On the up: What will higher interest rates mean for real estate investors in New Zealand and further afield?
The Land of the Long White Cloud is shaping up to raise rates and the country may well be a bellwether for the Australia...
You may have seen the latest headlines and been convinced by the crowds of commentators exclaiming the Sydney property market has bottomed out, and the start of the next value upswing (some have said, ‘the new boom’) is underway.
And I get it. The city is our country’s largest real estate market and its performance plays a significant role in the nation’s real estate story, but all these glowing reports have got me asking one very important question:
Is now the time to buy in Sydney?
It would seem the stars are aligning once more for the NSW capital with growing population, limited land supply, global city status and decent employment options. Add to that falling interest rates, a relaxation in lending requirements and two years of price retraction.
Surely all this makes Sydney a good bet?
Well, there are plenty of buyers who think so, with metrics revealing a rise in auction clearance rates and an overall strengthening in property prices during the most recent quarter.
But here’s where I vary from the rest. Because to me, regardless of these measures and the long-term upside of the city’s market, I firmly believe investing in Sydney is not for everybody.
For starters, Sydney’s price point is a lot higher than in other states such as Brisbane and Adelaide, so if you’re tight on available capital, Sydney is not for you. Also – being a long-term investor relies on your ability to hold onto the asset over many years... and that means having adequate cash flow to service your debt and cover all other costs while retaining the property.
You might have acquired the most impressive capital gains holding in the whole nation, but if you can’t cover the outlays needed to keep it in your possession, then you are on a fast path to becoming just another loan-default statistic.
Therefore, if you need decent yields in order to keep your head above financial water, then Sydney’s tight rental returns are definitely beyond your needs. In fact, I believe the equilibrium between value and yields in Sydney is a bit askew at present, and we can look forward to at least another 18 to 24 months of tight yields before things return to balance.
The REAL question to ask
When it comes to buying, don’t ask, “Should I be purchasing in Sydney?” No – the smart investors are asking another important question first and foremost, and that is: “Where will my dollars be most productive for me?”
And the answer depends entirely on your investor profile, and the stage of your property journey. It all comes down to your individual affordability metrics.
What capital am I starting off with? What cash flow do I have to support the investment? How does the investment fit into my current and future plans?
Perhaps, in the most rudimentary sense, I want you to ask yourself, ‘What level of investment and risk allows me to sleep at night stress-free?’
A city-by-city discussion
To help illustrate the options, here are some broad-brush thoughts on how a few of Australia’s major capitals sit in the cross-section.
Sydney and Melbourne
As I said, high buy-in cost, low-yields – particularly in the inner suburbs. We might actually be in a time where an investor can expand their consideration to the outer suburbs and commuter centres like the south and the central coasts.
These have liveability, affordability and access to the working hub.
The secret is identifying where the ripple effect will run over time, selecting your locations wisely and then identifying specific opportunities.
Both Sydney and Melbourne have excellent prospects, but only for well-reasoned buyers who do comprehensive due diligence and have the wherewithal to retain a property over many years.
Brisbane has affordability and reasonable yields. It’s metrics also look good with increased infrastructure spend, strengthening employment prospects and rising net interstate migration.
That said, the ‘Brisbane boom’ has been a long time coming. This is not really the city for super quick growth, but continues to be an excellent long-term bet if you buy the right asset in the right location.
If you want/need steady prospects, decent yields in comparison to other centres and unexciting, long-term gains, then Adelaide might suit your circumstances.
Adelaide is often touted as a classic ‘rising tide floats all boats’ market, but I prefer to think of it as the little red engine of Australia. It won’t break any speed records, but just keeps chugging along.
At present, Perth is a market that only suits really sophisticated buyers in my opinion. It’s being talked up by many commentators, but the fact remains you need to be very smart when sourcing a purchase. They’re certainly available, but are definitely rare.
The short answer is this – every state in the nation has opportunities in some way, shape or form. It’s just about drilling down and locating those excellent property assets that best fit your investor needs, resources and risk profile.
By Steve Waters, Right Property Group.