Updated: Oct 31, 2020
Australian residential property has a strong record of delivering capital growth, and can be an ideal vehicle to build long-term wealth. However, any form of investing carries a level of risk. It is important to understand both the opportunities and risks related to property investment before any action is taken.
Why invest in Australian Residential property? What are the opportunities?
1. Current & future demand
When you consider that housing provides shelter (a basic human need), it is easy to appreciate the demand for residential property in Australia. The demand exists for both owner occupiers and renters, with rental properties accounting for around 30% of the nations 10million dwellings. As our population grows, our demand for residential housing increases. Australia is experiencing large levels of migration- driven by the fact Australia is generally viewed as a safe & aspirational place to live, with a stable political landscape and strong employment opportunities. This migration, along with natural increases in birth rates, is resulting in the Australian population growing by around 400,000 people each year. Hence, the demand for Australian housing is ever increasing.
2. Track record of capital growth
Since the inception of records, there is well documented evidence of Australian house prices continuing to rise over time. This growth was especially prevalent in the back half of the 20th century and into the start of this century. A recent Swiss research paper identified that Australian house price growth in the 55 years since 1961, was the most sustained property market upswing in the world , rising at 8.1% per annum. In the most recent 25 year period to 2018, the median Australian House Price grew 412% or $459,900. There is a strong track record of Australian real estate delivering capital growth.
3. The ability to leverage
Property is well accepted as security for borrowing from Australian lenders. Property also offers greater leverage (loan to valuation ratios) than other investment vehicles (such as Shares). You can therefore use this leverage to build and hold a meaningful asset base.
Rental income helps to minimise the holding cost of the asset, allowing investors to hold property for the longer-term, maximising capital growth outcome
5. Tax Benefits
Property investors obtain tax benefits via deductions for negative gearing, depreciation and other costs such as interest, rates, insurance etc.
What are the negative aspects / risks associated with investing into Australian Residential Property?
1. Entry and Exit Costs
Property is an illiquid asset with significant entry and exit costs, it cannot be quickly or easily traded (like shares). Property should therefore be viewed as a long -term investment.
2. Holding Costs
There are ongoing holding and maintenance costs associated with an investment property. Whilst standard holding costs (rates, insurance, mortgage payments) can be consistent in both timing and cost, some property repairs/ maintenance issues can be unplanned and expensive. A cash buffer should be maintained to cover such expenses.
3. Tenant Risks
Whilst tenants provide valuable income, issues can arise. Tenants may fall behind in rent, damage the property, or choose to vacate, leaving the property empty and without income. A high- performance property management agency can help to mitigate tenant risk, helping to maximise current and future incomes. Landlord insurance is also recommended.
4. Gearing Risks
Many investment properties carry a level of debt. Variable interest rates may rise or fall. When interest rates rise, the investor holding costs increase. Whilst APRA delivers guidance to lenders to apply stress tests to new borrowers to ensure they can accommodate higher interest rates (with a 2.5 % sensitivity margin added to the 'actual' interest rate), Investors need to be aware that variable interest rates can rise. Investors may choose to adopt a fixed interest rate to deliver cashflow certainty for a period of time. Investors should also carry a cash buffer to meet any unexpected increased holding costs.
5. Value & Volatility Risk
Property does not always go up in value. Whilst the long-term prognosis of well-located high demand properties (eg a freestanding family home in the inner to middle rings of major capital cities such as Sydney, Melbourne or Brisbane) is generally good, the line of growth is not linear. Property growth can move in cycles (driven by macro and micro economic conditions), and periods of rapid price expansion can often be followed by a period of value decline. Conversely, property with poor demand may not grow at all, and as such, choosing the right asset is a critical part of property investing.
In summary, investing into Australian residential property can be a rewarding experience helping to build long term wealth. It is not unrealistic to expect quality, well- located Australian homes to carry higher values in 25 years, compared to today. That said, there are no guarantees, and property investment (like all forms of investment) carries risk. It is important that current and future property investors are aware of these risks and have meaningful mitigation plans in place. Investors are encouraged to self- educate, or enlist the assistance of reputable Independent/ Licenced professionals (Such as Qualified Property Investment Advisors QPIA's, Licenced & Independent Buyers Agents, Mortgage Brokers, Accountant & Lawyers).
Grant Foley is a Property Investor, Qualified Property Investment Advisor (QPIA), Licenced Real Estate Agent & Buyers Agent. Enquiries: firstname.lastname@example.org