Australian property a safer bet than the rocky share market
The experts are predicting Australian investors will shift back to property as the cornerstone of their investment portfolios, in an attempt to protect themselves against the fluctuating stock market.
The Australian economy appeared to be largely insulated from the lending crisis in the US, with a strong resources sector and supply routes to China keeping the economy buoyant. But this confidence was rocked yesterday when Chinese Premier Wen Jiabao forecast new “difficulties and contractions in the domestic economy”. The Australian market responded with a 1.5 per cent drop.
While the medium-term forecast is for a soft landing for the Australian economy, market-watchers are predicting an end to the 20 per cent return on investment seen in recent years, which makes property investment once again a very attractive option.
Returns for risk
A shortage of rental properties has been driven by slow land release by Government, high interest rates deterring first-time homebuyers, and an exodus of investors from the property market in recent years in favour of strongly performing shares. Now, for best return on investment, it is an ideal time for astute investors to get back in the property market game.
According to the Real Estate Institute of Australia’s Market Facts Report, rental vacancy rates have been under 2 per cent in each capital city for almost three years. In Sydney, rental vacancy rates are sitting around 1 per cent.
This demand has driven a rise in rental returns across the market, with the latest Consumer Price Index figures released last week showing rents increased 6.4 per cent in the past year. These are the fastest growth figures since the mid-1990s, providing an opportunity for healthy returns when you consider the capital gains to be had on top of the rental income.
The Interest Rate Story
While the US Federal Reserve is slashing interest rates in an attempt to rev up the economy, Australia is facing higher-than-ideal inflation, which is putting upward pressure on interest rates.
In addition, some major banks have responded to the global credit crunch by increasing interest rates beyond the cash rate suggested by the Reserve Bank of Australia.
Although debt is getting more expensive, investors need to weigh the benefits of property investment and the regular income it produces, over the exposures involved in the increasingly volatile stock market.
Location! Location! Location!
As rising interest rates drive higher mortgage defaults amongst homeowners who are too highly geared, there are some bargains to be had.
South-western Sydney has seen a 2 per cent drop in property values in the last year. Data released last week by Australian Property Monitors showed Sydney residential values grew overall by just five per cent in the last year.
House prices in Canberra jumped 15 per cent in the past year, with APM expecting the heat will come out of the market mid-2009.
Meanwhile, Melbourne and Perth continue to be on the up-and-up. Melbourne saw a 25 per cent growth in the median property price in the last year, with no end in sight, which means there’s no time like the present to get a foothold in the market.
