Property investment traps

Would-be property investors beware. Aggressive promoters of get-rich-quick schemes are back in force, aiming to capitalise on growing optimism for the economy, rising property prices, and strong auction clearance rates in Melbourne and Sydney. And their favoured targets are naïve property investors.

One scheme reportedly being promoted involves an investor borrowing $1 million or so against a family home and then using the borrowed money to create an instant portfolio of heavily geared investment properties.

Property consumer advocate Neil Jenman, who hires a media-monitoring firm to track the rising level of aggressive property advertising, describes the spike in promotions by get-rich-quick operators as “depressing”.

And Jenman claims the stance taken by property spruikers is changing with some now claiming: “You might have heard about the crooks. But the laws have been tightened and the rogues have been pushed out.” He is, of course, highly dismissive of such promotions.

Aside from threat from the latest outbreak of get-rich-quick schemes, the residential property market is entering a somewhat difficult phase for property investors, at least over the short-term – given rising interest rates, no growth in national rents, and a range of pressures on rental yields.

However, Matthew Bell, economist for Australian Property Monitors (APM), describes himself as bullish for residential investment property. And Bell points to the fundamental strengths of the market such as a lack of housing stock, strong population growth, low tenancy vacancy levels and the improving economy.

Over the medium-term, Bell expects property prices to keep growing – despite expecting a possible slowdown in price growth over the short-term as interest rates rise – and he anticipates that rents will increase as the economic recovery gathers pace and tenants earn higher incomes.

Here are five points for intending property investors to closely follow at this time:

1. Watch for impact of rising interest rates

As official cash rates continue to rise from their 50-year lows, price growth in the lower-end of the market favoured by first homebuyers and investors is likely to slow, warns residential property researcher Louis Christopher.

Christopher, managing director of property adviser and forecaster SQM Research, says the market is “moving up as we speak”. The return of property investors since June and the rush for first home buyers to beat the deadline for the Commonwealth first homebuyer boost – now to end completely on December 31, having already been halved – are big contributors to the upward movement in prices.

Future interest rate rises will inevitably take their toll on the growth in housing prices. Yet views differ among some commentators about when higher rates could begin to bite into housing prices.

Christopher expects prices to keep rising through the first two rate hikes but for price growth to begin slowing with the second rise, and then for prices to possibly “retreat” with subsequent rises. “It is a delicate market,” he says. “Prices are likely to slow from the first or second quarters next year.”

While Matthew Bell of APM believes that the rate rises will make residential property a less attractive investment over the short-term, he thinks that rising rates will not make a big difference at this stage about whether or not an investor buys a property. “People will realise that rates are coming off emergency levels,” he says.

But Bell is convinced that there will be a “tipping point” when rate rises will turn buyers away. “Perhaps that won’t happen until the [official] cash rate gets to 4.5% [equating to an average variable rate of about 7.3%]. I think investors will remain interested to this point and then pullback,” he says. Currently, the official rate is 3.25% after a 25 basis point rise in early October.

Tim Lawless, national research director for property researcher RP Data, notes that most economists and the financial markets are predicting another 50 basis point rise in the official rate before Christmas. That would suggest rises in November and December.

Lawless expects that if average variable rates were to exceed 8%, “there would be a “more serious dampening of demand” for properties.

2. Understand that the best buying time has passed

Bell says the best time to buy was early in the year when interest rates and prices were at their lowest. He understands that many investors had been holding back until they believed that interest rates had hit their lowest point.

Louis Christopher, who agrees that the best time to buy was at the beginning of the year, emphasises that an investor would have been fortunate to accurately time the market.

3. Don’t expect investors to completely fill the void left by the departure of many first home buyers from the market

Christopher does not accept that the return of property investors into the market since June will entirely fill the void left by first ranks of homebuyers once the first home buyer boost has been completely withdrawn.

And Bell adds: “It would be a big call to say that investors will fully take up the slack left by first home buyers; I don’t think that will happen.”

Bell says house prices for the September quarter have remained very strong, suggesting that first home buyers are still in the market with many trying to beat the December deadline for the withdrawal of the Commonwealth boost, as discussed.

4. Know that rents and rental yields are no longer rising

APM’s Rental Report for the September quarter found that the asking rents for houses recorded “zero national growth” for the second consecutive quarter – with asking rents for houses and units in Sydney and Perth actually falling. Further, national gross rental yields slightly dipped in the latest quarter.

While the APM’s report shows that national gross rental yields remain close to five-year highs of 4.59% for houses and 5.15% for units, Bell comments: “Yields only have one way to go – and that’s down.” A fall in yields would be due to rising property prices and interest rates, as well as tenants being unable to afford higher rents.

Nevertheless, Bell expects that rental growth will move upwards over the medium-term without returning to the double-digit growth rises of recent years.

5. Consider the risk-return value of rental yields:

Although gross yields of about 5% from investment property may not seem outstanding to many investors, Bell believes these yields are attractive on a risk-return basis. And, in fact, he says the yields had encouraged many property investors to reenter the market.

As Bell explains, property investors are willing to take a lower yield for what they believe are more stable returns.