11 September 2015

Sound News September

1. Vacancy rates are rising as a result of COVID, will this affect my rental income?

The media have been reporting on increased vacancy rates, however if you dig deeper you will see they are referring to CBDs (e.g. 14% in Sydney) and holiday zones, which makes sense due to the reduction in transient tenants that rent in these areas due to COVID travel restrictions. Vacancy rates are not rising in all areas, in fact, in some regions they are plummeting and currently sitting well below 1%. If you buy in the right area (i.e. many established, low-density house markets), rental income is still strong and combined with the low interest rates on offer may actually offer a positive cashflow during the pandemic. 

Bracken Ridge is an example where vacancy rates have been dropping during COVID and currently sit at 0.6%. (SQM Research)

2. If masses of people lose their jobs, will this mean forced sales and a crash in prices?

Unemployment has been rising as a result of the pandemic and subsequent business slowdown and closures. The majority of this initial wave of job losses has been in the hospitality and tourism industry, a segment that potentially has low home ownership rates to begin with. For those who own their own home and lose their job, paying current interest rates at around 3% on an 80% LVR loan is significantly more affordable than selling and paying 4-5% of the property value in rent in the same area. When times are tough the family home is usually the last asset to be liquidated, especially with the current low interest rate environment, various repayment freezes on offer by lending institutions and other government assistance. 

3. Some are predicting a 40% fall in property prices, will this occur?

Whenever there is uncertainty in the economy, commentary around house prices is the first to be touted around. After all, Australian’s love affair with property is no secret, and as with any news the most spectacular will receive the most attention. So far national prices have only dropped -1.7% over the past 3 months, and in suburbs targeted by Sound Property over the past 5 years prices have actually risen an average of +1% this year (some even +22.8%!). For prices to drop 40% it means the majority of property in the suburb needs to be selling at 40% below its current value. There is no doubt that some areas will be more affected (e.g. CBD apartments and other high-density areas, or where supply of land is abundant). However, with the current low interest rate environment a fall of 40% in prices across the board is very unlikely.  

Australian home values recorded a 0.4 per cent fall in August. (CoreLogic)

4. If my tenant loses their job, will my income stream be affected?

The rules around evicting a tenant due to job loss and failure to pay rent varies state to state. Nationally, capital city rents held up better than housing values, according to recent figures. Capital city dwelling rents are down 1.4% compared with the 2.3% drop in dwelling values, for the period since March. However, despite the apparent resilience, a more substantial performance gap is opening up between houses and units across the rental sector. Since the end of March, capital city house rents are down by a modest 0.3%, while unit rents have fallen a more substantial 3.5% with rents underperforming relative to house rents across every capital city.

5. If I lose my job how will I be able to afford my investment property?

We are fortunately in a low interest rate environment where most property with a rental yield above 4.5% is positive cashflow and doesn’t rely on personal income to support it. The Sound Property Cashflow Calculator is a user-friendly tool designed to give a quick estimate of the net operating in the first year of ownership. It combines the rental revenue and operating expenses of the property, with the percentage of income tax paid, to measure the net change in the investor’s weekly and annual income. It is always important to invest in high yielding suburbs with low vacancy rates (below 3%) to maximise rental income and cashflow.

6. We are currently in a recession, is this still a good time to buy?

Warren Buffett, arguably the world’s best investor has a saying, ‘Show fear when others show greed, and show greed when others show fear’. This is the foundation of countercyclical investing, where the premise is over the long-term the world will prosper, however there will be periods of expansion and periods of contraction. With this in mind, it is often in times such as this that investors who have the capacity and courage to invest will secure better opportunities than in a market that is booming. Many leading economists are now predicting this current recession will be over next quarter, with a return to positive GDP growth. Once confidence returns to the market the pent-up demand will trigger competition and price appreciation. A savvy investor will take a long-term approach, buy well located property now and stay ahead of the masses.

Many of the top economist predict a return to positive growth this year. (AFR, NAB)

7. What types of properties will perform the best in the pandemic?

In order to maximise your property returns during the pandemic (and at any time really) here are a couple of important points:

1. Invest in low-density areas only – avoid high-rise apartments or large house and land subdivisions where supply can exceed demand

2. Diversify – spread your risk, don’t have all your properties in the same street or suburb

3. Buy close to the median value for the suburb – this means the majority of people can afford it if you need to sell

4. Don’t just buy in ‘cheap’ areas – these areas can have higher unemployment and lower incomes

5. Invest in proven growth suburbs – don’t speculate on emerging zones or sub-regional markets

DISCLAIMER: All content in this article is general in nature and does not take into consideration individual personal circumstances. It contains projections and forward looking statements which involve unknown risks and uncertainties. The actual results, performance or achievements may be materially different from these projections and forward looking statements. All interested parties must rely on their own research before making any investment decision and should seek advice from a qualified financial planner or similar professional. Sound Property takes no responsibility for any errors, omissions, viruses, loss and/or damage suffered in connection with the use of the information contained in this article. Members and representatives of Sound Property Group are not licensed to give advice in relation to financial products, including self-managed superannuation funds. Sound Property is not licensed to provide investment advice. You should obtain your own financial, taxation and legal advice before making any decision.