Is it wise to capitalise on low interest rates to invest in residential property?

The continual decline of interest rates still dominates Australian residential property market discussions. Record low rates have encouraged investors and homeowners to borrow and buy while debt and serviceability is cheap. In addition, increased levels of migration from the mining states to eastern seaboard cities has had an impact, and we believe this will continue, augmented by the moderate outlook for the resource sector, particularly the decline in capital intensive work. And although foreign investment has received a lot of media coverage, due to relatively tight regulations its impact has been largely limited to investment in new housing stock such as off-the-plan apartments.

It’s a mixed market for freestanding housing across Australia’s capital cities

The domestic housing market is not homogenous. Each suburb of each city has different local factors that impact investment performance. While there has been some moderation of housing growth over the past two years in Sydney, Canberra and Melbourne, these cities have been growing at (or just shy of) 10 per cent per annum​1. Auction clearance rates remain above average and with housing supply not matching buyer demand, it is truly a seller’s market in these capital cities.

In the mining capitals of Perth and Darwin, the two-speed nature of the housing market is evident, revealing sub-zero per cent growth. And while turnover remains very low like other markets, it is driven by rising unemployment and stagnating population growth that has pushed demand below supply. As a result, properties sit on the market for an average of 75 days in Perth and 84 days in Darwin coupled with greater levels of discounts (approximately nine per cent) needed to achieve sales2. While these markets are ripe for buyers in terms of property choice, it’s difficult to identify short-to-medium term catalysts to spur growth.

And sitting in the middle is Adelaide and Brisbane. Growth in Adelaide’s housing market has slowly edged higher while Brisbane’s has remained slightly sluggish. It’s worth keeping an eye on migration figures to Brisbane however, because with housing becoming increasingly unaffordable in Sydney and in parts of Melbourne, some economists speculate that large net migration figures towards Queensland – similar to the late-1980s and early-1990s – will be driven by first home buyers seeking affordable housing solutions.

In the apartment market we have begun to see some concerning trends

As with freestanding residential property, there is no uniformity among Australia’s capital cities. Given limited housing supply, increased migration levels and superior economic growth, there has been a rapid increase in unit construction and apartment approvals in NSW, Victoria, and Queensland, with an extra 12, 15 and 26 per cent3 respectively expected to finish construction within the next two years4. UBS estimates5 that there are now more cranes involved in building apartments in Sydney, Melbourne and Brisbane than there are in all cities in North America.

Of particular concern in inner Sydney, Melbourne and Canberra is the homogenous nature and low quality of some apartment projects – all are similar in size and design and lack distinguishing features. Compounding those issues are limitations on banks funding apartment purchases and restricting loans to foreign buyers who comprise a significant portion of off-the-plan purchases, which may result in settlement issues.

Further investment in Australian residential property right now is not generally recommended

If you already own your principal residence and (potentially) investment properties, then residential property likely makes up a large portion of your overall asset base. In addition, through direct equity exposure, listed investment companies or hybrid securities, many investors also have exposure to domestic banks whose profitability is strongly tied to the fate of the domestic property and mortgage markets. While these institutions are now more bespoke with their mortgage exposure and lending practices, a downturn would still likely have a large impact on their profits and, to a lesser extent, their balance sheets.

Looking beyond this, as prices have increased, yields have been compressed with investors relying more heavily on capital growth for return. If you hold an income-focused portfolio, such as a pension-paying self managed super fund, be cautious about over-concentration to any single asset, particularly noting the current subdued yields. We are cognisant that liquidity risks could become exacerbated should it become difficult to sell or reweight the portfolio around the property.

This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.

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Lyle Meaney

Managing Director & CEO – E&P Wealth

In his primary role as Managing Director, Wealth Advice, Lyle ensures all Investment Advisers and Analysts deliver the highest level of proactive service and advice in line with Investment Committee’s views on market conditions. All Investment Advisory clients have a dedicated Investment Adviser, who works closely with Dixon Advisory’s Superannuation Specialists, Financial Advisers, Estate Planners and Property Investment Specialists to deliver the best possible financial outcome. 

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