Residential property opens its doors

What’s the right move for property investors now?

Residential property investing is back. And it’s not just for the very brave or the very wealthy who don’t need a mortgage.

The real estate agents might be getting excited about those ‘‘best numbers for 17 years’’ when the month on month price rises came in this week, signalling a 2 per cent jump.

But it’s the remarkable 44 per cent lift in new home lending compared to this time last year which is the number that really changes the landscape.

We now have record low interest rates, rising prices and a free flow of credit.

Of course the chances that the RBA can keep mortgage rates at current levels for the next three years (as they have consistently indicated) are zilch. Rate rises or new lending restrictions will be with us if these conditions continue although such moves should only happen gradually.

Until very recently the property market has been dominated by home buyers, particularly grant-subsidised first-home buyers, but that is changing. Property investors are again growing as a share of the market.

Unlike the sharemarket, where crashes offer regular reminders that things can go wrong, property is still often viewed as a foolproof investment. The truth is more severe: you can easily go wrong with timing (selling too soon), selection and financing.

In fact, we’ve just been through the rarest of events in the residential market: a double dip. Prices fell across the board by 3 per cent in 2015 and then by 15 per cent between 2017 and 2019.

A recent survey by property research group CoreLogic found that in late 2020 one in five property investors were selling their properties at a loss. Ouch! That would hurt because big city rental yields offer little income. Consequently, in many cases, those properties may well have been run at loss in the years before the loss-making sale.

Indeed, those losses might have been a lot worse if the expected minus 10 per cent hit from the pandemic had come to pass; it did not. The banks are now talking of a 16 per cent lift in prices over the next two years.

What’s the picture for investors? As we emerge from the unique conditions of a national lockdown, the residential market is dominated by two themes: the rush for home and the rush for the regions.

Who knows how the rush for the regions will pan out long term. As investors we are probably on much more solid ground in larger cities.

The strongest investment area is houses, where the demand is currently outstripping supply — this is one of the key reasons that we had the record jump in monthly dwelling prices. A closer look shows houses growing three times faster than units over the last quarter (4.4 per cent versus 1.4 per cent).

Some analysts believe that buying a house just about anywhere in a metropolitan capital is a better proposition than units.

RiskWise CEO Doron Peleg says: “The opportunity cost of buying an inner city rental apartment may be high as houses with similar prices in the outer rings or in popular regional areas are projected to deliver higher returns.”

But for most investors units are the entry point; houses are too expensive. Moreover, they are even more expensive to maintain than apartments, so the running costs are higher. Indeed, industry figures are again talking about ‘‘positive cashflow property’’ though for many investors in the larger cities this remains a myth.

Property investing is all about capital growth over long periods, but how long? At least nine years, most analysts suggest. So if we look out nine years to 2030, will we look back and say 2021 was a bargain period when new apartments in the middle of the city were going for very keen prices?

Certainly if the surge in house prices continues — and just about every signal suggests that they will — then there is a strong chance that sooner or later that price buoyancy crosses over into quality apartments.

The story will be different in each city. Melbourne, which is still struggling with falling rentals, may remain the toughest market due to oversupply. In the Melbourne CBD district there are 1767 more apartments in the pipeline compared to 919 in Sydney. In proportional terms, Adelaide also has a considerable number coming down the line, though the city is in a catch-up phase. As a percentage of existing stock there are more apartments due to open in Adelaide than any other city at 13 per cent.

But the point to grasp is that even unit prices are now turning.

As Tim Toohey, head of macro and strategy at Yarra Capital, explains: ‘‘Units have lagged the recovery, but they have recovered nevertheless.”

He also makes the point that the much discussed ‘‘pop’’ in regional centres has already been rivalled by a pick-up in the cities: “The gap to the earlier surge in regional prices has narrowed,’’ he explains.

Toohey was one of the first to call the current upswing. He now says that any lift in inner city prices this time round might even come with a lift in rental returns. There is strong evidence of this happening in cities emerging from lockdown overseas.

“For an investor rental yields from property have actually been far more stable than dividend yields in the sharemarket and the issue from here is if landlords actually increase rents when the CBDs reopen — it’s an open question.” “ he suggests.

James Kirby will present House Calls next Wednesday, March 10 at 7pm at The Australian