11 May 2016

Buying in 'cheap' areas

As far as strategy goes, there is no problem buying affordable properties, especially if that is what you’re budget allows. There are, however, additional risks inherent in the markets these properties may be found and those must be assessed. This months Sound Tip explores this strategy in more detail.

We often have clients trying to find ‘cheap’ areas that may appreciate in value based on the pull from more expensive neighbouring suburbs. You may have heard how investors have bought multiple, sometimes hundreds of properties in these markets. But is this strategy safe in the current and future cycle as interest rates are anticipated to rise?

Take the case of Logan which is a suburb 23km to the south of the Brisbane CBD. Investors are being drawn here due to it being in Brisbane, a current market of interest due to its stage of growth cycle, and its apparent ‘cheap’ entry prices. Another example is Liverpool, 32km to the south east of the Sydney CBD which has been a hotspot for cheap buying during the recent Sydney market upswing.

Two of the main risks in these ‘cheap’ markets are unemployment and the relative affordability of mortgages. It seems pretty obvious if people don’t have jobs and are not earning enough you are not going to see them cope with rental increase or push prices up. These are the two fundamentals every investor needs but are often overlooked, sometimes in the vain attempt to add another number to their towering portfolio of sub-par cheapies.

In the case of Logan at the last census locals were paying a massive 42% of their income before tax towards a mortgage compared to the QLD state average of 24%. In Liverpool in NSW locals were paying 37% compared to the NSW state average of 27% (SQM research). Clearly there are not much funds left in the kitty in either of these suburbs after the monthly mortgage bill.

At the last census unemployment in Logan was 7.2% compared to the Greater Brisbane average of 5.9%. In Liverpool unemployment was at 7% compared to the Greater Sydney average of 5.7% (Profile i.d). A higher percentage of people reliant on welfare is not the ideal demographic for a successful property investment.

Whilst the strategy of buying multiple properties in these ‘cheap’ markets may have worked in some areas of Sydney over the past 5 years or so due to exponential increase in prices it does not mean that it will work for the next 5 years. Sydney’s current affordability is strained, especially in these ‘cheap’ markets and with the RBA expected to raise interest rates again around 2019-20 (last week some banks already started their own agenda of increased rates) these areas of Sydney will really feel the pinch. The combination of higher unemployment and lower household incomes that has been masked in recent years within a low interest rate environment will become evident and lead to mortgage stress, forced selling and price decline. Not a good mix for a property investor.

The good news is that strong investments in affordable suburbs do exist. In order to maximise the performance and reduce the risk of an investment, check out Sound Property’s 15 Key Investment Drivers  as part of a strategic investment plan.

Written by Andrew Cull, Sound Property Group

To discuss this information with us further please contact a Client Manager at Sound Property on 1300 655 899 or admin@soundproperty.com.au

This article is provided for general information only and does not constitute personal advice, as it does not take into consideration your personal circumstances. Please consult a licensed tax or financial advisor before making any decision to invest.