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If you listen to some sections of the media, you might hear that the property market will fall by 30% on the back of the COVID-19 crisis. However, others say it's set to surge to boom levels. It’s little wonder, therefore, that investors are faced with confusion and concerns. With experience that equates to more than 24 years in the industry, Sam Khalil sheds some light on the reality of Australia’s property market.
Is property set to fall or boom?
It’s difficult to know what to believe when conflicting stories abound. The truth is, this is a topic that’s discussed every year, regardless of what’s occurring on the world stage. There’s a simple answer to the question. With at least 8,800 suburbs in the country, and growing, there is no actual 'one property market' in Australia. Therefore, generalised statements don't apply.
What we tend to see in the media are discussions on the averages of all the properties in Australia. Realistically, it’s not possible for every property to drop by the same percentage, at the same time. Alternatively, stories are often sensationalised with attention-grabbing headlines. It’s always important to read the detail and conduct in-depth research with regard to facts.
In beginning to assess the impact of the current slowdown on property, it’s worth exploring how property has historically responded to negative economic shocks.
Major share market losses and recession are not necessarily predictors of declines in housing values. This can be seen in the graph below. When significant, negative economic shocks occur, the effect on the housing market varies. Property values change depending on the level of impact on Australian industry.
When significant, negative economic shocks occur, the effect on the housing market varies.
Positive government incentives
Further to the unlikelihood of a downturn, and in response to the current global crisis, the government and banks have staved off massive price reductions. Incentives, such as the JobKeeper package, have acted in a strong and powerful way to ensure we don’t experience a significant drop in prices. In terms of leasing performance, these incentives have also gone a long way towards alleviating investor concerns.
With comprehensive research and knowledge, wise investors understand that 2020 could be the right time to invest in property.
Supply and demand
What does alter property prices is supply and demand. Currently, there’s a lack of supply due to owners pulling properties off the market, with mixed results. For example, recent auctions in Sydney and Melbourne have produced prices significantly above reserve. Yet, in other suburbs, oversupply and high vacancy rates in units have led to a drop in prices.
One of the biggest things on the horizon is overseas immigration, which may reduce by about 85%, with regard to demand coming in. This will result in an oversupply of certain residential apartments in the immediate future. However, the pipeline is already slowing down towards market equilibrium.
There are investment properties in Australia which have become cash-flow positive on the back of the global crisis.
To simplify this question, the right time to buy is any time you’re able to. The reality is, if you have a stable job you should always look at investing. The requirement to build a stable portfolio to create a passive income hasn’t gone away with the global crisis. In fact, with the government instilling a level of confidence in the economy, and dramatically low interest rates, investing in the market today can save you money. As always, the key is to buy astutely in the right areas, to get the right returns.
Interest rates at generational lows
Today, it’s possible to get a fixed, 2-3 year rate for a quarter of what they were a decade ago. What we’re seeing already, is that means there are investment properties in Australia which have become cash-flow positive on the back of the global crisis. For first home buyers and investors with a stable job, this presents an excellent opportunity.
It’s possible to get a fixed, 2-3 year rate for a quarter of what they were a decade ago.
What types of property should you invest in or avoid?
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It’s a common misconception that investing in city apartments guarantees consistent tenants, though apartments continue to decline in value as an asset class. Because most apartment buildings are around 80% investor-owned, shifts that equate to unemployment result in significant swings in vacancy rates. That’s what we’re seeing now in all capital cities, along with heavy discounting in order to capture tenants. This, in turn, affects property prices.
Therefore, it’s important to look at owner-occupier areas that don’t have an oversupply of rental stock. An area with only 10 to 30% rental properties and a stable, rather than transient, market offers a higher rental yield to cover you in the case of a price adjustment.
Dual income properties continue to be popular with investors. Furthermore, there’s an ongoing demand for duplexes. It's possible to manufacture some equity by buying a block of land for two separate titles, thereby generating two rental incomes and increasing the value.
Armed with comprehensive research and knowledge, wise investors understand that 2020 could be the right time to invest in property. As the great physicist says:
In the midst of every crisis, lies great opportunity.
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