At the end of each year I like to look for a label to describe our property markets and this year I planned to call 2014 – The Year of the Property Investor.
The year finished with property investors taking out around 50% of all new loans, the highest percentage on record and many investors had a great year.
Australia’s property markets enjoyed a positive 2014 buoyed by strong population growth, historically low interest rates, a voracious appetite for capital growth by investors and the desire by overseas investors to place their money in Australia’s large capital cities.
However, not all property investors did well!
Unfortunately, many complained that “the property boom passed them by.”
This was because our markets were very fragmented and if you didn’t own the right type of property in the right location, you probably would not have enjoyed significant capital or rental growth.
Clearly the standout performers for 2014 were Sydney, where home values increased by 13.2%, and Melbourne, where home values rose by 8.3%.
Over the year, home values were 6.0% higher Brisbane as well as rising in Hobart (+5.2%), Adelaide (+2.8%), Canberra (+1.7%), Perth (+1.4%) and Darwin (+1.4%).
But now the impact of the lowest interest rates in 60 years is dissipating with prices growth peaking mid year and capital growth is likely to moderate in 2015 due to the soft outlook for economic growth, rising unemployment, ongoing job security concerns, lower consumer confidence and sluggish household income growth.
While there are still positive factors that will affect our markets next year, there will be some stumbling blocks and potential landmines along the road, so let’s:
- First take a big picture overview of what’s likely to happen over the next year or two; and then
- Look at some ways to protect yourself from the turbulent times ahead.
First, the good news ahead
The positive factors for our housing markets in 2015 include:
- Continuing strong population growth in our capital cities, albeit at a lower rate than in previous years. According to the Australian Bureau of Statistics, currently Australia’s population grows by one person every 77 seconds, driven largely by international migration. This means our population grows by around 400,000 people each year. Of course many of these want to live in the same four big capital cities (and in particular in Melbourne and Sydney where many of the jobs are), which means demand is likely to outstrip supply in our inner and middle ring suburbs.
- Interest rates are likely to remain at historic lowsthroughout 2015 and it’s quite possible we’ll have another fall or two in official interest rates. At the same time, banks are continuing to aggressively chase new business, meaning more people will be able to afford to enter our property markets.
- Confidence in our property markets and a feeling they are missing out, whether as a home owner or an investors, will mean more Australians will try and get a foothold on the property ladder before prices increase further or borrowing conditions turn less favourable.
- Overseas investors will keep looking for a safe haven for their money and continue investing in Australian property. The low Australia dollar is likely to encourage overseas investors to keep ploughing their money into new and off the plan high-rise apartments in our capital cities. This will continue at a time when we already have an oversupply of this type of property and will further inflate the price of inner CBD properties.
- The wealth effect will kick in with existing property owners (particularly in Melbourne and Sydney) feeling better off as the value of their homes have risen significantly over the last few years. Some will use this extra equity to move home or invest in real estate.
- Buying in self-managed super funds may accelerate in the first part of 2015 as the government contemplates removing the ability of SMSF’s to borrow to buy property as recommended by the Murray Financial System Inquiry.
- An improving local economy in the second half of 2015 will increase consumer confidence.
Potential stumbling blocks for our property markets
But it won’t all be rosy.
I see consumer confidence falling in the first half of 2015, which will have a negative impact on our property markets.
Fact is: Australians will keep hearing negative news about the world’s problems – China’s economy slowing down, the European economy being a basket case, deflation around the world, wars, etc.
And locally we will be worried about rising unemployment, a weak economy and a government that can’t deliver its budget.
This means the media is going to have a field day with negative commentary and the average consumer will keep their hands in their pockets and not spend, particularly on big ticket items like upgrading their homes or buying investment properties.
Some possible X-factors
Economists refer to ‘an X factor’ when an unforeseen event or situation blows all their carefully laid forecasts away. Every year we get lumbered with an X factor (or two) that comes out of the blue to surprise us.
Potentials for 2015 include:
- APRA introducing macro prudential controls limiting investor finance.
- Changes in the ability for SMSFs to borrow to buy property investments as recommended by the Murray Inquiry.
- An X factor that we don’t know about – otherwise it wouldn’t be an X factor. And I’m not talking in riddles – we have an X factor virtually every year, so be prepared.
So what should an investor do?
