If you are a property investor you would have to have been hiding under a rock not to have noticed the changes over the last 12 months. From FOMO (fear of missing out) to FOBO (fear of missing better options) the urgency has gone out of the market and many buyers are sitting on their hands.
The media has spent all year calling for doom and gloom, and our 2 most expensive markets have seen significant price falls. BUT much of the nation has a relatively stable property market. Many economists and the reserve bank themselves have been clear that the fundamentals are actually ok, especially in the vast areas of coastal and regional Australia where normal family owned homes are the majority of stock (ie everywhere EXCEPT the high-rise tower madness of the inner cities).
So, if the foundation is firm but the sentiment is saggy what’s a poor investor to do? Do you decide to buy or not? Well, smart money has been quietly buying over the last 3 months (reasons below) and here are 6 reasons you should think about following suit:
# 1 The LENDING RULES just changed: In December 2018 APRA REMOVED the artificial set of brakes they had applied to investor lending. They applied this temporary restriction back in March 17 because they wanted to stop the Sydney and Melbourne markets (remember all the hipster anger, FOMO and smashed ago-gate?). By all accounts they were successful and things ground to a halt.
Well this policy handbrake was a limit to investor lending as 30% of total lending. The handbrake is now off. This should create a signal for lenders to get more creative and lend to investors again after one of the tightest years on record for investor borrowing.
# 2 NEGATIVE GEARING: If you believe the polls, Labour has a good chance of winning the next federal election in April/May 2019. They have stated they will remove any remaining negative gearing benefits - which will make holding investment properties slightly more expensive in the short term (due to the extra tax paid). For most people the actual amount is not large but the sentiment is huge on this issue.
Eliminating negative gearing will be likely to cause a short term exodus of less educated property investors to stop thinking property altogether. History shows this will only last 6-12 months then they will be back in the market again. HOWEVER - Labour has said they will be grandfathering negative gearing laws for those who already hold property before the election. What does this mean? Well, if you buy BEFORE the election, you get to KEEP precious tax savings for the life of the property. But after the election there will be no possibility for time travel.
# 3 CAPITAL GAINS TAX. Similar to above, Labour is likely to do the same thing to Capital Gains tax rules. This means the sale profit in your hand from a property purchased in March 2019 compared to July 2019 could be tens of thousands of dollars extra. In particular the current 50% reduction could be squeezed down to 25% effectively adding up to 40% (top marginal rate) to the total tax paid on a capital gains event. Can you imagine copping a 40% tax rise on your salary in one hit? Financially for the average investor holding a property 5-7 years this is an even bigger deal than the negative gearing issue. Remember the old adage “the best time to buy real estate is yesterday, the 2nd best time is today” - well in 2019 that could be the understatement of the decade.
# 4 MEDIA SKEW… The media hype (aimed to maximising fear to sell more newspapers) regarding falling property values is NOT nationwide but highly focussed on overpriced Sydney and Melbourne Suburbs. Now we know property has ups and downs and should be a long term investment… WHAT THE MEDIA AREN’T TELLING YOU is that across Australia (including some parts of regional NSW) are performing far better than Sydney and are likely to continue for the immediate future. We know the key areas that have outstanding potential based on infrastructure growth projects. Remember property is all about supply and demand? That fundamental truth hasn’t changed, and won’t change any time soon.
5 GLOBAL ECONOMY - The fact is there are a number of global issues at play that increase uncertainty. Every year since the global economy existed you can find a headline indicating that when one country sneezes somewhere else catches a cold. Its the nature of being connected. Currently the trade wars between China and the USA plus Brexit are at the top of mind. These are much more likely to effect share prices than property. Seen in this light, property could actually be a safe haven from falling stock prices.
6 UNEMPLOYMENT - December saw further falls in unemployment from 5.2% to 5.1%. This is solid news for our overall economy and employment picture. ABS Chief Economist Bruce Hockman said: "The continued decrease in the trend unemployment rate to 5.1 per cent coincides with the highest trend participation rate ever." Is our economy imploding? It seems perhaps not.
So… what should you make of this?
Be a turtle - pull inside your shell and do nothing. This is what most people will do because it is easy and allows fear to call the shots.
For the brave few still reading… If you want good deals you need to be prepared to buy when sentiment is quiet. It’s what a professional investor does, as Warren Buffett says “be fearful when others are greedy and greedy when others are fearful”. You would be surprised how many professional investors (who come from property families worth millions) are actively buying in today’s market. What does that tell you? It tells you they know its a good time to be making cheeky offers and having them accepted, that’s what. Tick tick tick. The deals that present themselves in the market between now and April have the potential to be the best available for years. You will need to act now to capitalise on them.
Caution: New and off the plan properties in oversupplied locations could still see further price falls. We have never advised people to buy these kinds of properties for this reason. Not everything will perform the same & not all areas will grow equally. Buying established property in owner occupied dominant areas with a tight supply/demand equation at fair prices is the best form of insurance we know. Do your research and remember you make your money when you buy.