Sam Khalil’s property investment outlook – spring 2019

It’s that time of year again, where the weather starts to take a positive turn and we start spending more time outdoors. It’s no coincidence that the shift from winter to spring typically encourages a frenzy of activity in the property market.

For property investors, this creates its own set of opportunities. But in the meantime, the more pertinent considerations extend to the broader economy and local property markets in each city. After a couple years of cooling house prices, suddenly, the outlook and rhetoric for growth is showing signs of blossoming.

Leverage regulatory stability

After the strong run in property prices between 2012 and 2017, we saw government intervention at play. From a regulatory perspective, the Australian Prudential Regulation Authority and Royal Commission spent the last 12-18 months addressing perceived ‘overheating’ by tightening lending regulations.

As investment loan transactions dwindled (Figure 1), it became clear the measures went too far. They have contributed to a slowing economy. Simultaneously, many were concerned around a potential change in government, where proposed changes to negative gearing and capital gains tax would have impeded investors. With this now out of the way, and absolute certainty of government confirmed, we will witness increased confidence in the market.

Look for stimulatory initiatives to underpin the market

Property market sentiment is shaped by the actual economy, as well as stimulatory initiatives. One of the government’s key measures to avoid a recession is the strength of the property market. We are seeing efforts from the government to restore borrowing levels and the broader economy. This includes sizeable tax cuts for individuals – to encourage spending – both now and across the medium-term (Figure 2). For many, it is a pay rise.

Enormous infrastructure spending is also planned across the country. This will support jobs growth and help shore up the economy. Inflation remains subdued, but this is more an indication of expectations for additional interest rate cuts to stimulate growth. Since the election we have already seen three interest rate cuts by the RBA. With rates at historic lows, and only looking likely to drop further, now is the time to benefit from affordable debt and invest in property.

Since the above measures have been introduced, early signs are showing auction clearance rates have started to turn the corner in Sydney and Melbourne. Collectively, these measures are vital to restore economic growth and realise sustained sentiment, which will support property prices.

Identify socioeconomic trends by region

Cooling house prices in Sydney and Melbourne have created opportunities for astute investors who have saved over the last couple years. You will need to invest selectively. Supply has come off and there is still 6-12 months until capacity builds due to a lag in funding, approvals and construction. However, waiting until then will involve paying a premium as competition increases, auction clearance rates improve and vendor expectations lift.

You will want to target areas exposed to growth trends. In Sydney, the western suburbs out near the new airport are set to receive a boost from extensive infrastructure investment, which will spur on private investment and huge employment opportunities. As an airport that will act as a cultural destination and benefit from ‘placemaking’, the corridor from Wollongong to Penrith is leveraged to this growth. Properties in these areas are currently affordable and offer high yields.

Brisbane is another market offering exposure to a rebound in prices as the local economy improves, infrastructure is built, and both population and employment growth takes hold. The (CBD) apartment market is oversupplied and caution is warranted. But middle link suburbs are best leveraged to these growth tailwinds. For the long term, Canberra also offers upside as population growth, facilities, and long term projects stimulate local activity.

In regional cities, both population and employment growth need to be sustained to underpin property prices. This is best catered through economic and industrial tailwinds. In areas like Newcastle and the Hunter Valley, there are infrastructure projects, freight and transport activity, tourism, industrial production, and population growth. As an ‘anchor’ off a capital city like Sydney, the region offers superior yields and compelling value.

Ensure your money works smarter, not harder

Record low interest rates mean that there is next to no return on funds kept in the bank. In fact, once inflation jumps, you actually stand to lose on your savings. Similarly, term deposits and bonds provide low growth.

On the other hand, shares may offer high returns, but are sitting at record highs. We’ve seen periods of significant volatility, where timing the market becomes important. Investing in property however, offers upside through yield, modest stability and capital appreciation.

The low cost of funds environment, which is likely to remain steady for years, if not only eventually increase gradually, supports investment in standalone, finite properties. The right property in a sought after area will always appeal. Holding costs may apply, and yields may be lower but being in the market is the first step for sustainable capital growth.

Meanwhile, dual income properties can provide you with immediate profits as yields (circa 6%) trump out current cost of funds (circa 4%). Even once rates move higher towards their historical average, the yields are still favourable, plus tax benefits extend that.

The key window is the next 6-12 months, before other buyers and investors take to the market after it has rebounded. Until then however, the importance of picking the right areas to invest in is no less diminished.