Which property type will serve you best in 2016 and beyond

Australia’s property market found itself caught in a perfect storm last year. With RBA interest latest sitting at levels not seen since the 1950’s, an Australian dollar sitting below 0.80 to the US dollar, and a low a level of inflation, both investors and owner-occupiers alike saw it as the perfect opportunity to claim their piece of Australia’s property market pie. Across the country, we saw new dwelling commencements increase for the third year running at 211,860 in conjunction to the boom in Melbourne and Sydney’s house prices.

But after experiencing this seemingly perfect storm that helped us sail prosperously through 2015, as we propel further into the next leg of the race many are left wondering; will 2016 provide the same conditions to herald a consecutive year of property market success?

Much like the weather, our economy is far from static. The forces that once may have assisted us can very quickly take a turn. Some will find this will ultimately put them at an advantage; for others, it may make the voyage a little less linear.

While RBA interest rates currently sit on two per cent and are expected to hold, and the Australian dollar floats around 0.70 to the greenback, it is the banks that have changed their game.

The rhetoric of global economic uncertainty currently prevailing among business experts means that banks have had to respond. More stringent stress testing standards to assess their capability to respond to a financial downturn mean this is also being applied to investors in 2016.

As the cost of capital has increased for banks due to greater risk, investors will now find it harder to access loans. While there has always been a degree of stress testing, the margins are now higher. The Big Four Australian banks have a large amount of security tied to residential debt, so while you may put in an application at four per cent it is likely to be tested at six per cent.

This creates an environment where being able to prove cash flow is prime, highlighting two major players: those who have assets but are cash flow poor and may struggle to liquidate, and those with strong balance sheets with a large amount of cash on hand who can prove mitigation of future risk. For those who are able, commercial property will likely be the investment pick, with better yields and stronger prospects for long-term tenants providing stronger foundations for capital growth and ultimately a more secure investment.

It is important for both large scale and individual investors alike that property is not a short-term venture, and disruptions in the market should not instantly prompt investors to sell. Those who panic will ultimately lose because they are selling in a softening market if having purchased recently. Given the nature of our globally-linked financial markets and the uncertainty surrounding them, it is likely interest rates will remain low for at least several years to come. If you are sensible with the amount you are borrowing, and gear yourself comfortably, you are likely to be in a winning position in the long run.

Our perfect storm may well be on the turn, but it’s still presenting a whirlwind of opportunity for property investment. This will be easier for some more than others, but with a prudent and logical financial approach, there’s still plenty of opportunity to capitalise.