the expert
Sam Khalil
Managing Director - DPN
Fuelled with a passion for property, design and innovation, he has a clear vision for the future of property investment built on a solid financial model.
By any measure, 2015 was a dizzying ride. The property market hit a feverish peak that lasted throughout winter; only to have the brakes slammed on it later in the year. It was a year of aggressive buying from both overseas and domestic investors. There was a cockiness and confidence around clearance rates – they were reaching Olympian heights that simply couldn’t be sustained. Those in Sydney and Melbourne who were seeing terrific property appreciation started thinking: ‘we can access that equity and start going for investment properties’. The capital growth of 2015 was phenomenal. Understandably, many were lured in.
Yet, before spring, the measures that APRA introduced drastically slowed down wild speculation in the property market. By forcing the major banks to require a bigger deposit from investors and increase the servicing required this pushed up standard variable rates and winnowed out the field of investors. By the end of 2015 we certainly saw a cooling in the market, especially in Sydney. So where will 2016 take us? Is it too early to predict? My take is that this year will pick up from where we left off.
Property value from 05/02/15 to 04/02/16
2016
The property boom we saw last year is unlikely to be repeated this year. We’re going through a period of correction and caution. Volume has dropped off dramatically in Sydney, especially in the outer suburbs. While Melbourne is still rising in the middle and outer suburbs, its inner city prices are stabilizing, in part due to an oversupply of apartments last year. There’s also clearly oversupply in some areas, as development and construction always lags behind the frantic buzz of the market. It’s worth noting that what’s hurt investors has been the rental yields. Many investors were buying investments on the hope of continued capital appreciation. But rental yields have not been that good, hovering around the 3 – 4% mark. So while property prices have appreciated dramatically rents haven’t kept pace with them. This has most affected investors who jumped into the property market in the last twelve months. So, for example, those investors who bought properties for $700 000 last year and did a lot of borrowing are now finding that the rent is only $500 per week and are struggling to cover the shortfall. This has been coupled with those who got caught out buying apartments off the plan in 2015 only to see values drop well below what they anticipated.
The second wave
What I think this will lead to is a second wave. That is, those investors who bought in the last 12 months, and may have overpaid, are now seriously questioning. They’ve bought at the time no investor ever wants to buy at, which is the peak. They were hoping to see more capital appreciation and yet what we’re looking at is a correction. The latest Residex reports show some suburbs in Sydney moving sideways and, in some cases, having negative or zero growth. If you’re an investor that’s not an exciting proposition.
APRA’s measures have also created “property clocks” in different markets.
There’s no clearer example than the case of Brisbane. Brisbane has been doggedly following Sydney and Melbourne. It’s poised to have a stellar growth and, increasingly, investors’ eyes have been turning there. Yet its growth will be more subdued because there’s less borrowing. Brisbane has been dealt a rough hand. It’s projected to outperform Sydney and Melbourne but it won’t have as much momentum or opportunity because of the APRA lending guidelines and the subsequent caution we’re seeing in the market. So this year will see smart investors becoming more forensic and less emotional in their property choices. My tips are: look outside Sydney, predominately at regional areas like Newcastle and Wollongong. These centres are already on the rise and will take the spotlight even more this year.
Oversupply and high price. Where to invest?
In places like Brisbane and Melbourne you’re best to avoid units because we’re already seeing an oversupply. However Queensland is still a hot area and the Sunshine Coast is worth a look as well as the corridor between Brisbane and the Gold Coast. The Gold Coast itself is getting momentum but this is a bit of a honey trap. It’s a boom bust market that’s heavily reliant on expensive units being bought off the plan. It’s highly vulnerable to over supply and a lot more may come on the market in the next few years.
Affordability is a key factor
Make sure the rental return is there to support whatever property you choose. As the second wave starts to hit, we may well see a few disillusioned investors exit the property market, this in turn will put more stock out there. This means oversupply could well be with us for some time. People who bought between 2004 and 2012, when the market wasn’t rocketing along insanely, could well be advised to sit it out and wait. This is because capital appreciation on the property is already very high. However, if you’re a canny investor and you bought at the height of the market, here’s a hard truth… you may be better off exiting.
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Look at it this way; if you bought a property in the last in 2015, you only have so much capital to deploy. Ask yourself this question: if the capital appreciation you were expecting really isn’t moving, then do you really want to hold the property for 10 – 15 years? It takes some fortitude but you may be better off investing your capital in another market that’s about to hit a peak. One of the common downfalls of property investment is that of stubbornness, the belief that we can sit everything out and the market will correct itself. Yes, the property market is more robust than most. But there is also an opportunity cost to you as an investor. If you’ve been advised badly in the last year and bought at the peak of the market then look at your investment with a forensic detachment.
If 2015 was the year of the rabid, big spending investor in a sizzling, white-hot market, then 2016 is the year where careful precision and pin pointed research will pay dividends. Property investment is always going to be an attractive proposition, but in a time of correction, the smarter investors will be the ones to thrive.
