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The Herald Sun- Monday 14th May 2007
Housing game tougher for first timers
The resurgent demand in housing values in Melbourne has few, if any, precedents. The residential market has become very tight for stock with keen competition.
A convergence of factors is taking prices in several suburbs into territory that for investors is hard to justify on traditional fundamentals
Current conditions have, in part, been exacerbated by the extreme shortage of rental accommodation. Landlords may be having little trouble squeaking a further 10 per cent out of tenants.
First home buyers are finding purchase challenging after the surge in prices in recent weeks. They are competing with retirees scaling down who have unprecedented levels of assets and a boost to income looming from the start of July. They are also competing with growing numbers with a lazy $1 million searching for assets - on top of their once-off special contributions into super.
The first home buyer runs the risk of future interest rate fluctuations on what usually is a highly geared asset, although there is anecdotal evidence banks are becoming a little stricter in lending ratios after a lift in bad debt provisions last half.
By contrast, buyers recently have come to auction and purchased effectively purchased sight unseen at levels well above market reflecting that lazy $1 million syndrome and the huge incomes and bonuses in the financial services sector.
Indeed, many moves to record prices are probably driven by those who have never seen a market fall when conditions turn sour.
In the current buying frenzy, agents are in a dilemma in advising on values and taking plenty of criticism for guidance prices that prove well below sale value.
Melbourne´s values reflect the move to smaller residences and to close to the city living. Investors who look further out can still find value in established suburbs with yields of a gross five per cent available for investors.
The residential market in some areas is currently nearly beyond the capacity of some smaller investors with yields very low and the on and off threat of interest rate rises which ultimately would affect values.
Serious investors in property do due diligence at high levels which is not always an area on which small investors spend much time However, in current circumstances the investor, as distinct from the punter, should be making it a priority.
From time to time Portfolio Management Services conducts personalised property investment Market Tours in selected areas for their clients. These tours start and finish at our offices in Flinders Lane in Melbourne and aim to highlight an existing opportunity in the market and familiarise Portfolio Management Services property investment clients with the area, the existing yields and the potential for capital growth. If you would like to participate in one of these personalised tours of a Melbourne or Sydney residential suburb contact us for dates and expression of interest. Modest refreshments and a tour of the suburb is provided, however investors are responsible for any interstate airfares. For more information contact us.
Property as an Asset Class
Property is a distinct asset class with particular advantages.
A balanced investment portfolio will have a portion of its assets invested in property. Most experts believe 10% to 15% of assets should be invested in property. The level will vary according to personal preferences and individual circumstances like experience and risk profile.
Points to Consider with Property Investments
The advantages of investing in property, as distinct from equities or cash, are apparent in considering the following points:
- Property is a relatively stable asset class.
- Property provides an ideal diversification away from equities in that these asset classes tend to perform best at different stages of the economic cycle.
- Property allows significant potential for capital appreciation.
- Ongoing cash flow is generally available from rental income.
- Property offers a medium to long-term investment horizon.
- Borrowing for property investment is attractively priced as well as being a well established and straightforward process.
- Appropriate negative gearing of property investments allows investors to manage their tax position. However because tax requirements vary widely, Portfolio Management Services recommends that investors discuss this point in detail with their own financial advisers.
- Liquidity is often raised as a challenge for property investors. This point is, however, countered by investing in the relatively liquid markets of Melbourne and Sydney.
Other Options Worth Noting
While not unique to property investment, the following points are also relevant.
- A property investment is tangible. Direct property attracts many investors because of its highly visible 'bricks and mortar' nature.
- Property investors have a head start in understanding their investment because of personal experience. Investors live in residential property and work in non-residential property.
- Property investment can be time consuming. Portfolio Management Services has the time and resources to overcome this challenge on behalf of their clients.
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Investors stay tuned 23.07.2007
