We’ve seen how there’s a new breed of property investor as first time buyers break into the property market through investment rather than the traditional owner-occupier strategy.
What’s also clear is that that more people are getting into the investment game from different economic spheres than in the past. Recent figures show that there’s a large number of investors earning incomes of less than $80 000 a year who are splashing out on properties. The stories you hear tend to be along the following lines:
- Flipping properties – buying cheap apartments a good distance from the CBD and renovating then quickly selling.
- Living at home with parents and saving and either doing collective family buying or using parents as guarantors.
- Strategically identifying property growth - buying into the suburbs about to gangbusters and then sitting on a strong capital growth.
- Easy access to loans and a more intelligent use of equity to purchase upwards.
What all these four points above have in common is that it shows how savvy most people are now about property investment. There’s also a belief (often true) that anyone can buy property regardless of his or her net income. However there’s also a trap of that well-known phrase: “a little knowledge is a dangerous thing”. Many think they know the secrets of property success but it can also be due to a very hospitable property environment.
There are lots of success stories about pizza delivery boys or checkout chicks that now own a string of investment units through smart and targeted buying. But the crucial takeaway is that Australia currently has a very investor friendly environment due to three key reasons: negative gearing, low interest rates and a red-hot market.
Of these three key factors, negative gearing is unlikely to be watered down by the government, though there have been calls for this to happen. The unabated demand for property won’t diminish any time soon. Our growing population and the unquenchable thirst from foreign investors clearly demonstrates this. That only leaves interest rates. It is quite probable that interest rates could rise in the near future as the RBA tries to put a brake on the acceleration of household debt. Of course predicting interest rate rises is as fraught as reading tea-leaves or putting money on the Melbourne cup trifecta.
The RBA has a difficult job: household debt is rising and housing prices are going through the roof; yet the Australian economy still remains weak. What’s happened is that everyone has got comfortable with the idea of debt in order to buy property.
Still if rates do rise, how vulnerable will this leave the low-income investors who may have one or two mortgages, borrowed equity, and are working off a very tight margin? And what will it mean for property investment generally?
APRA has asked that banks keep in mind of “the strong growth in lending to property investors”. There’s a hope that the banks will have an “interest rate buffer” so that borrowers can still cope if there’s a rise of a few points. But realistically banks can’t and often won’t always put the brakes on borrowing.
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A shaky economy and rising interest rates could create a housing bubble. If a housing bubble does arrive it’s the lower income investors that will be the most badly hit.
The risk has been identified as very high in areas such as inner city Melbourne where there’s been a flurry of apartment building in the last few years. It’s now reached the point where’s there’s alarm bells ringing about an oversupply.
Property investment is a very tricky and complex art. Professional investors can take years and many mistakes to perfect it, and even then are still prone to the unexpected quirks of the market. So for the lower income investors it’s crucial to team up with a professional. Look for a service that can help guide you holistically through your property journey. If you’ve achieved the first stage of your property journey alone, it’s to be congratulated. But to get to the next stage of battling with the big players and having a large portfolio it’s worth talking to an expert who can tailor a strategy for your needs.