Some won, some lost; 2016 was a big year for the Australian property market. But what property investment lessons have we learned from 2016, and how can they prepare us for the years ahead?
Pretty self-explanatory right? Let’s have a closer look at Perth as an example. The WA capital enjoyed a relative property boom in 2012 through to the end of 20131, but despite increased investor demand and declining interest rates, the years from 2014 to 2016 have been like a kick to the shins for Perth’s homeowners.
Why? Because property boom’s aren’t sustainable. Sooner or later, supply will catch up to demand while other indicators such as unemployment, population growth, unaffordability and tighter lending take their toll. During a boom people don’t want to glimpse what’s around the corner, but the property market is cyclical. With every price peak there’s an eventual downturn or correction that paves the way for the next boom. Yes there will be more recessions and yes there will be more booms. What property lessons can we take out of this? Be prepared for the next phase of the property cycle by diversifying your investment portfolio and covering your backside.
It’s true that not all capitals were created equal and last year we saw how local market factors impact each city. Perth, Darwin and Adelaide trailed behind Hobart and Canberra, with Brisbane, Melbourne and Sydney leading the charge. This is contrary to most pundit’s predictions in early 2016, and hence one of the most important investment lessons we learned. Rising unemployment, an oversupply of properties for sale and poor regional economies hurt some while lack of stock, tax incentives and increased investor confidence helped others.
It’s easy to oversimplify and say that the property market is performing well in Australia, however it seems the East Coast is doing most of the heavy lifting. Our biggest property lessons learned from 2016? Selection is critical if you’re in an underperforming market, as is adding your own capital growth through renovations. If you’re in Sydney or Melbourne, be wary of becoming an emotional purchaser as overpaying will come back to bite you in the long run.
New South Wales, Victoria and Queensland are currently experiencing exponential building activity as they try to play catch up with latest the surge in buyer demand. This rapid development of inner city areas and the construction of high rises in Melbourne and Brisbane will lead to an oversupply of stock and eventual slowing of the market2.
New South Wales is the only state where an undersupply is expected to remain, with a shortage of 41,0313 anticipated as a result of large-scale job growth and an increase in new residents4. Assuming interest rates remain steady and the economy keeps chugging along, oversupply will have the most impact on property prices on the East Coast. We’re already seeing the effects of too many properties and not enough purchasers in places like Darwin and Perth, where prices this year are expected to bottom out5.
Here’s a bit of advice for you if you’re a first time investor and eager to learn more investment lessons: wrap your head around the concept of diversifying your portfolio. We’ve seen so called “property experts” who limit their purchases to just one town, city or state because it’s easier and more convenient. No guesses for what happens when their local market takes a dive. Putting all your eggs in one basket is risky, however if you spread out your investments and purchase in different capitals, you’re able to ride the different stages of the property cycle and take advantage of boom times. Take Perth and Sydney. If you were to own investments solely in Perth you’d be in a bit of a pickle at the moment. However if you held properties in both cities you’d still be fairing rather well off the back of Sydney’s strong market.
The main benefit of doing this is that even when one of your properties in a certain city is stuck in a downturn, your other investments will still be performing. This then gives you a better chance of obtaining finance for additional investment opportunities.
Seems a bit rash doesn’t it? But let’s look at the facts. In what’s been declared by John McGrath as “shortsighted”, New South Wales, Queensland and Victoria have wacked foreign buyers with unnecessarily high taxes in order to take a bigger slice of the overseas purchasing pie. Last year in June, NSW introduced a 4 per cent stamp duty surcharge for foreign buyers, followed by VIC, which raised its stamp duty surcharge for foreign purchasers from 3 per cent to 7 per cent. The QLD government followed suit last month by introducing a 3 per cent stamp duty surcharge on foreign purchases. Not to mention the federal government, which now demands fees for foreign property acquisitions, starting at $5,000 for purchases under $1 million7.
Have these taxes been imposed for revenue purposes, or with the intent of giving local buyers an advantage when it comes to purchasing in the Australian market? No matter the motivation, it sends a clear message to potential purchasers hailing from outside our borders – you can buy here, but be prepared to pay a premium.
These are the investment lessons we learned from 2016, make sure to study them and use the knowledge we gained when defining your investment strategies for the years to come.