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Is now the right time to invest in property

Is NOW the Right Time to Invest in Real Estate?

There is no doubt that 2019 has been a rollercoaster year for Australian Real Estate, and provided plenty of material for the media, with headlines such as “from freefall to boom: What the hell is happening?”.

While some investors may have gotten a little jittery, overall there was little to no harm done except for those who needed to sell during this time.

Actually, the little dip in prices did a lot to improve buyer sentiment in the market as buyers suddenly saw better opportunities and reignited their interest. For many prospective first home buyers, it was a great morale boost.

As 2019 came toward a close, the major metropolitan markets returned to their previous trajectories – with people scrambling to get in while prices were favorable.

So, you may be wondering what is in store for 2020? Well, in this post we lay out the groundwork and let you decide for yourself.

 

Supply, Demand and Cheap Money

Now, we could bring out all sorts of charts, statistics, and analyses and dissect in minute detail what happened in the Australian property market over the last decade. But we know you probably don’t have the time for all that.

In any case, no matter which way you slice and dice the stats it all boils down to this – supply, demand and easy money. These were the three pillars holding up the Australian property market over the last decade.

 

Demand

As a young nation with a relatively tiny population, the government has favored an aggressive population growth plan.

Between the 1970s to today, the annual growth rate has stayed between 1% – 2.5% annual growth – much higher than the average across the western world.

This means that Australia also had a big need to consistently build more houses.

For example, in 2019 the population rose by 305,046 however only 228,000 new residential dwellings were built (Master Builders Australia).
This number only doesn’t consider the 10 million tourists who visited Australia in 2019 – many of which stay long term to work and study (Australian Bureau of Statistics).

There is a very strong demand for residential, short-term, extended stay and student housing – all of which flows on to affect residential house prices.

 

Supply

What makes the matter worse is the fact the residential dwelling construction approvals pipeline is drying up.

Australia has just come out of a record-setting construction boom (which peaked in 2015-2016).

Even with all this building activity and supply, it was not enough to pull down overall prices.

And now we are staring down the barrel of a forecast 25% reduction in construction by 2023 ((Master Builders Australia).

This means we are on a path to only build 176,000 new homes while at the same time adding another 300,000 people to the population – not including the millions of international visitors.

Most of this imbalance will be most strongly felt in the major capitals like Sydney and Melbourne.

 

 

Cheap Money

The decade since the GFC of 2009 may as well be known as the decade when the Reserve Bank of Australia let the purse strings loose and started making cheap money available for the economy.

This means than Australian Banks were able to borrow money for less, and they were able to on-sell that money as home loans for residents and charge much less.

If we look back to the late 80’s property prices were low, but interest rates were very high.

When we look at today, we can see the opposite is true, property prices are high, but interest rates a low.

Clearly interest rates have a big effect on property prices.

 

It’s also worth noting that although today we have bigger mortgages, and higher principle repayments – our interest repayments are much smaller.

A simple analysis shows that despite today’s media hype, housing is in many ways still more affordable than it was in the 1980s.

 

Cost of Home Loan Repayments in 1986

Principle and interest repayments on a $100,000 loan, at 16% interest over 30 years would cost $1,344 a month. Medium income was $22,516 per annum. Housing repayments consumed 71% of income.

 

Cost of Home loan Repayments in 2019

Principle and interest repayments on an $800,000 loan at 6% interest over 30 years would cost $4,796 a month. Medium income is $86, 476 per annum. Housing repayments consume 66% of income.

 

It’s important to note that neither of these examples factor in a deposit, so the final repayment figures are slightly higher than would be in real life.

Now we’re not saying that it’s all smooth sailing out there, there are many households today dealing with mortgage stress – especially lower income or single-income families.

However, people are finding ways to be smart with their money. Many people are choosing to rent in a prestigious suburb, while buying a cheaper entry-level property in a less desirable area.

Even people on lower incomes are finding ways to participate in the property market despite the seemingly high prices.

And policymakers seem keen to encourage this as the RBA has consistently dropped interest rates since 2009. The current cash rate stands at a record low 0.75% – with no signs of going up anytime soon.

The fact is that cheap money is here to stay, and while it does then property prices will continue to be pushed up.

 

 

Downward Pressures

Now that you understand the fundamental drivers behind property price growth, we need to mention some of the downward price pressures currently in the market.

The biggest barriers to property piece growth are poor wage growth, high entry costs and niche pockets of oversupply.

 

Poor Wage Growth

The Australian economy is changing. Our traditional heavy industries such as mining are not pulling their weight like they used to since the slow down of the global economy.

Since the GFC, the construction industry has stepped in to fill the gap and has been the force behind much of our economic activity.
However, construction is now facing a 25% downturn which will have a slowing effect on the general economy.

This is part of the reason why the RBA is keeping interest rates so low, to encourage investment in development and the creation of jobs.
Elsewhere in the industry young Australians are reporting that it is finder to find full-time work and although employed, many are underemployed – working part-time of casual jobs or in areas which pay them less than fitting for their skills and experience.

This all contributes to less personal financial stability, financial power, and confidence, encouraging more renters and fewer homebuyers.

 

High Entry Costs

One of the biggest costs of buying a home today is not the repayment costs, it is the initial entry costs.

For first home buyers to buy a home they need to save a large deposit of around 20%, or $160,000 based on an $800,000 home.

They then need to pay stamp duty, legal costs, etc. which can easily amount to $35,000 for an $800,000 home bought in NSW.

For many young people, saving nearly $200,000 seems impossible, and some give up.

There are also many who choose to ‘rentvest’ instead. They use a small deposit to buy cheaper entry-level apartments or units in affordable areas and rent them out to others – while they themselves rent in a desirable location.

It’s a way of overcoming the obstacles and getting a foot on the ladder.

 

Pockets of Oversupply

Despite there being an overall shortage in housing supply within the market, there are pockets with oversupply.

This has happened in several inner-city areas of Sydney, Melbourne, and Brisbane many high-rise apartment complexes were built in the same area within a short time.

This is great news for someone wanting to get a better deal on their rent or a first home, however it will not get the best immediate returns for investors as rents and capital growth will be depressed for these properties until the supply gets soaked up.

 

So, there you have it, hopefully, a simple snapshot of the property market and the upward and downward price pressures in play.
What are your thoughts? Do you think 2020 is the year to buy property? We’d love your comments below.

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