling in value over a 10 year period. So this indicates that these markets are certainly at or very close to their peak. With some suburbs in Sydney starting to see negative growth trends come through in the past 12 months, areas like Sydney’s Inner West and Sutherland Shire to name a few this would be the first signs of a cooling market.
We are often asked about the opportunities in satellite cities such as Wollongong, Newcastle or Central Coast. These areas certainly do grow off the back of Sydney, as people get priced out they search for a more affordable alternative, ideally within a reasonable commute to Sydney for employment, family and friends. As well as the local employment opportunities, infrastructure, amenities, schools and the life style it offers.
These areas do tick a lot of these boxes but those looking to invest in these areas for 2017 have missed the boat. You needed to be buying there 2-3 years ago as the growth has already come through.
Take this modest home in Dapto near Wollongong for example. This renovated 3-bed cottage was purchased by one of Suburbanite’s clients for $340,000 in 2014 and there are now similar houses in the same street for sale in the high $500’s to low $600’s. This shows an increase of around $250,000 in less than 3 years.
The ‘Wollongong’ Of Melbourne
So does Melbourne have a Wollongong? A satellite city that is within commute to the CBD, has diversified local employment opportunities, affordability and infrastructure? There certainly is. There are markets that represent similar opportunities in and around Melbourne that are just starting to see the growth come through as people are being priced out of Melbourne inner metro areas. With good price points around $450,000 and solid rental returns, these markets are a great opportunity for investors. However, investors need to be cautious of newly developing areas on Melbourne outskirts. There are some newer suburbs that have far too much supply of new housing stock and the demand can’t meet the supply, resulting in downward pressure on values and high vacancy rates.
In years gone by we have picked some of the best performing markets in Victoria. This property is a great example of this. This is a modest house purchased in November 2015 by one of our clients for $412,000 and just 18 months on the investors bank valued it at $565,000.
There are still opportunities like this in the market place, you just have to know how to do the research, get your timing right and avoid the traps along the way.
If you have owned a property in Sydney, Wollongong or Melbourne in the past few years, it is a great time to speak to a broker about unlocking the sleeping equity you will most likely have in your property and utilise that as a deposit for an investment property. There are some fantastic opportunities but you just need to get the right guidance so that you don’t make a costly mistake and you can get your money working for you to build wealth for your future.
You can get in touch with us on 1300 245 490.