Buy now, but where and what?
Income and growth are still the goals for investors, but opinion is increasingly divided on how best to secure them. Article by Jo Studdert.
The rumour is, it’s a buyer’s market. Property prices are stable or falling: now is the time to buy.
But where and what? Is it better to make one investment in an expensive area or several in cheaper places? Should you buy a house or an apartment or town house?
Ultimately your decision will be affected by your ability and willingness to take on debt and the state of the local property market and the economy.
Traditionally, investors have sought income (from rents) or growth (from rising property values).
With income (yield), the rule has always been the cheaper the property, the higher the yield. With capital gain (growth), it is the opposite: the dearer the property, the bigger the gain, but these distinctions are fading.
Stephen Bock, sales director at Ray White in Sydney’s Manly, says growth and yields are high in his beachside suburb, and significantly higher than in cheaper neighbouring areas.
“Yields on Manly apartments are 5 per cent where in 2003 they would have been 3 per cent, not because property values have fallen but because rental demand is up,” Bock says.
“And in some cheaper nearby suburbs owners can have trouble finding tenants. It is always better to buy in a desirable suburb because there is always excess demand: lots of people want to move in and no one wants to move out.”
Scott Calcraft, a long-time Manly resident and investor, says the suburb is the best place to live and to invest.
“Why? Because everyone wants to live here,” he says.
“It’s got the best of everything: restaurants, a fishing-village feel, and five beaches to choose from depending on which way the wind’s blowing.
“My first investment property here had such a multi-multi performance that I bought a second, and I wish I’d never sold anything in Manly.
“I would have been a multi-multi millionaire. It’s magnificent.”
Monique Wakelin, principal of Melbourne’s Wakelin Property Advisory, agrees. “It is never a question of the number of properties you own, it’s always about quality,” she says.
“So go for one good property in an inner-city area rather than a bunch further out.
“Buy a place with true architectural scarcity value as close to the city as you can in areas where demand exceeds supply. The more money you have to invest, the less you should compromise on quality.
“You will get about 3.8 per cent rental return, but you should not buy on the basis of yield: property is capital, so buy for its capital growth.
“I would advise investors actively to avoid any property with a yield above 3.8 per cent to 4 per cent because it suggests there is not enough demand for that property to grow in value.”
But Vince Movizio, principal at at Ray White in Sydney’s western suburb of Fairfield, disagrees, saying “poorer” suburbs such as his offer capital growth and high yields these days. He says it is almost impossible to find houses to rent in the district.
“As soon as one becomes empty for a split second, tenants are queuing up,” he says.
“There is not, however, so much interest in small apartments.”
Movizio says a vacancy is financially disastrous if you have only one property in an expensive suburb with a correspondingly large mortgage. “But if you have a few places in a cheaper area and a tenant vacates, it won’t kill you.”
Rents in lower-income areas used to be well below the median, but Movizio says that has changed. “Fairfield used to have low rents and therefore low yields, but now our rents are extreme and so is capital growth.
“Having the railway line and the M7 [freeway] keeps our prices up and we have more variety of property types so can appeal to a wider audience.”
But generally yields have been poor. Australian Property Monitors research shows rental growth in most capital cities is up only 1 per cent to 3 per cent for houses and down by 0.2 per cent for units in the December quarter, nowhere near covering interest rate rises.
Yields on houses ranged from a low of 3.64 per cent in Melbourne to 4.99 per cent in Hobart; and, for apartments, from a Canberra high of 5.47 per cent to a Melbourne low of 4.31 per cent.
The story was a bit better for capital growth, except in Sydney, where property values have been stuck in the doldrums since 2009, but even nationally, growth has been moderate. Andrew Wilson, senior economist with APM, says: “The prospects of capital gain in Sydney are better than they have been for years, especially if you buy in expensive suburbs, and rental yields in Sydney are always good.
“Capital growth in Perth and Brisbane has been very poor, and only moderate in Adelaide, so opportunities are there, but there has been a 33 per cent growth in house prices in Melbourne in the past 18 months, so much of the capital gain has already happened.”
Daren Schneider, spokesman for the West Australian branch of the Real Estate Buyers Agents Association, says 68 per cent of sellers there have discounted their properties by an average of 6.3 per cent in the past year, so growth did not work for them.
Wilson says Melbourne has an oversupply of entry-level studio apartments, which will dampen rentals, and Brisbane has an oversupply of entry-level houses, so is not offering much capital growth or yield.
But Brian White, chairman of Ray White, says there is another factor that investors should not ignore: emotions.
“You need to consider whether a property appeals to you, for if it doesn’t, it probably won’t appeal to owner occupiers and it is owner-occupier buyers who drive property prices, not investors. Investment apartments in [Sydney’s] Mosman are not likely to be desirable to owner occupiers, so you could be better to buy out west where there are always owner occupiers."
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