Firstly, be careful…
Lower overall capital growth, more in line with the rise in wages or disposable income, means that investor mistakes won’t be covered up by strongly rising markets.
Remember Warren Buffett’s great saying: “A rising tide lifts all ships, but when the tide goes out you see who’s swimming naked.”
However, I see falling consumer confidence and lower buyer demand for properties in the early part of 2015 as a potential opportunity for investors with a long-term focus.
Remember Warren Buffett also said: “Be fearful when others are greedy and greedy when others are fearful.”
In other words there is likely to be a window of opportunity for property investors with a long-term focus to take advantage of a time when others are sitting on the sidelines.
Where will the opportunities be in 2015?
Clearly our property markets were fragmented in 2014, performing strongly in Sydney and Melbourne while other regions languished.
In fact, they were even more fragmented than this, with only certain regions in these two big capital cities performing strongly.
I see this trend continuing in 2015, as property markets in new homebuyer locations, blue-collar areas and regional Australia underperforming in line with a weaker economy, rising unemployment and jobs uncertainty.
On the other hand there will still be a large group of Australians with rising disposable incomes because they work in the type of industries that will still be growing strongly. In general these people will work and live in the inner and middle ring suburbs of our big capital cities.
These are the property locations that should still perform well in 2015.
What property investment strategies won’t work in 2015?
The strategies that won’t work in 2015 include:
- Hot spotting – in other words looking for “get rich quick” locations. Of course this has never really worked. The landscape is littered with casualties who invested in previously touted hotspots such as Mandurah, Moranbah, Port Hedland, Gladstone and Cairns.
- Buying generic apartments in large high-rise off-the-plan projects – there is an oversupply of this type of property looming especially in Melbourne, Brisbane and Sydney. Lack of capital and rental growth will make this type of property a very poor investment.
- Buying house and land packages in the outer suburbs. These, typically first homeowner locations, are likely to underperform as many people living in these locations are already struggling a little with their mortgages and are likely to continue to do so next year as our economy stumbles along and wages growth remains low.
- Buying properties in regional Australia where economic growth will underperform the powerhouse economies of our capital cities.
- Buying properties in mining towns where investor demand has waned.
Some tips to maximise your property profits in 2015
Personally, I’ve taken advantage of the opportunities the property market has presented me and purchased a significant number of properties this year and plan to do so again in 2015.
To ensure I buy a property that will outperform the market averages, I will continue to use my 5 Stranded Strategic Approach:
1. I only buy the type of property that would appeal to owner-occupiers. Not that I plan to sell my property, but because owner-occupiers will buy similar properties pushing up local real estate values. This will be particularly important in 2015 when the percentage of investors in the market is likely to diminish.
2. I would only buy a property below its intrinsic value – that’s why I avoid new and off-the-plan properties that come at a premium price.
3. I buy in an area that has a long history of strong capital growth and that willcontinue to outperform the averagesbecause of the demographics in the area. This will be an area where owner-occupiers will want to live because of lifestyle choices and one where the locals will be prepared to, and can afford to, pay a premium price because they have higher disposable incomes. In general these are the more affluent inner and middle ring suburbs of our big capital cities.
4. I would look for a property with a twist – something unique, special, different or scarce about the property, and finally…
5. I would buy a property where I can manufacture capital growth through refurbishment, renovations or redevelopment rather than waiting for the market to deliver me capital growth.
It’s likely that 2015 will be a difficult year for some property investors.
However, I’ve noticed an interesting phenomenon; some investors do well in good times and continue to do well in difficult times. On the other hand, some investors do poorly in good times and even worse in bad times.
Now that’s interesting isn’t it?
What’s the difference between these two groups of investors? It’s not what most people think.
Sure, knowledge is important, but that’s not enough. Successful investors are financially fluent, have a good team around them, treat their property investment like a business by holding themselves accountable and regularly reviewing the performance of the portfolio, and most importantly they have the right mindset.
I hope 2014 has been kind to you in all aspects of your life including your property investing and I wish you even more success 2015.
While I’ve tried to point out some of the risks ahead, the real risk is what creeps up when you think you’ve covered all your risks. Let’s see what the X-factor for 2015 will be.
Michael Yardney is a director of Metropole Property Strategists, a company which creates wealth for its clients through independent, unbiased property advice and advocacy.