Two speed property market ripe for investors

The real estate landscape has changed yet again and like most times it was overnight, at least it seems that way. In reality the property market does not change overnight, it starts at a point and changes, over time it will hit a bottom and then progressively get better before peaking again. By the time most people know it has changed it is too late and is already affecting those that least expected it. Of course we view all this with the benefit of hindsight.

The present market is traveling at different speeds. The lower end, or first home buyer (FHB) market as it is commonly called, has seen a spike because of the extra seven thousand dollars to the FHB grant (for both new and existing homes). On top of this low interest rates and demand which is higher than supply has seen activity steadily climb since November 2008.

In contrast, the impact is being felt mostly in the top end of the market with few buyers for properties valued at $1m and more. Agents report that sales are harder to put together as buyers are few and far between and when there is a genuine buyer they are negotiating hard.

It appears that job losses and redundancies as a result of the clean out in middle management in some industries have taken its toll. This has caused property owners in that market segment to explore downsizing and clearing debt, or sell and rent. Some have gone through the selling process only to find that the market does not deem their house to be worth as much as they do and they are then hanging on. The same can be said for the mid tier market, however it appears to be in better condition.

Evidence would suggest that the top end of the market will remain unchanged and could even worsen towards the end of 2009. Reports coming out of the UK suggest that Australia is yet to see the worst of the global financial crisis.

As I mentioned earlier, the higher end of the market is struggling, but the lower end where FHB are is firing on all cylinders. In Brisbane it is not uncommon to be one of two or three buyers offering to buy the same property at the same time. Those who are losing out in that competitive situation are becoming increasingly frustrated and leaving themselves vulnerable to a potential mistake. They may either buy a property they would not have normally bought and does not suit their needs, or they may pay too much for a property.

With the lower end of the market performing well and owners cashing out to trade up and the higher end owners selling out to clear debt and down grade, where has that left the mid tier market? Well I think that it has stabilised at present with buyers from above and below keeping demand and supply in check and holding values steady.

Rents have significantly increased over the past few years and interest rates have dramatically dropped over the past six months. This has led to the best buying conditions for many years for an investor where we have annual rental almost paying the annual mortgage. For example, if you bought a property for:

Purchase price: $500,000
Deposit:  20% ($100,000)
Loan amount:  $400,000
Interest rate:  5% (interest only)
Yearly mortgage: $20,000
Annual rental:  $21,840

Positive cash return: $1,840 (this would be used to pay rates, management and maintenance).
The example obviously outlines that now is a good time to buy for investors. If you review any property cycle graph it will illustrate that when rents have risen and prices have dropped it is a good time to buy and that is usually followed by a period of price growth.

(This article was written in 2009)

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