Is 2010 the right time to invest?

If you haven’t given yourself a New Year’s resolution, here’s one for you…

Take advantage of this early stage of the new property cycle, buy the right property in the right location and you’ll do very well in the long-term.

The good news is that Santa has brought us one of the presents at the top of our wish list – confirmation that we are going to have a great year in Australia’s property market.

I see five green lights to selectively invest in now:

1. A stable Australian economy

The Australian economy’s vital signs are healthy and it is performing much better than anyone would have expected this time last year. Ultimately, it is indicators like strong employment levels, wage and productivity growth and manageable inflation that drive prosperity and the demand for goods, including property.

But watch out – every year there is one “X factor”, one unknown that pops up and surprises us and the economy.

Two years ago it was the subprime crisis overseas and its effects on the world financial markets. Last year the Australian Government’s financial stimulus comprising deep interest rate cuts and fiscal stimulus had our markets surprised us on the upside, with their resilience at a time when almost everyone was expecting a recession.

By definition (being an unknown X factor) I have no idea what will crop up this year. It could be rising interest rates stalling our markets, or maybe further financial problems overseas. Who knows? Something always crops up to surprise us – so be ready!

2. Increased demand but a lack of supply of dwellings

Remarkable growth in immigration levels over the last few years plus a baby boom have boosted demand for housing. However, despite a shortage of dwellings around Australia builders are just not constructing enough new homes and developers are not producing enough new apartments or townhouses to meet demand.

The problem is that for most new medium- and high-density development projects to become financially viable to allow banks to lend for new development and to encourage developers to take the commercial risk, the end value of the apartments or townhouses will need to rise by at least 20% above current market prices.

Putting all this together, a shortage of supply and continuing demand, plus the increasing cost of development (including higher land costs, infrastructure costs and building costs) means that the value of new dwellings will have to rise substantially soon. This will of course have a positive impact on established property prices.

3. Demographics

Our population is fragmenting with more people living alone; which means we need more dwellings just to house the same number of people. At the same time we are living longer. All of this means that more people will be seeking more accommodation both as tenants and owner occupiers, pushing up property values and rentals.

4. Rents will strengthen in 2010

With demand for rental properties outstripping supply, rents increased strongly over the last few years. Record low vacancy rates, fewer investors bringing new properties onto the market and low housing starts all mean residential rents will rise even further over the next few years. The rental boom has only just begun.

5. Low interest rates

Last year saw three interest rate rises and even though it is likely that there will be further rate rises this year, we still have relatively low rates compared to long-term trends.

All this makes 2010 a great time to buy properties as the beginning of this new economic cycle and this early stage in our property cycle offers great opportunities to create long-term capital growth.

But as you’ve heard me say before… you have to be careful because not all properties will perform well.

Our property markets will be fragmented and patchy. Some suburbs will outperform while others will underperform. Some houses within those suburbs will increase in value and some will be duds.

As interest rates increase affordability will be one of the key issues that limits property price growth in some suburbs in 2010.

Affordability will continue falling as property prices increase and interest rates rise. But this will affect some more than others. First home owners and those living in the working class and outer suburbs are likely to be affected more.

On the other hand, those who own properties in the more affluent suburbs of our capital cities, which have exhibited strong capital growth over the last few months of 2009, are sitting on a heap of equity and won’t really be worried about affordability.

These inner and middle ring suburbs are likely to keep performing well again in 2010 and this is likely to lead to a three-tiered market; especially in Melbourne, Sydney and Brisbane.

The more affluent suburbs near the city and the water will become even more expensive and strongly outperform the averages as owner-occupiers and astute investors chase the small numbers of properties coming onto the market in these suburbs.

As more and more home buyers and investors find they are priced out of the inner ring they will start looking for affordable properties in the neighbouring middle ring suburbs. These will also increase in value, but maybe not to the same extent as the inner ring of suburbs

However, the outer suburbs are usually where home owners are more interest rate sensitive, with many currently struggling to meet their mortgage payments. With the likelihood of further interest rate rises in 2010, property values in these suburbs are likely to languish.

So while the news is not the best for first home owners and renters, the current property markets offer good opportunities for investors who buy selectively.

As a way of saying thank you for reading my blog, and to pass on some ideas of how you can take advantage of the upcoming property markets in 2010, I’d like to give you a gift of learning: an eBook, The Science of Getting Rich, plus two tele-seminar downloads, including the Great Property Debate where six Australian property experts give their forecasts for 2010. Just click here to receive my gift to you.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.

Look out for the newly updated 3rd edition of his best selling book How to Grow a Multi-Million Dollar Property Portfolio – in your spare time.