Investors are finding themselves unsure about buying property because of uncertainty about interest rates and capital growth, according to a new report.
As the most basic formula to decide on the validity of an investment is ‘cost of carry vs capital return’, JPMorgan/Fujitsu Australian mortgage industry report found that today’s market is not conducive to confidence in property.
The report found that when looking at the current rate of residential property growth the net funding gap has expanded to 4 per cent, outstripping current national house price growth of -2 per cent (annualized at December 2011), leaving a 6 per cent shortfall.
“Capital gains … were sufficient to offset the funding gap for a sustained period between 1996 and 2005 the situation has become a little more complicated in recent years with strong volatility in interest rates and house price growth materially impacting net returns for investors,” found the report.
The report forecasted little increase in investment activity in the short to medium term, and while owner-occupiers keep a ‘steady base’ it is investors that provide the ‘boom’.
The top 40 per cent of income earners, some of the most frequent property buyers with 70 per cent of household debt in Australia, experienced an increase in wealth between 2002 and 2006, however this has not been seen since.
As a result of the modest capital gains on these investments, this group of investors’ propensity and confidence to borrow has been impacted, the report said.
Speaking to Smart Property Investment, managing director of 1st Street Loans, Jeremy Fisher, said that the flat market should be a consideration that investors take into account when buying, but shouldn't be a turn off when looking at property.
“To build equity in a property requires either the amount owing on the loan to be reduced and/or the value of the property to increase. The current market is fairly flat and we haven’t seen rapid growth for quite a few years,” Mr Fisher explained.
While in the past, property values have increased quickly, to the point where a significant amount of equity could be made within a year, he says that it can now take quite a few years to accrue the necessary 5 to 10 per cent needed for the next buy.
“However, generally speaking, time in the market is better than timing the market,” he said, explaining that he expects growth to happen again soon.
For investors waiting for signs of capital growth, it may be worth watching other avenues for signals of when the next jumps are to be seen, the report said.
“In the absence of meaningful house price appreciation, housing growth will increasingly reflect recovering construction activity.”