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Reflections and predictions: How to make sure you don't go broke when rates rise

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Well, another year is closing to an end and its been one of the more diverse and varied years within the Australian property market in recent memory.

The APRA legislation, which was put in place over 18 months ago and then ramped up in April this year, is now starting to have the desired flow through affect it intended (in my opinion, this is a good sign for the sustainability of the market in the short to medium term).

So, where do we expect the market to head in 2018?

Melbourne

Melbourne has had a sound growth cycle which is now into its fourth year of continued growth. While 2017 has seen around 10 per cent capital growth, the yield across the board is now sitting at a dismal 2.8 per cent gross. This is going to present headwinds for investors in this market over the coming three years.

With auction clearance rates now showing signs of slowing down (into the 60 per cent), we expect 2018 to be a more subdued capital growth year. Population growth is strong and the economy is progressing nicely. We are expecting a growth range between 4 per cent and 8 per cent, depending on property type. The next three to five years are going to be very suburb-specific for growth.

Pure Property Investment (PPI) has limited its attention to the Melbourne market as we see it is now fully priced and cash flow is very limited.

Sydney

It’s been a game of two halves in the Sydney market – with the first six months continuing its strong growth, Sydney has since entered its flattening/plateauing position (which we expect to be sustained for the coming two to three years).

The APRA restrictions have now started to have their intended effects within the market and we are now seeing a distinct drawback from investor activity. With soft yields and 80 to 90 per cent capital growth over the past five years, Sydney now has a well-earned break on the sidelines. The talk of a bubble bursting or a crash however are most certainly not what the data dictates.

Sydney still has the lowest unemployment in the country along with a continued housing shortage deficit projected into the next 15 years. With a population predicted to be close to 8 million by 2045, and Sydney now being well and truly cemented as a global city, the high prices are here to stay. Sorry to be the bearer of bad news, but for those not in the market, the rentvesting strategy may well be a much more prominent strategy.

Brisbane

Our data suggests that Brisbane will continue to show a nice period of sustained growth into 2018 to 2020.

Its limiting factor in the past has been state government commitment to large-scale infrastructure projects, however, with the re-election of the Annastacia Palaszczuk Labor government and with some sound economic news coming from the broader Queensland market, we expect to see a consistent growth market across the free-standing housing South-East Queensland regions.

Hobart

The sometimes-forgotten Hobart market has proven to be a fantastic investment area for our clients over the past 24 months with 25 per cent capital growth and over 6 per cent gross rental yield.

The Hobart jobs market has been firing of late with an 8.4 per cent increase in jobs over the last 12 months. Hobart clearly is leading the country in jobs creation data with Melbourne coming in a distant second, producing a 3.5 per cent increase.

There can often be a lag of 12 to 18 months before what’s occurring on the jobs front to direct property value increases, and we expect 2018 to provide a strong and consistent value growth along with low vacancy rates and strong rental yields.

Adelaide

We are still bearish on the long-term capital growth within the broader Adelaide market, with some of the large-scale manufacturing plants closing over the short term.

The announcement of the $50 billion submarine project will provide a great boost with an additional 3,000 or so high-paying jobs flowing from this. However, this project has a 15-year horizon and as such we don’t see the benefits coming in until around 2019 to 2022. We expect 2018 to be quite a typical year for Adelaide, that is, 1 per cent to 4 per cent growth.

Perth

We appear to be close to the bottom of the cycle in Perth, however the economy is not giving us much confidence that things will be turning around within the next 24 months from a property perspective.

There is still a high vacancy rate across the board and days on market is still sitting at close to 10-year high. We expect to see a flat market for 2018 with some soft rental return to boot.

Darwin

Similar to Perth, we see some distinct challenges in jobs growth and economic diversification. If the new gas project gets off the ground, we may see some prolonged price stability. However, PPI is bearish on Darwin into 2018, and with over 7 per cent drop seen in prices this year, there are most certainly some strong markets to focus your attention towards.

Canberra

Canberra continues to deliver investors a solid and stable return, with 2017 providing over 6 per cent capital growth and the jobs market looking solid along with the shortage in supply.

We expect 2018 to provide investors a sound 4 per cent to 6 per cent return on the capital growth front, and rental yield looks to be consistent between the 4 per cent to 5 per cent mark.

All in all, 2017 was an above-average year across the Australian housing market. Our clients have enjoyed some excellent results and we are very confident in the long-term story for much of the Australian property markets.

The factors, which investors need to be more cognisant of into the coming three years, is cash flow. I’m not saying go out and buy regional properties with over 7 per cent yield, but to simply ensure that you are fully aware of your personal income versus expedites BEFORE you buy your next investment.

The banks are calculating serviceability on a much high level and this will prove to be a headwind for investors if they are not clear on their personal finances. Understanding cash flow in your investment properties factoring in a higher interest rate will ensure that you have a strong buffer in place, as, and when the RBA lifts rates in the coming 36 months.

Now is the time to reflect on the year that was and set your investment objectives to ensure that you make 2018 your best year yet.

Merry Christmas and happy hunting from the team at PPI!

About the Blogger

Paul Glossop

Paul Glossop is the founder and director of Pure Property Investment. Paul has built a substantial property portfolio, focusing on the fundamentals of property investing. He founded Pure Property Investment to enable investors to experience a truly holistic approach to property investment. From the initial consultation to the acquisition of the property, Pure Property Investment is a true partner for its clients through the entire journey. We specialise in sourcing properties Australia wide that are below market value, positively geared and primed for capital growth.

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