The Australian property has been very hot the lately, mainly thanks to low interest rates. Sydney has been the star performer, prices have increased 21 percent over the last 18 months. But the last few weeks, the prices have started to stall and even fall in some places. Is it just a temporary pause or has the market peaked?
Australians have been very fond of property investments and prices are high, in many places very high. That property prices are expensive in the cities is not much of the surprise. Outside the cities, house prices used to be low but that started to change just after the turn of the century. Prices in rural Australia started to outpace prices in the cities. In some places this was due to the mining boom but for whatever reason, prices in virtually all of Australia started to increase significantly. Ironically, there was just one exception, Sydney. Property prices in Sydney have increased pretty much in line with inflation since 2003, except for the boom the last 18 months. The reason for this is that real estate in Sydney had become too expensive in 2003, the market cooled because fewer people could afford to buy a property in Sydney. Even with the 21 percent increase during the last 18 months, the average house price in Sydney has only increased with a little bit over 3% per year over the last ten years. In other words, not a very exciting return and rental yields are low, and getting even worse since prices are increasing much faster than rents.
Despite the recent increase in Sydney, the poor ROI the last ten years and the poor rental yields, Sydney still looks like one of the safest places for property investors. Prices are high but so is demand, developers have plenty of projects coming up but it looks much worse in Melbourne and Brisbane, also Perth is looking worse than Sydney.
Melbourne has been a big surprise, property prices have gone up ten percent over the last 12 months and have now reached the previous peak set back in 2010. Why prices in Melbourne have gone up is difficult to explain. One reason could be the enormous amount of off-the-plan units sold to people overseas who are fooled paying well above market prices, creating an artificial price increase on paper. Another reason can be that the current rules for self-managed super funds make it possible to lower your tax by lending your SMSF money which might explain the increased buying by SMSFs. Quite clearly, it is not first time buyers that are pushing up the prices. On the contrary, they are being squeezed out of the market. There are also rumours that financial advisers are being offered generous commissions by some developers to persuade non-savvy investors to buy expensive off-the-plan units.
On the whole, central Melbourne has been a no-go area for prudent investors the last few years and things don’t seem to get any better in the near future. Prices and rents have been surprisingly resistant given the huge amount of units that has been flooding the market in central Melbourne. There are a few explanations that help to understand this paradox, a lot of the units have been sold overseas at inflated prices, many of the developers have deep pockets and have refused to drop prices and the population has been growing strongly the last couple of years. But unfortunately, developers have stepped up the pace and are now building almost everywhere in Melbourne. Docklands and Southbank are well known traps but extreme care is recommended for the whole of Melbourne. Unless you really know what you are doing, stay out of Melbourne. There are some signs that reality is starting to catch up, prices have stalled and in some cases dropped slightly lately. Rents have also started to drop slightly in some areas. It is too early to say if this is the beginning of a painful adjustment to reality or if it is just a temporary slowdown.
Brisbane is being recommended by many property experts and gurus, price growth has not been as strong as in Sydney and Melbourne the last 18 months and rental yields are higher than in any other major city. For houses, gross rental yields are a little bit below 5% while for units the yield is a little bit above 5%. But there are certainly big risks for beginners in Brisbane. Developers are building a lot in central Brisbane and much more is in the pipeline. Central Brisbane has been a horrible place for property investors and given all the upcoming developments, it looks like things are getting even worse. Given that Brisbane is not growing as quickly as Melbourne, central Brisbane may actually be even worse than central Melbourne for property investors. It is also worth pointing out that the Gold Coast is not a good place for property investors. Developers built far too much some years ago, things have improved since then but once again developers have started to build and oversupply is quite clearly becoming a problem. The Sunshine Coast is slightly better, after years of oversupply things are looking a little bit better, but caution is recommended.
Perth has delivered fantastic gains for property investors the last 12 years but lately the market has cooled down. Actually, it has come to a standstill. Also in central Perth, developers are building far too much, at the same time as the local economy is slowing down. In essence, investors should be extremely careful with property investments in central Perth. Prices are high but rental demand is weak, the result is that rental yields are going down, towards Sydney levels which are the second lowest in Australia, only Melbourne is worse. On the whole, unless you already know the Perth market inside out, stay away.
Adelaide has been a little bit of backwater for many years. The property market is likely to stay cool but at least the developers are not building as much as in the other major capital cities. Rental yields are not great but look far more stable as in the other major cities. The main drawback with Adelaide is that the city is not growing much. Canberra looks risky at the moment. The government has announced severe budget cuts, which generally translates to job losses in Canberra. Looking at the last ten years, Canberra has not been a great place for property investors and it does not look like things are going to change for the better in the near future.
Rural Australia is best avoided, unless you know what you are doing. As mentioned earlier, for whatever reason, property prices outside the big cities have gone up a lot the last ten years. But rental demand is difficult to predict and prices could drop if the economy slows down.
Given the relatively gloomy outlook, what should a property investor do? Firstly, remember that sooner or later interest rates will go up. And this is likely to happen long before rents start to go up. Make sure that you are not too heavily geared, it may be prudent to pay down on your debt before buying new investment properties. Where should you buy? Quite clearly it is best to avoid the CBDs of Melbourne, Brisbane and Perth. Most investors should also be careful with Sydney CBD. Melbourne is best avoided all together, new projects are being started almost everywhere in Melbourne. Some parts of Brisbane could be of interest. On the whole, Sydney is the safest choice, just make your homework before you invest. Prices are high, rental yields are low but at least demand is stable.