Despite the faster-than-expected economic recovery and the surging property market the RBA kept the cash rate steady at 0.10 per cent at its April board meeting, with the governor maintaining “the RBA does not, and should not, target housing prices” and that rates will not be lifted until 2024 “at the earliest”.
Essentially the board remains committed to maintaining the existing supportive monetary conditions until inflation is sustainable within their 2 – 3% target. And to meet these conditions significant gains in employment and wages growth will be required.
The expectation being this low-rate environment will be around for some time longer – albeit we are starting to see some out of cycle movement in longer-term fixed rates and talk of the regulator stepping in to subdue the rising housing market. The mechanisms available to the regulator include restricting low deposit (high Loan to Value ratio) loans, increasing benchmark assessment rates or limiting investor finance loan to value ratios to 80%.
In terms of the housing market – we are seeing prices rise at the fastest rate in almost two decades, with Core Logic recording a 2.1% increase in home values in March, the highest since 2003, auction clearance rates are over 90% in some regions and credit growth particularly to owner occupiers and first home buyers is continuing.
This surge is being driven by the low-rate environment, high owner occupier demand – particularly first home buyers and new construction, and stock still being slow to come onto the market - with new listings through 2020 well below the four preceding years and total listings down as stock is absorbed before or as soon as properties hit the market. Additionally, owners are reluctant to put their house on the market, fearing they will miss the boat getting back in.
In contrast to the owner occupier activity, we are seeing subdued investor activity and credit growth – with investors still essentially sitting on the sidelines. 12 months ago, investors were waiting for the market to drop, now they are concerned about the limited stock, surging prices and the impact of COVID on rental yields.
So - how can your property investor clients manage this rising market with limited stock and be ready for investment opportunities?
For property investors cashflow is critical in building a property portfolio. And right now, while the market is running, is an opportunity to lock in and access capital – to positioning themselves to re-enter the market when the right asset comes up and as stock levels rise.
As such building a strategy around getting properties re-valued to understand the equity available and then do analysis on understand their purchasing capacity can be a smart investor strategy.
And as access to credit tightens with provider delays, limited pre-approval options available and talk of regulator intervention to slow the market, preparation in executing this will key.
So once re-valued it would be sensible to seek guidance in releasing the equity available and appropriately structuring this, and in getting the suitable finance approvals in place to ultimately be secured by the property purchased.
This will position investors to get into the market when the right opportunity comes up, and for investors – we can expect the supply of properties into the market to increase, potentially from other investors wanting to take advantage of the surge and make a tidy capital gain and also as current renters buy and leave properties vacant, leading to an opportunity to sell.
Leave the emotion out! The core fundamentals remain the same for an investor…
- Work out the strategy - what your clients want to achieve and their end goal.
- Understand the investment strategy – whether it be to live off the income, maximise equity and build a portfolio or a combination.
- Do the homework on a good investment property! Including:
1. Does the property have strong capital growth potential?
2. Understanding the region, its infrastructure and economy – will it be easy to find tenants, what rental income can be expected and what are comparative prices?
- Analyse the cash flow: What can they afford and the potential income and costs to hold the property.
- And lastly not every property makes a good investment! Successful property investors do their homework and never stop researching the market to capitalise on the best opportunities across all Australia’s property markets and not just their local market, in order to find the best investment.
And finally, as with investing in any asset class, critical for property investors is to remain disciplined and keep emotion to one side – whether capitalising and selling in a rising market, getting into the market now or positioning themselves for the future. A quality asset will stand the test of time and for most, property is a long-term investment, not bound by the short-term sentiment of market emotion.
Anthony Landahl, managing director, Equilibria Finance
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