It is important under current market conditions that property investors stay calm and do not get caught up in the hype. Here's what you need to know before you buy.
Blogger: Victor Kumar, Right Property Group
In 2015, activity in the property markets in Sydney and Melbourne in particular has got off to a spectacular start – encouraged to a great extent by the early cut in interest rates and continued affordability of borrowing. In Melbourne, CoreLogic RPData reports 1,149 auctions were scheduled for the second weekend in March, 64 more than for the same time last year. Clearance rates have been consistently above 70 per cent. In Sydney, we are hearing reports of even hotter markets as buyers face strong competition in the frenzy to jump into an escalating market that has pushed the median house price to $900,000!
It is important, under current market conditions, that property investors stay calm and do not get caught up in the hype. The main way to do this is to research markets and conduct your due diligence on properties thoroughly. Three areas of research that can help you make reasoned decisions are:
It is important to invest in an area that has potential to affect capital growth in your property. Such areas have growing populations, strong employment opportunities and a council that is investing in infrastructure for the long term. Even if an area is buzzing with market frenzy, if your research shows that it doesn’t meet these criteria, then it is probably not a good place to invest. Hype cannot overcome the consequences of industry closing down, families moving away and a council that is short-sighted and reluctant to invest in local infrastructure.
RIPPLE EFFECT RESEARCH
Of course, sometimes a buoyant market can lead you to research an adjoining suburb or area that is yet to get caught up in the hype. This is known as the ripple effect. The next suburb to a ‘hotspot’ is still close to all the amenities and attractions, just a few kilometres further away. It may be that you need to cast your net wider when your research finds a good investment area but buyer frenzy is making the properties overpriced. Don’t give up on this area completely, just move a little further outside of it. A good way to find a quieter market is through the realestate.com.au ‘buyers on the market’ data. In each suburb it reports the numbers of buyers looking at each property on the market. If these numbers are high, move on (but not necessarily too much further on!).
VACANCY RATE RESEARCH
Remember that as an investor, capital growth is important but so is cash flow. A vital part of your research should be vacancy rates and rental returns. When a market is too hot, and competition is pushing prices higher, it’s very sobering to crunch the numbers. What is the rental return as a percentage of your purchase price? Is there an oversupply of rental property in the area and therefore a strong possibility that you will experience extended periods without a tenant, and be forced to reduce rents to compete for the dwindling tenant pool? This area of your research must not be overlooked.
Don’t allow the hype in a heated property market to lead you to take shortcuts. When interest rates go up (as they eventually will) you don’t want to be holding property that you overpaid for and can no longer afford to keep.