Like all TV Economists, we can say we know exactly what real estate prices and the market will do in the future. And when the market proves us wrong, like all TV Economists we will blame ‘unforseen, outside events’. We will also hope no one remembers what we said. These confidence predictions that most real estate commentators seem most comfortable making about which way the market will go next week, next quarter and next year is one of the more entertaining features of our industry. For every prediction there are those that stringently reject it.
The thing about all market predictions is even if you get it wrong, wait long enough, the market will change and then you can claim to have been one of the first to see it coming. This market has been in constant growth for close to 20 years. Trying to call the top of the market is impossible, but it's what everyone wants to know.
In the immediate future, same old, same old. The market value will continue to climb. Not dramatically but it doesn't seem that there is anything likely to cause a turn off that will happen in the coming year. Interest rates, NSW employment especially with the State Government spending on infrastructure, overseas money coming in buying new property and so on seems pretty certain to remain constant. This could and probably will go on for the next year, maybe two. Longer term, it will change.
Taxation changes, lack of confidence and rent returns falling off because of an over supply of investment housing (more on that later) will add up to just too much for the market to carry. And this is what a real estate train crash looks like. Good news is it happens slowly.
Firstly may I say, investment safe havens aren’t always safe. People just think they do. You can tell a safe haven by the fact that people think and say that a particular investment 'really can't fall'. The more people believe that, the more it will hold value and for longer. Behaviour psychologists call this sort of thinking, Herding. People feel safe doing what others do.
J P (Joe) Kennedy is reputed to have said after the 1929 stock market crash – “I knew it was time to sell when my 'shoeshine boy' gave me a stock tip”. Growth that's not linked to fundamentals such as rates of return or grow in value primarily because people are speculating that the market will go up can't keep performing indefinitely. At some point people will start to doubt. In Australia, many think real estate is a safe haven. In many Asian countries they think the same.
When the real estate market starts to come off in value, people's first reaction is denial followed by anger. Investors refuse to accept what's happening. Then, they acknowledge it's happening, just not to their property. And then they realise it is happening and to them. And they look for someone to be at fault. When they want to sell they talk in terms of 'it owes me' as if it's the property's fault. Eventually they accept their loss and move on.
That transition takes a couple of years but it's what a market looks like when it's coming off. My bet is that this will happen sometime in the next 3 years. Or it might not. I've been wrong just as many times as I've been right. The real question is what do you think?
Well some of this is obvious given what I have already written.
There is a massive amount of new units and apartments that have come on to the market and are still to come on. We are not talking 100's, we are talking 1000's and in our immediate area and other parts of Sydney are no different. These properties have one feature that makes them special. 50% can and are being sold to overseas investors. The other 50% are being sold to local investors and local owner occupiers. That creates an awful lot on new property on the rental market for lease.
If your investment property has increased in capital value, your rates and taxes have increased, well unfortunately your rent hasn't. In fact it probably has fallen unless you have upgraded your property to create some extra value and appeal.
Many investors use to use 5% as a standard rate of return. If a property was worth $500,000 then it should attract a rental of $500 per week. Not any more and it hasn't been that way for quite a while. Returns are now around 4% and the rate is still dropping.
Right now because the property values are increasing, the rentals are holding their levels. Some property when it comes up for reletting, will get a little less, others a little more. We don't think this is going to change over the next year or so. The best advice is upgrade the property. I don't mean sell and buy, rather spend money on a new kitchen, new lights, put in a dishwasher, a better stove, look at air conditioning. All these things are become more common and expected more.
If you have investment property you might think I'm being harsh. Actually the opposite. If the government does change negative gearing rules, now might be the time to get set up. The general convention with tax changes is that we use grandfathering. That is if you are negatively geared, you will continue to receive the benefit even though new players will no longer benefit.
The tax changes could see investment in older property dry up for a while and that would see a rent rise. Every black cloud has a silver lining as they say.