‘Era of property hotspots’ has ended, says economist

Despite the criticisms on the way banks and governments try to shape the property market, Dr Wilson said that Australia remains a fortunate country for its continuously growing economy.

“Banks, governments can only respond to the models and the experiences of the past or, in this new environment, speculations. We're still a very fortunate country here and I'd rather be here than anywhere else in terms of our economy.”

“We're going to go through a period of settlement and the uncertainty in our housing markets, make no mistake. It will accelerate until we hit sort of ground zero or rock bottom, but I don't think we're going to have any cataclysmic fall in price,” the economist said.

Overall, investors can sleep soundly knowing that the good economic standing of Australia will continue to support the property market, inspiring a continuous surge of strong demand for housing across the states and territories.

As the real estate landscape undergoes significant changes, investment success will come down to making the right adjustments to strategies based on the new environment.

Yield over capital growth

The residential property market will likely emerge with a different dynamic once the Australian real estate market reaches a new level of normality.

While property investment will continue to be one of the most favoured wealth-creation tools in the country, the way investors generate income through their real estate assets may change fundamentally over time.

For one, moving forward, chasing yield would be deemed a smarter option than chasing capital growth, according to Dr Wilson.

The margin between gross yields and deposits is now the widest it’s ever been, but despite the changes in the cost of money, gross yields for property remains stable.

In other words, yields have been consistently immune to the unpredictable movements of the property market, particularly in recent times, when some of the biggest markets continue on to the softening phase, the economist said.

“The highs and lows of capital growth have always been a hook to investors. The cycle always rises on the back of speculative investors wanting to get in on higher prices but if we take that roller coaster ride out of it, residential investment offers tremendous positives in the form of yields that are highly tax-advantaged.

“If you're an investor, you must start thinking a little bit more about the yield opportunities rather than the capital growth opportunities, which aren't going to be a lot different from capital city to capital city. I think the era of the hotspot is probably behind us to some extent,” he said.

Moving forward, residential property investors might benefit from the execution of commercial investment plays, which focuses on yield returns more than capital gains.

“I think that we'll see certainty and predictability in this market cycle and our economy going forward, particularly when it comes to interest rates. The changes will be more on the way we look at residential investments,” the economist highlighted.

Medium- to long-term play

As the property market makes it way towards recovery, investors are advised to take advantage of the low level of activity in the market.

Investment activity is expected to settle at around 45 per cent. At this point, medium- to long-term yield plays would be among the best strategies to employ in order to be able to continue capitalising on the changing market, according to Dr Wilson.

While the extraordinary returns experienced by investors during the property boom is unlikely to happen again soon, they can still expect around four to five per cent return on their investment, even in a flat interest rate environment. Capital growth will still be substantial and yields can still reach about three per cent.

“I think that we'll see certainty and predictability in this market cycle and our economy going forward, particularly when it comes to interest rates. The changes will be more on the way we look at residential investments,” the economist highlighted.

Now, more than ever, education and research will be critical to the success of property investors as they navigate the new norm in the real estate market.

“The changes, really, are in the nature of that asset class and, I think, it's a positive and, in a way, a bit of a lifesaver against this grinding low-growth economy. Just open the door when opportunity knocks,” Mr Wilson concluded.

Tune in to Dr Andrew Wilson's episode on The Smart Property Investment Show to the unpack the potential of the changing Australian property market.